Are you prepared for healthcare costs in retirement?

Healthcare costs in retirement are a tricky thing to budget for. You’ll have to get health insurance in retirement, plus plan for out-of-pocket expenses and prepare for an increase in costs if you need to go to an assisted living facility. 

If you started saving for retirement when you were young, that’s great! But even if you didn’t, there’s still a path to comfortable living alongside the medical expenses everyone can expect after they hit age 65.

How to plan for healthcare costs in retirement

Healthcare costs in retirement will likely be expensive. According to the Fidelity Retiree Health Care Cost Estimate, the average retired couple who are 65 in 2023 will need to have $315,000 saved toward out-of-pocket health care costs throughout their retirement, assuming both are enrolled in traditional Medicare. That estimate excludes over-the-counter medications, dental services, or long-term care. If you have Medicaid or excellent retiree healthcare coverage or remain in excellent health throughout your life, you might not need to pay this much out of pocket.

Long-term care, whether in an assisted living or at home, is an extra expense that Medicare doesn’t cover, and you should expect to budget about $200 per day, says Richard Stefanacci, DO, an internist and geriatrician who teaches a class about population health at Thomas Jefferson University.

Those are just averages, though. The cost of healthcare in retirement will vary significantly based on each individual. Jennifer Steil, a wealth management adviser in The Woodlands, Texas, notes, “A good rule of thumb is to have anywhere between 80% to 85% of your annual pre-retirement income for your annual retirement budget.” This includes all costs in retirement, including food, housing, vacations, and more. Additionally, you should be prepared for about two decades of healthcare costs. Stefanacci says to budget on the conservative end and have more money saved than you think you’ll need.

Retiree health insurance coverage 

One of the most important things to know about health insurance after retirement, or your health retirement insurance options, is that it doesn’t necessarily work the same way your health insurance did while you were in the working world. Your employer-sponsored plan may have included lower copayments and deductibles; plus, you were still getting a paycheck. For Medicare, those copayments and deductibles change depending on how you receive your Medicare coverage and whether you’re enrolled in or qualify for other programs, benefits, and insurance. But keep in mind that Medicare is not the only option for healthcare once you’re retired.

Medicare and Medigap

When you turn 65, you should apply for Medicare if you aren’t already receiving Social Security benefits. (Some people must apply with the Railroad Retirement Board instead.) You’ll have four parts within Medicare to choose from, plus optional supplemental health coverage called Medigaps if enrolled in Original Medicare. If you or your spouse are still working or getting insurance from your job, you may not want to take Parts B or D yet. Traditionally, Medicare Part B will cover approximately 80% of medical costs, says Cobi Blumenfeld Gantz, co-founder of Chapter, a free online website that helps seniors navigate the Medicare sign-up process. If you have Original Medicare, the remaining 20% is usually paid out-of-pocket or with a Medigap plan. These are the four parts Medicare.gov lays out:

• Medicare Part A: This part of Medicare covers services like hospital stays, skilled nursing care, hospice care, and limited home health care services. If you paid 10 years of Medicare taxes while working, you don’t have premiums for Part A. If you didn’t, it costs from $278 to $505 per month in 2024. If you didn’t pay Medicare taxes and are low income, you may be eligible for premium-free Part A through state subsidies.
• Medicare Part B: With this part of Medicare, you’ll pay premiums, copays, deductibles, and out-of-pocket expenses. In 2024, the premium can be $174.70 or higher depending on your income and tax filing status. Part B plans typically cover medically necessary—such as ambulance rides and medical equipment—and preventive services like flu shots. 
• Medicare Part C: Medicare Part C comprises the Medicare Advantage plans. Private companies contract with Medicare to offer these plans, which typically cover health and drug benefits. These cost about $18 per month, but costs vary by state and plan. With Medicare Advantage plans, you will have deductibles and coinsurance, so you must use doctors within the plan’s network. If you choose to enroll in Medicare Advantage, this is how you will receive your A, B, and D benefits instead of through original Medicare.
• Medicare Part D: Medicare Part D is the part of Medicare that covers prescription drugs. However, Part D is administered through private plans. For 2024, the average premium before income adjustments are applied is projected to be $55.50 per month, and there are deductibles and coinsurance that apply as well.
• Medigap: Medigaps are private plans that pay for some of the costs that original Medicare does not, such as copayments, coinsurance, and deductibles. You’re required to have Medicare Parts A and B if you want to use a Medigap plan.

RELATED: Medicare open enrollment guide

Group health retirement benefits

Some employers offer group health plan benefits for retirees from the company. These often work in conjunction with Medicare. When you have both, which is primary (billed first) and which is secondary depends on several factors. It’s important to check with your employee HR department to learn how they coordinate with Medicare and your best cost-saving options.

Marketplace insurance for early retirement

Retiring early? You’ll likely have to get a marketplace insurance plan. People who retire at 62 generally don’t qualify for Medicare, says Gantz. Keep in mind, though, that marketplace plans for people in their 60s are age-adjusted and will be pretty expensive. If possible, you could try to get on a spouse’s employer-based plan, which could be more cost-effective than a marketplace early retirement health insurance plan.

Long-term care insurance

As you age and transition into senior citizenship, your potential long-term care costs will likely increase due to medication, regular care, and any illness treatment. According to a Cost of Care Survey conducted by Genworth, the average cost of a semi-private room in 2021 was $7,908, while a private room averaged $9,034. A spot in an assisted living facility costs about $4,500 per month. You can get long-term care insurance to help defray these costs, but it is expensive and not commonly purchased. However, if you foresee a lot of expenses as you age, you might consider it while planning for retirement healthcare.

