Healthcare Costs in Retirement: How to Prepare for the Unexpected Now

Strategies to better prepare for rising medical costs

Fact checked by Vikki Velasquez

While most retirees assume Medicare will cover the majority of their medical expenses, out-of-pocket costs for premiums, copayments, prescriptions, and long-term care can quickly add up. In fact, healthcare expenses can be among the most costly expenditures retirees face. Failing to plan for them can eat away at hard-earned retirement savings over time. 

A proactive approach to understanding the impact of inflation and your current health, family medical history, and lifestyle choices on healthcare costs can help you make important decisions about buying supplemental or additional insurance and strategically using employer accounts to safeguard your retirement savings.

Key Takeaways

• Healthcare costs in retirement can have a significant financial impact, and proactive planning is essential to avoid unexpected expenses.
• To plan effectively, estimating healthcare expenses based on individual circumstances is crucial, considering factors such as your current health status and lifestyle choices.
• Saving and investing for healthcare expenses by utilizing tools like health savings accounts (HSAs) and long-term care insurance can help manage healthcare costs in retirement.
• Having a contingency plan and adequate insurance coverage are vital for mitigating the financial impact of unexpected medical events.
• Retirees should seek professional advice to help estimate and plan for healthcare costs.

The Importance of Healthcare Costs in Retirement

“Retirees often encounter a host of unexpected financial challenges that can disrupt even the most well-planned budgets,” says Martin A. Smith, CRPC, AIFA, founder and president of Wealthcare Financial Group Inc. “One major surprise is the rapid escalation in healthcare costs. Once retirees lose access to employer-sponsored or government-provided plans, they frequently must secure private insurance or state-based coverage. This transition can lead to much higher out-of-pocket expenses.”

While Medicare provides coverage for 98.2% of retirees over 65, it does not fully cover all medical expenses, leaving retirees responsible for premiums, deductibles, and copayments that can add up over time. A KFF study reveals that 22% of retirees have medical debt due partly to unexpected out-of-pocket expenses and rising medical costs. These expenses often include prescription medications, supplemental health plans, and long-term care services such as in-home care or nursing home stays.

Healthcare costs tend to rise faster than general inflation. These inflation rates, combined with increasing medical expenses due to technological advances and longer life expectancies, can significantly reduce retirement income for those who are unprepared.

Strategies for Preparing for Healthcare Costs During Retirement

While retirees don’t have much control over rising healthcare costs, they have plenty of options to help offset expenses before and after retirement.

Long-Term Care Insurance Policy

Non-medical long-term care is one of the most expensive healthcare costs that Medicare does not cover, yet 45% of adults over 65 incorrectly assume that Medicare covers its associated costs. According to the 2024 Cost of Care Survey conducted by Genworth and CareScout, an assisted living facility costs an average of $70,800 annually, and a semi-private room in a skilled nursing facility may cost as much as $111,325 annually. Someone turning 65 today has a 69% chance of needing long-term care in their lifetime. Without long-term care insurance, these vulnerable retirees must fund their long-term care expenses out of pocket.

Long-term care insurance policies help cover the costs of non-medical long-term care needs, which may include in-home care, assisted living facilities, and nursing facilities. Many advisors agree that the mid-50s is the sweet spot for obtaining long-term care coverage because policyholders will not pay for a product they’re decades from needing, and the average 50-year-old’s health is still good enough to get affordable rates.

Annual rate increases are 2-4% in your 50s but spike to 6-8% per year in your 60s. While there is no age cap for LTC applicants, the American Association for Long-Term Care Insurance reports that insurers denied coverage to 38.2% of applicants ages 65 to 69 and to 45% of applicants over 70.

Long-term care insurance, purchased before retirement, is one way to protect your retirement income and help your savings last your lifetime.

Tip

One strategy for LTC insurance is to purchase a rider when you buy life insurance, so, in effect, you get two benefits in one.

