A key to retirement planning is anticipating how spending habits may change in later years. Housing costs, for example, may decrease if one downsizes, but other expenses may consume a larger share of retirement assets than planned.

Healthcare can be one of the biggest expenses. According to Fidelity Investments, a 65-year-old newly retired couple will need $285,000 for medical expenses in retirement. That doesn’t include the additional annual cost of long-term care, which in 2018 ranged from $18,720 for adult day care services to $100,375 for a private room in a nursing home, according to Genworth, a long-term care insurer.

Despite saving and preparing for retirement their entire lives, many retirees aren't mentally or financially prepared for these expenses. A survey by HSA Bank found that 67% of adults 65 and older believed they’d need less than $100,000 for healthcare. “Retirees, in addition to most consumers, seem to underestimate how much they will need for health expenses in retirement, including premium and out-of-pocket costs,” says Chad Wilkins, president of HSA Bank. In fact, Fidelity calculated that males 65 and older will need $133,000—and females, $147,000—to pay for healthcare in retirement.

Key Takeaways

  • A 65-year-old newly retired couple will need $285,000 for medical expenses in retirement.
  • On average, those 65 and older spend $3,800 per month; Social Security replaces only about 40% of their working-life income.
  • Medicare can pay for some healthcare spending in retirement but without a Part D prescription drug policy, Medicare does not cover medications.

Those nearing retirement or already making the transition out of the workforce must understand how to plan for growing medical costs.

Review Retirement Income and Spending

There are two important numbers regarding healthcare expenses in retirement: how much money is coming in and how much is going out.

The typical person in their 60s has an estimated median savings of $172,000. On average, those 65 and older spend $3,800 per month; Social Security replaces only about 40% of their working-life income. In 2019, the average monthly Social Security benefit for retired workers is $1,461. 

How much retirement income to budget for healthcare depends largely on one's age and overall health. “The healthier we are going into retirement typically means that less money will be allocated toward healthcare expenses,” says Chris Schaefer, head of the retirement plan practice at MV Financial in Bethesda, Maryland. “The other side of that coin is that with a healthier lifestyle, life expectancy will be longer and, therefore, retirees need to plan for a longer time in retirement.”

Two-thirds of adults 65 and older believe they'll need less than $100,000 for healthcare in retirement. In fact, they'll need nearly more like $133,000 (men) and $147,000 (women).

Medicare can pay for some healthcare spending in retirement but with limitations, says Michael Gerstman, CEO of Gerstman Financial Group, LLC in Dallas. “For example, without a Part D prescription drug policy, Medicare does not cover medications.” Original Medicare, meaning Parts A and B, also won’t cover dental and vision care but Medicare Advantage plans typically do. No part of Medicare offers coverage for long-term care.

If relying on Medicare to help cover medical expenses in retirement, plan for deductibles, premiums, and out-of-pocket costs. For 2019, the standard deductible for Medicare Part A is $1,364. The standard monthly premium for Part B is $135.50, although some Medicare beneficiaries will pay less. The base premium for Part D coverage in 2019 is $33.19 per month, and most Part D plans have an annual deductible of up to $415.

Medicare Advantage plans are offered through private insurers; they set the premiums, not the federal government as with Parts A, B, and D. Depending on the insurer and what the policy covers, one could pay more or less for a Medicare Advantage plan.

Look Beyond Retirement Savings to Pay for Healthcare

Climbing healthcare costs don’t have to drain a nest egg. There are two ways pre-retirees can create a safety net for healthcare spending in retirement.

The first is with a Health Savings Account (HSA). These are available with high-deductible health plans and offer triple tax advantages: deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. “HSA funds can be used to pay for certain medical premiums, including Medicare premiums and long-term care insurance premiums,” Wilkins says.

Those already in their 50s can still maximize these plans by taking advantage of catch-up contributions and employer contributions. “Individuals 55 or older can make a catch-up contribution of $1,000 per year in addition to the maximum contribution limit,” Wilkins says. “Many employers will contribute cash rewards to an HSA for preventative screenings such as mammograms or annual physicals.”

For 2019, the regular HSA contribution limit is $3,500 for individual coverage and $7,000 for family coverage. Those limits apply to both employee and employer contributions combined. One caveat: Those enrolled in Medicare can no longer make new contributions to an HSA.

Purchasing long-term care insurance is another way to fill the gap left by Medicare. This type of policy can pay a monthly benefit toward long-term care for a two- to three-year period. That can help avoid spending assets to qualify for Medicaid, which does pay for long-term care.

Long-term care insurance premiums may not be affordable for everyone. Gerstman says an alternative is buying a life insurance policy that has the option of adding a long-term care insurance rider. “This allows younger people to get ahead in their long-term care planning,” Gerstman says, since the sooner one buys life or long-term care insurance, the lower the premiums are likely to be.

The Bottom Line

Healthcare spending can easily account for a big share of a retirement budget. Estimating those costs and creating a strategy for spending can help preserve more retirement assets for other expenses. (For related reading, see "Top 3 Health Insurance Options If You Retire Early")