Health Care Costs in Retirement

After housing and transportation, health care is one of the largest expenses to consider in the retirement planning process. While it's difficult to know exactly how much you will need to save for health care costs in retirement, there are some considerations to keep in mind such as how much you might need to pay for insurance premiums. There are also some ways to plan ahead to help reduce medical costs in retirement. Here's some information to consider.

How Much Does Health Care Cost in Retirement?

According to CNBC, a report found that a 65-year-old couple could expect to spend an average of $315,000 in total health care and medical expenses during retirement.¹ While it's impossible to predict the future and how much you will have to pay for health care during your golden years, there are a few factors to consider.

Health Status & Life Expectancy

Health care costs are generally lower for healthy Americans than they are for those in poor health. However, with a longer life expectancy, these costs tend to be higher later in life. A Barron’s article (“Expect to Live a Long Time? Plan for Rising Healthcare Costs") cited a helpful example based on projections from HealthView Services (a firm that analyzes health care data taken directly from medical claims) to illustrate how much longevity affects health care costs.² Compared to a 65-year-old woman with Type 2 diabetes who dies at age 81, a healthy 65-year-old woman who dies at age 89 will pay approximately $175,000 more for her lifetime health care costs, which include monthly premiums and out-of-pocket expenses.

Medicare & Insurance Coverage

If you retire before age 65, you'll need to cover your own insurance costs. At age 65, you qualify for Medicare coverage. Most people don't pay a premium for Medicare Part A. Keep in mind that co-insurance and deductibles may apply. Depending on your health and other factors, you may also need Medicare supplement insurance.

How Much Do Health Care Premiums Cost in Retirement?

Health care premiums can make up a large portion of your total and ongoing health-related costs in retirement. When planning for retirement, it's a good idea to estimate how much you'll need to spend on premiums, which may include the various parts of Medicare, supplemental insurance, potential co-insurance and deductible costs.

Here are the current Medicare premiums and related costs for 2024:

• Medicare Part A: Most people don't pay a premium for Part A. This is true for fewer than 7.5 years. If you buy Part A, monthly premiums can be as high as $505.
• Medicare Part B: The standard premium for Part B in 2024 is $174.70. For 2024, the annual deductible is $240. After you meet the deductible, you typically pay 20% of Medicare-approved costs.
• Medicare Part C: Also called Medicare Advantage plans, Part C coverage is offered by private insurance companies approved by Medicare.⁴ These supplemental insurance costs vary, but the estimated average monthly premium for 2024 is $18.50. Keep in mind that you must have Part A and Part B to get Part C.
• Medicare Part D: Costs vary, but the average monthly premium for a Part D plan is estimated to be $55.50 in 2024.⁵ Keep in mind that people with higher incomes pay more for Medicare Part D.

5 Ways to Help You Prepare for Your Health Care Costs in Retirement

Many of the medical costs in retirement are beyond your control. But you can do some things to help make them more affordable. There are at least five ways you can start to prepare for medical costs in retirement: open a health savings account (HSA), add to your retirement savings, use Medicare supplement insurance if needed, consider long-term care insurance and maintain a healthy lifestyle.

1. Open a Health Savings Account (HSA)

A health savings account (HSA) allows you to save money toward certain qualified health care costs on a pre-tax basis. The IRS sets HSA contribution limits and minimum deductibles for high-deductible health plans (HDHPs) each year.⁶ For 2023, you can contribute up to $3,850 for yourself or up to $7,750 for family coverage. Keep in mind that you may only contribute to an HSA if you have an HDHP. The minimum deductible for an HDHP is $1,500 for an individual and $3,000 for a family.

2. Add to Your Retirement Savings

Since retirement accounts, such as IRAs and 401(k) plans, will likely be major sources of income during retirement, you can help boost this income by maximizing your contributions to these accounts whenever possible. The maximum contribution to a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is $23,000 ($30,500 if you're 50 or older).⁸

3. Consider Medicare Supplement Insurance

Medicare supplement insurance is often referred to as a Medigap policy because it helps to fill in the gaps of health costs where Medicare Parts A and B may not be sufficient. This supplemental insurance is offered by private insurers and can cover health care costs, such as Medicare co-payments, co-insurance and deductibles.

4. Consider Long-Term Care Insurance

Long-term care (LTC) insurance can help to reduce health care costs in retirement by helping to cover the cost of a long-term care facility in the event that you need one. If you develop a chronic and disabling condition that requires supervision, LTC insurance can cover nursing home care, home health care or adult day care. Long-term care can be expensive, and an LTC insurance policy can help to reduce your health care costs in retirement if you end up needing this care.

5. Maintain a Healthy Lifestyle

By maintaining a healthy lifestyle, you decrease the odds of needing costly health care. Some of the things you can do that may help you stay healthy in retirement include:

• Exercising regularly: Getting your blood pumping and improving strength and balance may help to reduce stress and reduce odds of heart disease.
• Maintaining a healthy diet: Eating right is smart at any age, but a good diet in retirement may be more beneficial for reducing your risk of potential ailments, such as diabetes and heart disease.
• Socializing: Being around other people can help to keep your mind sharp and help reduce stress from being alone.⁹
• Limiting alcohol intake: Alcohol in moderation may not be a health risk, but it's a good idea to avoid consuming alcohol excessively.
• Eliminating tobacco use: By refraining from using tobacco, you may help keep your lungs healthy as you get older.

Understanding the Bottom Line

Health-related costs are likely one of the biggest expenses you'll have in retirement. While many medical costs and other health care expenses may be unavoidable, planning in advance can help you better manage these costs during retirement. Being aware of health care costs - such as Medicare premiums, co-insurance and deductibles - can help you gain a better idea of how much money you'll need to save for retirement.

Even if you are in retirement now, it's not too late to take advantage of certain strategies to help mitigate your medical costs. If you still need additional information or help, you can speak with a financial professional who is knowledgeable about retirement planning products and services.

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Sources

1. Americans can expect to pay a lot more for medical care in retirement. https://www.cnbc.com/2022/05/16/americans-can-expect-to-pay-a-lot-more-for-medical-care-in-retirement.html.
2. Expect to Live a Long Time? Plan for Rising Healthcare Costs. https://www.barrons.com/articles/healthcare-costs-retirement-seniors-51675979592.
3. Costs. https://www.medicare.gov/basics/costs/medicare-costs.
4. What is Medicare Part C? https://www.hhs.gov/answers/medicare-and-medicaid/what-is-medicare-part-c/index.html.
5. What Medicare Part D Costs in 2024. https://www.ncoa.org/article/medicare-part-d-costs.
6. CFR 601.602: Tax forms and instructions.. https://www.irs.gov/pub/irs-drop/rp-22-24.pdf.
7. 401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000. https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000.
8. Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits.
9. Social isolation, loneliness can damage heart and brain health, report says. https://www.heart.org/en/news/2022/08/04/social-isolation-loneliness-can-damage-heart-and-brain-health-report-says.