Health Savings Account (HSA)

Health savings accounts (HSAs) are tax-advantaged vehicles that help workers with high-deductible health plans (HDHPs) save for qualified medical expenses. Not only do HSAs provide short-term savings options, but they can also serve as powerful retirement savings tools with triple tax advantages. As Colin Overweg of Advize Wealth Management explains, “The HSA combines the best parts of a Roth and a traditional IRA. If eligible, contributions to an HSA are tax-deductible today, grow tax-deferred, and can even be withdrawn tax-free for qualified medical expenses, including Medicare premiums.”

Unlike other employer-sponsored savings accounts, there is no “use it or lose it rule,” and HSAs never expire. Your HSA is yours to take even if you leave your employer. HSAs are only available to employees with high-deductible health plans, but those who have HDHPs while working can use their HSAs to come out ahead in retirement.

In 2025, the annual HSA tax-deduction contribution limit (for employees and employers combined) is $4,300 for individual coverage and $8,550 for family coverage. If you are age 55 or older, you can contribute $1,000 annually, in addition to the maximum HSA limit for the year, as a catch-up contribution.

While opening an HSA earlier in your work life will give you more time to save, individuals closing in on retirement in their 50s should still consider opening an HSA and maxing out the contribution limits.

Medicare and Supplemental Insurance

Medicare is affordable, comprehensive medical coverage, but it does not cover everything—most notably, dental, vision, hearing, and routine physical exam costs. Without additional insurance, retirees must pay for these medical necessities out of pocket, which can quickly eat away at retirement savings.

Medicare supplemental insurance, or Medigap, is insurance sold by private insurance companies to cover the costs not covered by Medicare for copays, coinsurance, and deductibles. Alternatively, retirees looking for insurance that covers routine dental, vision, and hearing screenings in addition to original Medicare coverage may want to consider Medicare Advantage plans (Medicare Part C).

These are Medicare-approved plans from private companies that bundle original Medicare with prescription coverage and other benefits. While a Medigap or Medicare Advantage plan adds a recurring cost to your monthly budget, the advantage of not being surprised with out-of-pocket expenses for routine, necessary care may outweigh the expense.

Retiree Reimbursement Arrangement (RRA)

Retiree reimbursement arrangements (RRAs) are health reimbursement arrangements (HRAs) specifically for retirees. HRAs are employer-funded plans to reimburse employees for qualified medical expenses up to their annual limit. RRAs reimburse retirees instead of active employees.

RRA funds may pay Medicare premiums and other out-of-pocket medical expenses. Some employers may allow retirees to roll over unused funds. Because RRAs are completely employer-funded, they’re essentially “free” money for you to offset medical costs. If your employer offers one, take full advantage of its benefits.

Telehealth

Many retirees find telehealth, which provides healthcare services remotely, an affordable and convenient healthcare option, especially as traveling to and from appointments becomes harder. The convenience of telehealth encourages retirees to stay on top of chronic health conditions and prescription management, which reduces the incidence of hospital admissions.

Telehealth appointments are also particularly valuable when urgent but minor health concerns arise that might otherwise necessitate a visit to urgent care or an emergency room.

Because telehealth providers typically have lower overhead costs, their care also tends to be cheaper for the patients.

Warning

Starting April 1, 2025, you must be in an office or medical facility located in a rural area in the U.S. for most telehealth services, though there are certain exceptions. Also, Medicare Advantage plans and some providers may offer more telehealth benefits than original Medicare, so check with your plan or provider.

Preventive Care

Preventative healthcare, such as routine checkups, vaccinations, and health screening, reduces overall health costs in the long run by catching diseases early and helping to prevent chronic conditions.

Staying active and health conscious throughout your life and into retirement can help keep healthcare costs low as you age. Overweg has seen firsthand with his clients how “joining a gym for $50 per month might actually save thousands in the long term.” Studies show that retirees who stay active stave off cognitive decline longer, reducing the need for long-term care in their lifetimes.

Factors to Consider When Planning for Healthcare Costs

Planning for retirement healthcare expenses requires a personalized approach that considers your current health status, family medical history, and lifestyle choices.

