Health Care Costs in Retirement: Budgeting for a Healthy Future

Many factors affect your health care costs as you age, including where you live, your Medicare selections and whether you have long-term care insurance.

A doctor with a clipboard sits and talks with an older woman in a hospital corridor.
(Image credit: Getty Images)

Being able to afford to retire is a goal we spend most, if not all, of our working years planning. We start by investing in a 401(k) or Roth IRA, in hopes of saving enough money to last us once we no longer work. But how do you plan for all the unexpected costs, especially when it comes to your health care?

According to last year’s Fidelity Retiree Health Care Cost Estimate, a single person who’s 65 years old will need to have about $157,500 saved, after taxes, to cover health expenses. For a retired couple at age 65, that number goes up to about $315,000. Obviously, that number is dependent on several factors, like how long you work, when and where you choose to retire, your health and how long you’ll live, but it gives you a good benchmark to aim for.

While it is helpful to have that overall dollar figure in mind, it’s important to remember that health expenses are better calculated on an annual basis. You know how much your insurance premiums are, how much you typically go to the doctor and the costs incurred therein, the tests or procedures when seeing those providers, etc.

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The basics of Medicare

Once you turn 65, you’re eligible for Medicare. There are several different components: Parts A, B, C, and D. “Original Medicare” consists of Part A and B. Medicare Part A will cover inpatient medical expenses you may have after you meet your deductible per benefit period ($1,632 in 2024). Most people do not have a premium for Part A. Part B is outpatient coverage, but requires a premium of $174.70 per month in 2024. Original Medicare does not cover prescription drugs, which is where Part D comes in, so you’d want to make sure to get a plan to cover medications. Even if you do not take any prescriptions, it is wise to at least purchase a drug plan with a low monthly premium to avoid any late enrollment penalty in the future.

You might want to consider Medicare Advantage plans offered by private insurance companies, which are Medicare Part C. These plans are all-encompassing, providing coverage for services under Parts A and B and also can include drug coverage. They are network-based, so when choosing an Advantage plan, it is vital to ensure that all of your doctors are in network. You also want to look up your medications to make sure they are covered. Taking care of those two steps will whittle what is likely dozens of plans available to you — down to a handful. Advantage plans may or may not come with an additional monthly premium cost and may also cover services not covered by Original Medicare, such as routine vision, dental, gym membership, over-the-counter benefits and so on.

You can change your coverage

As you're reviewing different options, keep in mind that the plan you select isn’t permanent. You can change your coverage over time to fit your health care needs as you age during certain times of the year, most notably during the annual election period (AEP) of October 15 through December 7. Now, you might be wondering what happens if you or your spouse is still working at 65. If you receive coverage through an employer, you’ll still be able to get that coverage until you or your spouse retires. Once that happens, you’ll have the option to enroll in Medicare through a special enrollment period (SEP).

Medicare Advantage plans are a great option for medical coverage once you retire, but they don’t cover everything. Supplemental policies are also offered through private insurance companies and provide coverage for many things not fully covered under Medicare. Medicare supplements, also called Medigap plans, fill in many of the gaps in Part A and Part B, such as the $1,632 deductible, or the 20% coinsurance for outpatient services. Supplements will come with an additional monthly premium, depending on the plan you get. Most supplements’ rates will increase as you get older. There are no network restrictions on a supplement. Your first six months of eligibility for Part B allows you an open enrollment period to get into any supplement with no questions asked.

Like Original Medicare, supplements do not include prescription drug coverage, so you would still need to get a separate Part D plan to cover your medications. There are many different supplements to choose from, so be sure to compare costs as you’re making your selections.

Finally, supplements do not cover additional benefits, such as routine vision, dental and so on like some Advantage plans can, so you would need to get separate dental and vision plans to help with those costs.

About long-term care insurance

Medicare does not cover custodial care, the most common type of long-term care. Those are typically covered by traditional long-term care insurance plans. These are also offered by private insurance companies, and the benefits they pay out per day can keep you from having to tap into your savings to pay for your health care. It’s best to purchase one of these plans when you are younger, when the rates are more affordable and you’re generally healthier. That’s because you will have to pass underwriting to purchase one.

A benefit-rich long-term care plan accompanied by your choice of Medicare coverage options can go a long way to ensure that you’ve protected your retirement nest egg and maintain control of your health care into your golden years.

Figuring out what coverage works best for you and your family can be overwhelming, so be sure to talk with your employer about your health care coverage and seek the counsel of an independent insurance agent so that you understand all of your options, costs and potential restrictions.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Brandon Hill
Senior Advisor, Beckett Financial Group

Brandon has 17 years in the insurance industry, with a focus on Medicare, Affordable Care Act and under-65 life insurance, group benefits, life, long-term care and annuities. In addition to being an independent agent and Senior Advisor, Brandon also works in compliance, case design and administration with Beckett Financial Group.