RELATED: Learn more about Affordable Care Act open enrollment

Spousal coverage

If your spouse is still working and you aren’t yet eligible for Medicare, you could get or stay on their health plan. It could be the least expensive option—depending on the size of their company, amount of coverage, etc. It would provide you a buffer of time to get Medicare figured out before you can switch.

COBRA

If you don’t want marketplace coverage or can’t get spousal coverage, check and see your employer’s COBRA coverage before calling it quits. Most employers will allow you to keep your coverage for up to 18 months, but you will have to pay the employer share as well as your own. 

Medicaid

If money is an issue in retirement, look into Medicaid. Medicaid is a joint state and federal government insurance program that will give you coverage if you’re low-income and have low assets. Check with your state for eligibility criteria.

Choosing which insurance to use is a highly personal process and should be considered carefully with all your expenses and other income you might have in retirement. And keep in mind that costs will probably increase as you get older. A couple retiring at 65 who are in good health and live about the average age will have minimal out-of-pocket costs. But as you transition into being a senior citizen, that amount could skyrocket if you’re on a lot of medications—and long-term care insurance, which is independent of health insurance, isn’t much cheaper.

How can I reduce retirement healthcare costs?

Keeping costs down for healthcare when you’re retired is more than just having a good amount of savings already built up. You must be proactive about staying healthy and regularly reviewing your insurance options. These tips will help you get and stay ready for healthcare costs in retirement.

Open an HSA while you’re still working

Since planning for your future healthcare comes with tons of variables, it’s difficult to plan for if you haven’t already started to save. Steil suggests opening a health savings account (HSA) while you’re still in your working years. “This plan can be a great way to save for medical costs during retirement, as it allows you to annually contribute several thousand dollars more toward your retirement, currently in a pre-tax environment, in addition to what you may already be saving,” she explains.

Work with a financial adviser

Working with a financial adviser makes retirement planning easier in general. A financial adviser will help you take an honest look at your finances and retirement savings plan and can help you figure out ways to set money aside for healthcare costs without breaking the bank. 

Try to stay healthy

The most effective way to reduce healthcare costs in retirement is to try to stay healthy. Stefanacci says to focus on three different aspects of your life: mind (by problem-solving), body (by walking), and spirit (by engaging with others). “The healthier you are, the less you’ll utilize expenditures,” he says.

Find the right PCP

A good primary care provider will be one you can stick with and who understands your goals, needs, and concerns. The more you work with them, the more they’ll be able to give you personalized care that will likely save you money in the long run.

Consider a Medicare Advantage plan

Medicare Advantage plans come with limited provider networks and more restrictions overall, but sometimes offer lower costs. If money is a major concern and you’re relatively healthy, this could be a good option.

Take advantage of low-income subsidies

Medicare offers subsidies for low-income consumers that you may be able to use. For Medicare Part D, check if you qualify for Extra Help, a program estimated to help with $5,300 or more per year of prescription costs for people with limited resources. You can also apply for four other Medicare Savings Programs:

• The Qualified Medicare Beneficiary (QMB) Program helps pay for Part A and B premiums. The individual monthly income limit to quality is $1,275, with a $9,430 resource limit. For couples, most states have a $1,724 monthly income limit and $14,130 resource limit.
• The Specified Low-Income Medicare Beneficiary (SLMB) Program helps pay for Part B premiums. To qualify, the individual monthly income limit is $1,526, and the resource limit is $9,430. For couples, there is a $2,064 monthly income limit and $14,130 resource limit.
• The Qualifying Individual (QI) Program helps pay for Part B premiums. To qualify, you must have Part A coverage. The individual monthly income limit is $1,715 and a $9,430 asset limit. For couples, there is a $2,320 income limit with a $14,130 resource limit in most states. You must reapply for the QI program every year.
• The Qualified Disabled and Working Individuals (QDWI) Program helps pay for Part A premiums. To qualify, a person must be working, have a disability, and have lost Social Security benefits and Part A coverage after a return to work. In addition, there is an individual monthly income limit of $5,105 with a resource limit of $4,000. For couples, it’s a monthly limit of $6,899 and a resource limit of $6,000.

These figures vary moderately by state, and some states may have more generous eligibility rules—including no asset test. Contact your local state health insurance assistance program (SHIP) or local Medicaid agency for details.

Reassess your situation every year

This is critical. According to Stefanacci, most people set up their healthcare for age 65 and then don’t reevaluate their plan ever again. Insurance companies know that and aren’t afraid to take advantage of it. “It’s like your cable bill,” he said. “There are benefits, and they make it really attractive to sign up. Then, over time, the plan slowly ratchets up the out-of-pocket expenditure, and they decrease the benefits. and no one even knows it’s happening.” If you analyze your plan yearly to see if it still works for you, this won’t be an issue. 

You can do this annual evaluation as part of Medicare open enrollment, which happens every year from Oct. 15 to Dec. 7. Using medicare.gov’s Plan Finder, review your current plan to see if anything has changed, paying special attention to premiums, out-of-pocket costs, formularies, and Evidence of Coverage and Annual Notice of Change documents. You should also compare it to other plans available and see if there’s a better fit based on how your medical needs have changed.

Use a savings card for prescriptions

With drug costs now stretching up into the thousands depending on what’s being treated or managed, a prescription savings card like SingleCare is one of the easiest ways to reduce costs. You can get a card at your local pharmacy, sign up for one online (like singlecare.com), or see if your medical plan offers one. However, a savings card works in place of insurance; meaning you can use either Medicare or your insurance benefits OR the SingleCare savings—not both.