Medicare cannot deny coverage based on preexisting conditions, unlike other medical plans. Guaranteed medical coverage is good news for more than 86% of Americans aged 55 to 64 with preexisting conditions. However, these preexisting conditions may mean more visits, prescriptions, and procedures, leading to higher out-of-pocket expenses. Medicare recipients should plan to pay more than average to either purchase supplemental insurance or pay for necessary expenses.

You also need to consider your family medical history when making your healthcare plans, as genetic predispositions to illness may increase medical expenses over time. Similarly, if you come from a long line of centenarians, your retirement savings may need to stretch longer than the average person’s.

Lifestyle choices also impact healthcare spending in retirement. Unhealthy lifestyle choices affect quality of life and may significantly raise your costs for medical care in retirement. To help keep healthcare costs low, you can focus on healthy habits and preventative care.

After considering your current health, predispositions, and lifestyle choices, you must account for healthcare inflation to predict future healthcare expenses accurately. Financial advisors tell clients to “budget for higher healthcare inflation,” Overweg says. “Normal inflation may be around 3% annually, but it could be wise to assume healthcare costs increase closer to 5% or 6% per year.”

Planning for the Unexpected

In his poem “To a Mouse,” Robert Burns famously wrote, “The best-laid plans of mice and men often go awry,” about a farmer accidentally destroying a mouse’s carefully built nest. Burns certainly did not intend this line as an allegory for retirement savings, but unexpected healthcare expenses can destroy your nest egg.

That’s why, when you are building your savings, you should consider contingency plans to protect them and help cover these costs.

Consider supplementing your Medicare coverage with a Medigap policy or signing up for Medicare Advantage to make monthly healthcare costs more predictable. Plan on purchasing a long-term care policy before retirement while you are in good health to offset the cost of long-term care.

While you focus on building your retirement accounts during your working years, ensure you also grow your emergency fund. It can be your final backstop against unexpected healthcare (and other) expenses when you’re on a fixed income.

Resources for Healthcare Cost Planning

Many resources are available today to help estimate and plan for future healthcare expenses.

Overweg recommends Fidelity’s free health cost estimator and, for comparing plans based on your coverage needs and medication costs, Medicare.gov Plan Finder.

Anyone planning for retirement should also visit the AARP Health Care Cost Calculator to estimate healthcare costs in retirement.

Finally, one of the best resources for retirement planning is consulting a financial advisor. “Nobody knows the future, so a good financial planner will build a personalized plan with multiple scenarios to project your retirement plan success and give you peace of mind,” Overweg says. “And, of course, this plan will continue to be updated as the world evolves.”

How Much Should I Budget for Healthcare Costs in Retirement?

You should plan for out-of-pocket costs like premiums, copays, and prescriptions as part of your Medicare coverage. Healthcare costs tend to rise faster than general inflation, so budgeting for a 5-6% annual increase is wise. Additionally, nearly 70% of retirees will require long-term care, which Medicare does not cover. According to Fidelity’s latest estimate, a 65-year-old retiring in 2024 may need up to $165,000 in savings—an increase of almost 5% over 2023—to cover healthcare expenses throughout retirement.

Does Medicare Cover Long-term Care Expenses?

No, Medicare does not cover non-medical long-term care expenses like nursing homes, assisted living, or home healthcare. Long-term care costs are high, and long-term care insurance policies can help offset these expenses.

What Are Some Ways to Save on Healthcare Costs in Retirement?

Signing up for a Medicare Advantage or Medigap plan (you can’t have both) may help reduce out-of-pocket costs. If you’re still working and have a high-deductible healthcare plan, consider using a health savings account (HSA) to stash away tax-advantaged money for qualified healthcare expenses. Now and into retirement, prioritize your health with preventive care like vaccinations and regular check-ups and screenings to catch problems early.

The Bottom Line

It’s impossible to know what kind of health care emergencies will occur during your retirement–your age, health history, lifestyle, and genetics will all play a role.

By researching financial tools that can help you save on health care costs, like savings accounts and long-term care insurance, and talking to a retirement financial professional, you can protect yourself against unexpected health care costs in retirement.