The Role of Healthcare in Your Retirement Planning

Preparing for retirement involves more than just saving and investing wisely. Healthcare should play a pivotal role in your planning, as medical costs in retirement can be one of the biggest budget items. Understanding how healthcare fits into a retirement plan and estimating likely costs are key to ensuring adequate resources. This article explores the central role Healthcare in Your Retirement Planning

Healthcare Costs Continue to Rising

Healthcare spending has substantially outpaced general inflation for decades. Annual increases of 4-6% above inflation are common, even with insurance coverage. Rising costs are driven by new technologies, expensive specialty drugs, an aging population, and overall medical inflation. With longer lifespans, retirees also need care for more years.

According to Fidelity Benefits Consulting, the average retired couple aged 65 in 2022 needs about $315,000 saved just to cover medical expenses in retirement. And that figure is expected to rise to over $400,000 in 5 years. There is no indication of healthcare costs slowing down, so robust planning is essential.

Medicare Doesn’t Cover Everything

Many retirees mistakenly believe Medicare will cover most or all health expenses in retirement. But in fact, Medicare provides only about 60% coverage on average. There are copays, deductibles, and limits on covered services. Importantly, routine dental, vision, and hearing care are not covered.

Medicare supplement (Medigap) policies and Medicare Advantage plans can offset some out-of-pocket costs but still leave coverage gaps. Retirees need supplemental savings of $100-$300 per month for these uncovered expenses. Planning for healthcare costs beyond just Medicare premiums is crucial.

Long-Term Care Isn’t Covered by Medicare

Medicare does not cover long-term custodial care often needed in the last years of life. This type of care, whether at home or in assisted living facilities, helps with daily living activities like bathing, dressing, and meals. Extended stays in nursing homes for chronic health issues also aren’t covered.

These services can cost from $50,000 to over $100,000 per year depending on location and care needs. Planning for potential long-term care through LTC insurance or self-funding is an important part of retirement healthcare preparations.

Role of Healthcare in Your Retirement Planning

Evaluate Retiree Health Benefits from Your Employer

Some employers offer retiree health insurance plans that can supplement Medicare. These plans may cover deductibles, copays, and extra services. Retiree plans provide a valuable additional layer of coverage.

Understand if this retiree health coverage is accessible to you, at what cost, and how comprehensive it is. Factor this into your overall retirement healthcare strategy. Just beware that employers can modify or drop retiree health plans. Don’t rely solely on the promise of future coverage.

Choose Medicare Options Carefully

At age 65, deciding between traditional Medicare plus private supplements versus Medicare Advantage deserves careful evaluation. Medicare Advantage plans are all-in-one but restrict provider choice. Supplements allow access but cover fewer expenses.

Where you live, your health status and your personal preferences matter. There are many complex factors to weigh when choosing how to coordinate Medicare and supplemental coverage in the most optimal way. Do your homework to make the best plan selection.

Factor Geographic Differences in Costs

Where you live significantly impacts healthcare costs, even with the same coverage. For instance, average annual premiums for Medigap Plan F range from about $1,500 in New Mexico to over $6,000 in New York. Hospital stays and procedures can also vary dramatically in price between regions.

Your retirement locale matters for healthcare expenses. Research medical costs specific to communities you are considering for relocation in retirement. Geographic arbitrage can help tame expenses.

Plan for Costs in Early Retirement Before Medicare

Don’t overlook health costs prior to Medicare eligibility at age 65. Retiring before 65 means paying for an individual health plan or COBRA. Average annual premiums for ACA plans now exceed $7,500 for an individual. Build a health savings fund to cover premiums and out-of-pocket costs before Medicare kicks in. This bridge between employer coverage and Medicare is an often overlooked expense for early retirees.

Role of Healthcare in Your Retirement Planning


In total, current estimates are that a healthy 65-year-old couple will need around $500,000 saved for retirement healthcare costs, excluding long-term care. Understanding all the intricacies of Medicare, supplemental needs, and how geographic differences and timing impact costs is crucial. Get educated on true healthcare expenses so your retirement planning can sufficiently prepare you.

FAQs About Healthcare in Your Retirement Planning

What healthcare expenses does Medicare cover?

Medicare covers hospital stays, doctor visits, preventive services, and prescription drugs but with copays and deductibles. It does not cover vision, dental, hearing aids, or long-term custodial care. Supplemental insurance is needed to reduce out-of-pocket costs.

What are the parts of Medicare?

Part A covers hospital care. Part B covers medical services. Part C are Medicare Advantage plans. Part D adds prescription coverage. Parts A & B comprise original Medicare which can be supplemented.

How much does Medigap Plan F cost on average?

Medigap Plan F premiums average around $2,000 annually but vary considerably by state and insurer. Plan F covers all Medicare deductibles, copays, and coinsurance but won’t be available to new beneficiaries after 2020.

Can I change Medicare Advantage plans each year?

Yes, Medicare Advantage plans can be changed each Open Enrollment Period from October 15 to December 7 each year. You can switch back to original Medicare or change to a different Medicare Advantage plan for the upcoming year.

How much should I budget for healthcare costs in retirement?

Budget at least $5,000-$7,000 per year per person for out-of-pocket healthcare costs in retirement plus Medicare premiums. Factor in higher costs for chronic health conditions. This covers copays, uncovered services, dental, hearing, vision and more.

A Ahmad
A Ahmad

A Ahmad, a certified financial planner, Retirement Step was created to share over two decades of retirement planning experience with readers looking to take control of their financial futures.

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