Planning for Health Care Costs in Retirement

James Todd, CFP®, CTFA®

Sr. Wealth Advisor


Planning for health care costs in retirement has many unknowns and options. Learn the value of insurance and savings choices.

Person planning for health care in retirement

When planning for retirement, figuring out your health care costs can be daunting due to many unknowns and multiple options. Medicare can help cover some of your health care needs, so it’s important to learn about whether you are eligible and when you should enroll for coverage. You should also consider other ways to save for health care expenses, whether it’s a health savings account or long-term care insurance.

Health care costs

According to a recent study by Fidelity, the average retired 65-year-old couple may need approximately $315,000 saved (after tax) to cover health care expenses during retirement.1 Because these estimates are based on average costs, your actual costs could be more or less depending on when and where you retire, how healthy you are, and how long you’ll live.

Maybe you see $315,000 as a significant but manageable amount. But keep in mind that this payout can derail even the most well-conceived retirement, because it doesn’t account for long-term care and other catastrophic events, such as a debilitating/chronic illness or injury. While it isn’t entirely possible to completely plan for your health care costs in retirement, here are some steps you can take to make sure you’re covered.

Important to Note:

  • Health care costs generally do not occur all at once. The estimated $315,000 for health care costs for a couple aged 65 is the cumulative amount over a 20-year retirement.
  • On average, monthly premiums make up between 73% and 81% of the average retiree’s monthly health care expenditures2, making it a predictable and recurring expense that should be factored into a retirement plan.

Cost of care graphic

Medicare coverage

Medicare is the government-sponsored health care system for U.S. citizens aged 65 or over. It consists of Part A (hospital coverage,) Part B (physician and outpatient hospital coverage,) and Part D (prescription coverage.) Most people do not pay any premiums for Part A (if Medicare taxes were paid while working.)

For Part B, you pay a premium based on your modified adjusted gross income (Medicare uses your modified adjusted gross income as reported on your previous tax returns from two years ago to calculate your premium.) Most Americans pay $174.40 per month for Part B coverage in 2024; however, Part B premiums can be as much as $594.00 per month for those with the highest incomes.3 In addition, many Americans purchase Medicare Supplement (also called Medigap) insurance to cover Part B deductibles and co-pays. There are many different Medicare Supplement plans and they can cost a 65-year-old anywhere between $40–$796 per month.2 Part D prescription coverage varies depending on where you live and the insurance provider. According to the National Council on Aging, the nationwide average monthly Medicare Part D premium for 2024 is $55.50.4

When you add up all these costs, a “typical” retiree will spend more than $325 per month on Medicare premiums and supplemental insurance. Also, Medicare premium costs generally increase every year, while Medicare supplemental insurance costs increase every few years, depending on the company. Read more about Medicare.

Long-term care

Unfortunately, Medicare does not always pay for long-term care. Medicare covers some types of long-term care including in-home care, hospice care, and short stays at skilled nursing facilities. To be eligible for coverage, you must meet certain rules. If you have Medicare Advantage (Part C) or other Medicare health plan, you can check with your plan to see if it may cover a nursing home, but it typically doesn’t.

Ways to save for health care expenses

While you can factor monthly Medicare premiums into your retirement plan, it’s critical to have a plan for health care expenses and long-term care. There are several options, including:

  • Health Savings Accounts (HSAs). These accounts allow you to use pre-taxed dollars to pay for current or future health care expenses. Any balance remaining in your HSA at the end of the year rolls over to the following year. Also, since HSA plans allow you to invest your contributions (via mutual funds,) you can grow your balance on a pre-tax basis. You will not pay tax on withdrawals if you use the funds for eligible expenses like deductibles, copays, coinsurance, and other qualified medical expenses not covered by your medical plan. For 2024, you can contribute up to $4,150 to an HSA (or $8,300 for your family). If you are over age 55, you can contribute an additional $1,000 per year.5 Once you enroll in Medicare, you can’t make HSA contributions, but you can continue to use the HSA balance for Medicare deductibles, prescription drugs, dental expenses, and other medical costs in retirement. Read more about HSAs.
  • Long-term care insurance. There are two popular options: a traditional long-term care insurance policy and life insurance with living benefits.
    1. With traditional long-term care insurance, you purchase a policy and pay a monthly premium. In return, your policy provides a certain amount of coverage, usually on a maximum monthly or daily benefit basis. There are certain requirements that must be met before benefits are paid but, generally, if a claim is made, benefits are paid by the insurer. Long-term care insurance policies are notoriously hard to underwrite and are expensive, due to people living longer but not necessarily healthier. Also, if you are in poor health or already have a chronic illness, you may not qualify for long-term care insurance. On the flip side, it’s possible that you may never need long-term care; approximately one-third of retirees never need long-term care support.6
    2. Traditional life insurance policies pay a benefit upon death of the insured, but some life insurance policies come with living benefits riders which provide benefits for long-term care while the insured is living. With the living benefits rider, you would cover or offset any long-term care expenses using a portion of the life insurance payout. If you don’t use the long-term care benefit, your beneficiaries will receive the entire death benefit. Oftentimes, the long-term care benefit is a multiple of the life insurance benefit. Read more about long-term care insurance.

At Mercer Advisors, we engage in thorough discussions regarding your retirement plan’s approach to managing healthcare expenses. This discussion may include details about your family medical history, provisions for unforeseen costs, your options for Medicare, and considerations for long-term care. With the guidance of your advisor, we ensure proactive planning for both anticipated and unforeseen life events, helping to establish a robust and dependable strategy. If you are not a Mercer Advisor client and want to know more about planning for health care costs in retirement, let’s talk.

1 “How to Plan for Rising Health Care Costs,” Fidelity, June 21, 2023.

2 “Breaking Down Health Care Expenses in Retirement,” T. Rowe Price, March 22, 2024.

4 “What is Medicare Part D?” National Council on Aging, Oct. 27, 2023.

5 “Health Savings Accounts (HSAs) Rules,” USA Today, Dec. 19, 2023.

6 “How Much Care Will You Need?”

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