We all see the startling headlines about how much healthcare costs and that it is continually going up. According to the 2024 Fidelity Retiree Health Care Cost Estimate, a 65-year-old individual may need to spend around $165,000 for health-related expenses in retirement!¹ This leaves many pre-retirees wondering how they will ever afford that along with all their other expenses. While this number is nothing to scoff at, another study from Vanguard makes some interesting points about why we shouldn’t be as stressed as we are about affording healthcare in retirement. In fact, with careful planning, healthcare affordability may be more achievable than you think.

What Makes Up My Healthcare Costs?

While healthcare expense numbers appear astronomical, many costs are paid without people even realizing it. It’s a common misconception to think of healthcare costs as the out-of-pocket amounts you pay for medical services when visiting the doctor. However, much of the cost is the premiums people pay for their insurance. For those on Medicare Part B, the premium is normally taken right out of your Social Security check, so you don’t even notice it. When trying to grasp the size of these numbers, it’s important to note that the costs include insurance too, not just receiving medical services.

How Much Can I Expect to Pay Annually?

The flaw with a lump-sum amount is that it’s not entirely realistic. No one pays all their expenses up front; they pay on an ongoing, annual basis. When planning annually for expenses, including medical, the numbers become much more manageable and easier to prepare for. In a Vanguard study, it was shown that a medium-risk 65-year-old could expect to pay around $3,900 annually on traditional Medicare (this includes premiums and out-of-pocket expenses).²  While no one likes to dole out money for healthcare expenses, $3,900 is a much easier amount to chew than the whopping $165,000! What’s also important is that this amount is easier to plan for because it’s on an annual basis and not a lump-sum figure.

What Factors Can Change Your Retirement Healthcare Costs?

Numerous factors can change the amount someone can expect to pay for health-related expenses. For starters, having a spouse will double the cost. However, your health, income, and the coverage you purchase are the most significant factors impacting costs.

1. Your Health

It’s no surprise that the healthier you are, the less you can expect to pay for services. The more chronic medical conditions you have (high cholesterol, diabetes, asthma, etc.), the more you are likely to need medical services and, thus, the more you are likely to pay. While no one wants chronic conditions, the good news is that this is another area that can be planned for if you do have some conditions before you retire. Since your expenses are likely higher, a financial planner can include this in their calculations for your healthcare costs over time.

2. Your Income

Most people over the age of 65 receive their health insurance through Medicare. Medicare Part A is free, but the cost of Medicare Part B is based on your income. The more you earn (including investment income), the higher your premiums will be. Since the IRS does not have a crystal ball and doesn’t know what your income will be in 2025 or what it would be in 2024, they base the premium amount on your tax return from two years ago (2023). As a married couple, if you had an income over $212,000, the monthly premiums would jump from $185 to $258.60.³ From there, costs continue to go up in stages as your income increases. It is a common financial planning strategy to try and keep clients below thresholds if they are close because $1 over increases the whole premium. The brackets are all or nothing.

3. Your Coverage

While Medicare parts A, B, C, and D cover much of people’s medical needs, there are still gaps in coverage. That’s why purchasing Medigap coverage is generally advisable to fill these holes. However, there are numerous choices regarding coverage, all with their benefits and downsides. , leaving many pre-retirees with the stressful decision of choosing which other plan was best for them. The more a plan covers, the higher the premiums will be. But as you need medical services, you normally pay less out of pocket. This is another crucial planning area because choosing the right gap coverage can significantly impact the overall cost of medical expenses.

Additional Options

There are a couple of additional healthcare plans that could provide future relief. These are often overlooked but can be helpful later in retirement.

1. Long-Term Care (LTC)

People don’t often want to think about LTC, as it is costly and comes near the end of one’s life. This can be a significant expense that could be costly to your retirement savings and affect the legacy you might want to leave behind. Medicare doesn’t cover LTC, as it only pays for skilled care, requiring the skills of a registered nurse, physical therapist, occupational therapist, or speech-language pathologist. Most LTC services are provided not by these skilled professionals but instead by nonmedical persons.

2. Health Savings Accounts (HSAs)

If you are still working, this can be a great, tax-efficient way to save for healthcare costs in retirement.  Health Savings Accounts allow for tax-free growth and withdrawals for qualified medical expenses. By contributing to an HSA while working, you can ease the cost burdens of healthcare once you retire. The answer is yes; however, you cannot continue contributing to it if you want to enroll in Medicare.

Final Thoughts on Tackling Retirement Healthcare Costs

Medical costs are a big part of people’s overall retirement expenses. But a little planning can go a long way. Breaking down the lump-sum figure into an annual amount makes the expense easier to plan for and more predictable. Also, knowing whether you’re at a higher risk for incurring healthcare costs can help the planning process. However, most importantly, you want to enroll in Medicare when eligible and choose a Medigap plan that covers your needs.

A financial advisor can guide you in the right direction so that nothing falls through the cracks. If you need assistance with healthcare expenses as a part of your overall financial planning, please reach out to our team.

_{1 https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs}

_{2 https://investor.vanguard.com/investor-resources-education/retirement/planning-how-much-does-retirement-health-care-cost?msockid=158ce4eaee5f6a742629f76cefcb6bd5}

_{3 https://www.medicare.gov/basics/get-started-with-medicare/medicare-basics/what-does-medicare-cost}