How much does retirement health care cost? Find out how to estimate your health care costs in retirement.
How much does health care in retirement cost?
Health care is a line item in your annual retirement budget, just like food, clothing, and shelter. And like those other expenses, you can plan for it.
In this article, we'll explore 5 factors that could cause your average annual health care costs to rise or fall—so you can get a better sense of where you stand and learn how to prepare accordingly.
Why should you plan for health care in retirement?
Even with Medicare, health care costs in retirement can be considerable. Although costs vary substantially from person to person, it's possible to estimate what yours might be and develop a plan for handling them.
Want help creating a personalized plan that factors in retirement health care?
How much should you save for health care in retirement?
How much money you'll need for health care may be the biggest unknown expense you'll have in retirement, and how you prepare could determine how long your savings will last. Our research has shown that 5 things are particularly important to consider as you budget for health care in retirement.
1. Health status
How healthy you are when you enter retirement and your family health history largely determine the Medicare coverage you'll need and how much you can expect to spend on health care.
A few questions to consider:
- Do you smoke?
- Do you have an unhealthy diet?
- Do you refrain from exercise?
- Do you visit the doctor often (at least 10 times a year)?
- Do you have 2 or more chronic health conditions?
If you answered "yes" to at least 1 question, you should plan to spend more of your retirement income on health care. Keep in mind that a higher health risk can also increase the likelihood you'll need long-term care. Fortunately, many retirees don't end up needing it—but if you do, it can be expensive. You may want to think about building long-term care into your plan as a separate cost.
2. Medicare choice
When it's time for you to enroll in Medicare (at around age 65), carefully review the available plans and choose one that's right for you based on your individual needs.
Costs vary based on coverage. When considering your options, think about whether you'd prefer to pay higher premiums (and additional premiums for extra policies) to increase the predictability of your out-of-pocket costs. You'll reenroll each year around the same time, so you'll be able to reevaluate your plan and choose a different option to address your evolving needs.
If you need guidance around your Medicare decision, getting in touch with a financial advisor is a great start. They have resources that can help you narrow your plan selection based on your priorities.
3. Amount employer subsidizes
If you've had coverage through an employer-sponsored plan (either yours or your spouse's), your health care costs in retirement could increase. If that's the case for you or your spouse, you might need to bridge that gap with other funding.
A health savings account (HSA) may help. If you have an HSA, you can use the money you withdraw from it for qualified medical expenses. You could also pay out of pocket from your retirement savings. The decision is yours.
4. Retirement age
Some aspects of your retirement savings—like Social Security and your retirement account and HSA contributions—are easy to plan around. However, unpredictable economic factors such as inflation and market volatility can make it hard to determine how much you should save for retirement. If you're an early retiree or planning to become one, it's important to figure out whether you're saving enough to cover health insurance and health care expenses during those gap years before you're eligible for Medicare.
When considering health care for early retirement, one possibility is to stay on your spouse's employer-sponsored plan if your spouse is still working. You could also remain on your employer's plan through the Consolidated Omnibus Budget Reconciliation Act (COBRA), which allows workers and their families to continue health benefits under their group plan. However, COBRA coverage costs more than what most employees pay for health care before they retire. Additionally, COBRA coverage usually only lasts for 18 months (or up to 36 months for qualified individuals).1 That means if you retire before you're eligible for Medicare, you may have to use a combination of different solutions to cover your health care expenses.
If an employer-sponsored plan isn't a possibility, you can buy insurance through the federal marketplace or purchase private insurance. All these health care options for early retirees have their own requirements, and their costs vary, so you'll want to do some research to see what makes sense for you.
And since asset location and tax-loss harvesting2 can help lower your modified adjusted gross income, you might qualify for cost-lowering health care subsidies like those under the Affordable Care Act.
5. Location
Where you live in retirement also affects your health care costs. Although traditional Medicare coverage costs the same everywhere, other expenses such as prescription coverage, supplemental plans, and private insurance can vary from state to state and even region to region within the same state.
Explore our helpful retirement savings guide
Things to remember
Your own costs will vary
Your expected health care costs will be different than anyone else's. You'll need to take the factors above into account to get an accurate assessment.
Consider health care options before you retire
Your total retirement spending might be higher than planned once you accurately account for the cost of health care in retirement—especially if your employer has been generously subsidizing your preretirement costs. When researching available plans, think about what each offers and how they match your needs. Know the details of each plan's deductibles, co-pays, coinsurance, and maximum out-of-pocket costs.
As health care costs rise, other costs might come down
For most people, increased spending on health care later in life will be somewhat offset by reduced spending in other categories.
Make health care spending part of your budget
You'll find it much more useful to think about health care spending as an annual part of your budget, as opposed to a huge lifetime lump sum. Try our Retirement Expenses Worksheet to get a sense of what your budget can look like.
Long-term care costs are different
You might not need to pay for long-term care at all, but if you do, it can be very expensive. Your retirement plan should separately address the potential for long-term care costs.