How to Plan for Health Insurance Expenses in Retirement

Health Care Cost in Retirement: How Should You Prepare for it? 

Data revealed by Fidelity Retiree Healthcare Cost Estimate says that when a couple retires at the age of 65, they can expect medical expenses to be around $315,000. The data implies that healthcare is one of the biggest expenses a person faces in retirement. It is not the largest, but it is one of the largest expenses Americans face after housing and transportation. As you know, healthcare costs in retirement consume a significant portion of your retirement budget, and you need to plan according to it. Here, we will cover everything about healthcare costs in retirement and how you must prepare for this major cost.

Key Highlights

  • According to the US Bureau of Labor Statistics, medical expenditures are 30% higher than a decade ago.
  • A 65-year-old couple retired in 2022 and spent an average of $315,000 in health care costs throughout retirement, where long-term care is not included.
  • Retirement accounts like 401k, traditional and Roth IRAs, and health saving accounts can help you cover most of your healthcare costs in retirement.

How do people pay for healthcare in retirement?

While saving for retirement, we cover the expenses related to food, housing, transportation, and medical. We mostly stash away 15% of our Paycheque. This can be right when it comes to saving for retirement. Still, we sometimes need to pay more attention to the report that explains how important it is for retirees to have enough budget for their medical expenses. According to Fidelity, the average 65-year-old couple spends about $12,200 or even more on health care in their first year of retirement. Another Employee Benefit Research Institute report shows that 65-year-old couples need around $383,000 in savings to cover at least 90% of their healthcare expenses, including premiums, deductibles, prescriptions, and out-of-pocket costs in retirement.

The most basic question is who will pay for your medical expenses after retirement. Medicare here plays an important role in paying for some health care in retirement, but it does not fully cover all of it. If you have a health savings account similar to a retirement account, like 401k, it can benefit you as you can pay for qualified medical expenses through this account.

Let's take a look at Medicare, which is a federal health insurance program for people age 65 and older. Here, you must understand that Medicare tries to cover most of your expenses but will not cover your long-term care. Here is what Medicare covers for you.

  • Medicare Part A: It is like hospital insurance, which covers patients' hospital stays, skilled nursing facility care, hospice care, and home health care. In Part A, Medicare, you don't need to pay a monthly premium if you and your spouse pay the Medicare taxes.

  • Medicare Part B: It covers medical insurance and doctor service, outpatient care, medical supplies, and preventive services. You need to pay a monthly premium of about $174.70 for 2024.

  • Medicare Part D: It covers prescribed drugs and recommended shots and vaccines.

  • Medicare Advantage: It is mainly offered by private companies, which is an alternative to original Medicare and includes Medicare Parts A, B, and C. Also, they must get additional coverage for things like vision, hearing, and dental not covered by original medical care.

What is the average cost of healthcare in retirement? 

In 2018, a health and retirement study revealed how much of retirees' social security benefits and total retirement income go towards medical-related expenses like Medicare premium prescription drugs, surgery, and doctor visits. Here, we assume that having Medicare means we pay lower medical costs, but is this case true? 

The Data found that a median retiree paid 12% of his retirement income for medical expenses. A median retiree pays 20% of his social security benefit towards medical. He spends $4,311 on medical costs, most of which goes towards Medicare premiums.

In 2022, the monthly premium for Medicare Part B was $170.10. They also have to pay out-of-pocket expenses for their health expenditures. According to the Centre for Retirement Research at Boston College, it was found that people who are preparing for their retirement need to forecast how much they will spend on medical expenses later in their lives. According to Fidelity's retiring healthcare cost estimate, a person 65 in 2023 must save approximately $157,500 after tax to cover their health expenses in retirement. 

Here, it is important to note that the amount you need to save and the amount you spend on your healthcare expenses during your retirement depends on when and where you retire, how healthy you are, and how long you live. It also depends on which account you use to pay for your health care, like 401k, HAS, IRA, or another taxable account.

How do I prepare for healthcare in retirement? 

Now you know that healthcare costs in retirement are way too far from our expectations, so it is necessary to have a well-prepared plan for your future expenses. 

1. 401k and IRA

Tax advantage investment accounts like 401K or traditional or Roth IRA must be a point of focus when you want to cover your health expenses. With 401K and Traditional IRA, you get the tax advantage until you withdraw it in retirement, and with Roth IRA, your money is taxed upfront, which allows your investment to grow tax-free over time. There are various firms like Fidelity Investment, Vanguard, or Betterment where you can open your 401K and take the most advantages. 

2. Health Saving Accounts

Health saving accounts are good for individuals already enrolled in high-deductible healthcare plans. It is a tax-advantaged investment account that helps you pay your medical expenses. It offers you three major advantages. Contributions are tax-deductible, which means you reduce your overall taxable income and don't have to pay taxes on your contribution. You can withdraw your HSA fund with qualified medical expenses like copays, coinsurance, prescription drugs, and menstrual products. And most importantly, if you choose to invest your funds, you don't have to pay taxes on your earnings.

3. Long-term care insurance and Medigap.

Medigap is a supplemental Medicare insurance and is helpful when the out-of-pocket cost of your health care increases in retirement. Private insurance companies generally provide it, and you can use it to fund Medicare copays, deductibles, and coinsurance. The eligibility requirement for medical is that you must be aged 65 or older or enrolled in Medicare Part A and Part B. Here, you need to pay a premium for the supplemental insurance and any other premium that must be paid for Medicare Part A and Part B. 

Final words 

Making ends meet is quite difficult for most retirees due to the increase in out-of-pocket health expenditures and retirement incomes significantly dropping due to the increase in Part B premiums. Health expenditure is one part that eats a significant portion of your retirement budget. If we take health care costs in retirement, 12% of the median retiree's retirement income covers their medical expenses. Therefore, it is important to have a better plan and a budget of at least the average cost to cover these expenses that are not under control. 


What are the five biggest expenses in retirement?

Housing, Transportation, Healthcare, Food and utilities are the five biggest expenses in retirement. According to the consumer expenditure survey done by the US Bureau of Labor Statistics, the average retiree household spends about $50,220 per year.

What is the average retirement spending per month?

According to the Bureau of Labor Statistics, the mean expenditure for retirees 65 years and older, the average spending, amounted to $4,818 per month in 2022.

What happens if one cannot afford healthcare?

Many healthcare providers are willing to work with patients to develop payment plans and negotiate bills; however, patients can also explore options for financial assistance or charity care through healthcare providers or other organisations.

What is the average cost of long-term care services in usa?

If we consider different long-term care services, you can easily approach or exceed $200,000 if you need it. For home health care, the average cost is $98,280; for adult daycare, it is $81,900; for assisted living, it is $191,700; for nursing home semi-private rooms, it is $202,575; and for a nursing home private rooms, it is $226,300. And if you think Medicare or retiree health insurance benefits will pay for your long-term care expenses, it is generally untrue.

Does inflation affect my retirement healthcare budget?

Inflation means the price of goods and services over time. Healthcare cost is one of its parts, which sometimes even outpaces the rate of inflation, so whatever your budget today is, it won't be able to cover your healthcare cost in retirement. It is important to take professional advice to assess your budget and plan for your health care savings.

Read Also:

  1. Life Insurance and Coverage

  2. Universal Life Insurance

08 Mar, 2024


Add a comment

Why Is Tax Season Very Important for Stock Market Investors? |  Why Is There No Tax in UAE? How Dubai Makes Money with No Tax? |  Fastest Growing Industries in India 2024: Booming Indian Sectors |  Top Tech Companies List: Top 10 Largest Tech Giants Worldwide |