What Every Future Retiree Should Know
For many Americans, one of the biggest financial surprises in retirement isn't travel, hobbies, or helping with the grandkids. It's health care.
While Medicare provides valuable coverage beginning at age 65 for most people, it doesn't eliminate medical expenses. Premiums, deductibles, copays, prescription costs, dental care, vision services, hearing aids, and long-term care can all create significant out-of-pocket costs. And for those who retire before age 65, the costs can be even higher.
The good news is that, with thoughtful planning, you can prepare for these expenses and avoid having health care derail your retirement goals.
How Much Should You Expect to Spend?
The Employee Benefit Research Institute (EBRI) estimates that Medicare beneficiaries spend an average of about $4,000 annually in out-of-pocket health care expenses, not including insurance premiums.
Those costs include expenses such as:
- Deductibles and copays
- Coinsurance
- Prescription medications
- Dental and vision care
- Other routine medical expenses
While recurring costs tend to remain fairly predictable, unexpected health events, such as a heart attack, stroke, cancer diagnosis, or major surgery, often create the largest financial burden.
EBRI found that adults ages 65 through 84 spend roughly $4,000 annually on out-of-pocket medical costs, while households age 85 and older average more than $6,000 each year as health care needs increase.
Retiring Before 65? Plan for Much Higher Health Insurance Costs
If you're planning to retire before becoming eligible for Medicare at age 65, health insurance may become one of your largest retirement expenses.
Without employer-sponsored coverage, many early retirees purchase insurance through the Affordable Care Act (ACA) Marketplace, a spouse's employer plan, COBRA (temporarily), or a private individual policy.
How much should you budget?
A reasonable planning estimate for many early retirees is:
- $8,000 to $10,000 annually for an individual
- $18,000 to $25,000 annually for a couple
Your actual costs will depend on several factors, including:
- Your age
- Household income
- State of residence
- Tobacco use
- The level of coverage you choose
- Whether you qualify for ACA premium tax credits
Keep in mind that premiums are only part of the equation. You'll also want to budget for deductibles, copays, coinsurance, and prescription costs. Many financial planners recommend setting aside an additional $2,000 to $5,000 per person per year for out-of-pocket medical expenses, depending on your health and chosen plan.
For households retiring several years before Medicare eligibility, these expenses can total well into six figures, making health care one of the most important line items in any retirement income plan.
Don't Overlook Long-Term Care
One of the greatest financial risks in retirement is the potential need for long-term care.
Many people mistakenly believe Medicare pays for nursing home care. In reality, Medicare generally covers only short-term skilled nursing care following a qualifying hospital stay. It does not pay for ongoing custodial care, such as assistance with bathing, dressing, eating, or other daily activities.
Long-term care costs continue to rise nationwide. According to Genworth's Cost of Care Survey, average annual costs commonly exceed:
- More than $100,000 for a private nursing home room
- Over $60,000 for assisted living
- Tens of thousands annually for home health aides and adult day services
Without a plan, even a relatively short stay in a care facility can significantly reduce retirement assets.
Five Ways to Prepare
Fortunately, there are several steps you can take today to prepare for health care expenses in retirement.
1. Build Your Health Savings
If you're still working and enrolled in a qualified high-deductible health plan, a Health Savings Account (HSA) remains one of the most tax-efficient ways to save for future medical expenses.
HSAs offer three valuable tax advantages:
- Tax-deductible contributions
- Tax-deferred investment growth
- Tax-free withdrawals for qualified medical expenses
Unlike Flexible Spending Accounts, unused balances carry over indefinitely, making HSAs an excellent retirement savings tool. Just remember that once you're enrolled in Medicare, you can use the HSA to pay for expenses, but you can no longer contribute to it.
2. Enroll in Medicare at the Right Time
Missing your Medicare enrollment window can result in permanent late enrollment penalties.
Most people become eligible at age 65, with a seven-month Initial Enrollment Period beginning three months before their birthday month and ending three months afterward. If you're still working, your enrollment options may differ depending on your employer's size and coverage.
3. Review Supplemental Coverage
Original Medicare leaves beneficiaries responsible for several out-of-pocket costs.
Many retirees choose Medicare Supplement or Medicare Advantage plans to help manage expenses and, depending on the plan, receive additional benefits such as dental, vision, hearing, or wellness programs. Since benefits and provider networks can change annually, reviewing your coverage every year is a smart habit.
4. Explore Long-Term Care Insurance
Long-term care insurance may help cover services that Medicare generally does not, including:
- Nursing home care
- Assisted living
- Home health care
- Adult day care
- Certain hospice-related services
Premiums are generally lower and underwriting is easier when coverage is purchased before significant health issues develop.
5. Evaluate Critical Illness Coverage
A major illness can create expenses that go far beyond hospital bills.
Critical illness insurance provides a lump-sum cash benefit after the diagnosis of certain covered conditions, such as heart attack, stroke, cancer, kidney failure, or organ transplant, depending on the policy. The money can be used however it's needed, from paying deductibles and travel expenses to replacing lost income or covering everyday household bills.
Prepare Now, Worry Less Later
Health care is one of the few retirement expenses that almost everyone can expect to increase over time. Whether you're planning to retire at 55, 62, 65, or later, understanding your potential medical costs—and creating a strategy to address them—can help protect your retirement savings and provide greater financial confidence.
The earlier you begin planning for insurance premiums, Medicare decisions, long-term care, and unexpected medical expenses, the more options you'll have when retirement arrives.
If you'd like help evaluating your Medicare options, planning for early retirement health insurance, or exploring supplemental coverage, we're happy to answer your questions and help you understand the choices available.
