The Unexpected Cost That Could Ruin Your Retirement

Health care in the U.S. is already costly, and those expenses usually rise as you age. When you retire, unexpected medical bills can quickly drain your savings. To avoid this, start setting aside extra money now—more than you think you’ll need—to cover health care costs in retirement.

Key Takeaways

• Even a healthy 65-year-old could pay over $5,000 per year in health care costs in retirement, substantially reducing their retirement savings early on, with costs increasing as they age.
• Combined, your 401(k), IRA, and HSA savings could help cover the cost of your retirement medical bills if you contribute enough cash to them every year.
• Medicare will cover many of your health care costs in retirement, so knowing which type of Medicare you need could reduce your medical expenses.

Projecting Your Future Health Care Expenses

When you’re young and healthy, you probably don’t think about how much you’ll spend on health care in retirement. But those future medical costs may be higher than you expect, according to a 2021 report from Vanguard. 

Vanguard’s research showed that a 65-year-old woman with a medium-risk health profile would have to pay about $5,100 per year in health care costs even with Original Medicare with Medigap Plan G. (Medigap helps pay for out-of-pocket expenses but has its own premium.) By age 85, she could be paying between $9,700 and $12,500 per year, depending on her health.

Health Care Cost for Women by Age, 2020 Dollars

All told, in Vanguard’s model, a 65-year-old woman living to 88 would incur about $195,000 in health care costs (about $8,478 per year) if she lives the average of 23 years after retirement at 65.

How to Save for Future Health Care Needs

You can plan ahead for medical expenses by putting money into accounts such as a 401(k), IRA, health savings account (HSA), or a high-yield savings account (HYSA).

401(k) and IRA

Maxing out your 401(k) and IRA accounts can help ensure you have enough money for retirement. You can contribute up to $23,500 to your 401(k) in 2025 and an extra $7,500 if you’re over 50. Some employers also match a percentage of your contributions. For example, an employer may match 100% of your contributions up to 5% of your paycheck. Additionally, your contributions to a 401(k) aren’t taxed—they come out of your pretax income—although withdrawals you make after age 59½ are typically taxed as income.

A traditional IRA lets you contribute pretax dollars that you can deduct on your tax return, while withdrawals in retirement could be taxed. A Roth IRA offers no tax advantages on contributions, but withdrawals are tax-free. The total you can contribute to all your IRAs is $7,000 in 2025, plus an additional $1,000 if you’re 50 or older.

HSA

An HSA is a type of account that combines health insurance coverage with an investment or savings component. Contributions to your HSA are tax-deductible and grow tax-free. You can use the money in the account for qualified medical expenses. Qualified medical expenses include procedures and items needed “primarily to alleviate or prevent a physical or mental disability or illness,” the IRS notes, including: 

• Physical, eye, or dental exams
• Treatment for drug, alcohol, or tobacco use disorder
• Prescription and over-the-counter drugs

An HSA, unlike a flexible spending arrangement (FSA), stays with you even if you leave your job. That makes the HSA an important part of saving for retirement, even if you don’t max out your other retirement accounts. You can contribute up to $4,300 to your HSA in 2025 (up to $8,550 if your family is covered under the plan), with an additional $1,000 if you’re 55 or older.

HYSA

An HYSA has no tax advantages, but can provide liquid cash you can easily access for medical expenses. As of May 30, some banks offer up to 5.0% APY on HYSAs. These accounts can be great for paying medical costs in a pinch, especially if you’ve maxed out your other accounts. And because there’s no limit to how much you can deposit in a HYSA, you can add as much as you want for your retirement health care costs. Remember that HYSA interest rates are variable, so your earnings can fluctuate over time as your bank adjusts your account’s interest rate based on the market and other factors.

Navigating Medicare

Medicare is a government-run health insurance program for people 65 and older (with some exceptions). Understanding how it works can help you prepare for health care costs in retirement.

You can get Medicare coverage in one of two forms: Original Medicare, comprising Medicare Part A and Part B (though not prescription drugs, unless you purchase prescription drug coverage) or Medicare Advantage, which is offered by private insurers and includes Part A, Part B, and often Part D (a prescription drug plan).

Medicare Part A

Medicare Part A helps cover inpatient stays at locations such as hospitals and skilled nursing facilities, and can help cover the cost of certain home health and hospice care. It has no premium as long as you have worked and paid Medicare taxes for at least 10 years, but it does have a $1,676 deductible, as of 2025. You’ll also have to pay a copay of $419 to $838 per day for hospital stays that last longer than 60 days, and you’ll pay all costs for inpatient care that lasts longer than 150 days.

Medicare Part B

Medicare Part B covers medical services, such as outpatient care, preventive care, doctor’s office visits, durable medical equipment, home health services, and ambulances. It has a premium of $185 per month (or higher, based on your income) and a $257 deductible, as of 2025. Out-of-pocket costs are limited to 20% of covered services.

Prescription Drug Coverage

Prescription drugs are covered under Medicare Part D. You’ll have to pay a premium—around $40 on average in 2025—and potentially an additional amount, depending on your income. Drug costs can vary based on whether they’re covered by your plan, and you may need to pay a deductible. Part D deductibles are capped at $590, and out-of-pocket spending is capped at $2,000 in 2025.

Medicare Advantage

Medicare Advantage (MA) plans bundle Part A and Part B, and typically include Part D. Because these plans are offered by private companies, premiums and deductibles can vary widely based on the company offering the plan. Generally speaking, though, MA plans are affordable, with an estimated average premium of $17, with 60% of enrollees having no premium. Affordable average premiums come with a trade-off: You’re often restricted to using medical professionals in a specific provider network. Also, you may be delayed in receiving care if your plan requires you to get prior authorization.

Medigap

Medigap is supplemental coverage offered by private companies that pays for some or most of your out-of-pocket expenses if you have Original Medicare (in most cases). These costs might include your Part A coinsurance, hospital costs, or deductible and your Part B coinsurance or copay, depending on the plan you choose. Medigap premium costs are influenced by several factors, including your gender, insurer, smoking status, and where you live. In 2023, the average monthly Medigap premium was $217, according to KFF.

The Bottom Line

Health care costs in retirement can drain your finances quickly, with even healthy individuals potentially spending thousands per year. Planning ahead by contributing to your retirement and health savings accounts could be essential in covering these hidden expenses. Understanding Medicare and supplemental plans like Medigap can help reduce out-of-pocket costs. To protect your retirement, start preparing early and factor in health care as part of your financial plan.