How to manage health care costs in retirement

When thinking about retirement, most people imagine how they’ll fill their free time with new hobbies, travel, and visiting with family and friends. But medical issues often creep in as we age, and unfortunately, many people fail to properly budget for this reality as they’re planning for their golden years.

Some studies suggest a retired couple should have more than $300,000 set aside for health care costs during retirement, a sum that can seem out of reach for many Americans. Here’s how to plan for health care costs during retirement and what you can do today to avoid a major headache down the road.

3 ways to plan for retirement health care costs

1. Save now through a Health Savings Account (HSA)

An HSA works similarly to a retirement account such as a 401(k), but the money can be withdrawn tax-free to pay for qualified medical expenses. HSAs are offered as part of high-deductible health insurance plans and come with the triple tax benefit of tax-deductible contributions, tax-free withdrawals for medical expenses and tax-deferred growth on your investments. Here’s what else you should know about HSAs.

• In 2025, the minimum deductible for a HSA-eligible plan is $1,650 for individuals and $3,300 for families.
• Individuals are able to contribute up to $4,300 in 2025, while families can put in up to $8,550. If you’re age 55 or older, you can contribute an additional $1,000 each year.
• You can invest the money in your HSA account and the balance rolls over from year to year, so you don’t have to worry about spending a certain amount each year.
• Withdrawals used to pay for qualified medical expenses are tax-free. If you use the money to pay for non-medical expenses prior to age 65, you’ll pay a 20 percent penalty.
• During retirement, an HSA can act as a second retirement account because you can withdraw the money for any reason once you reach age 65, but you’ll pay taxes if you use the money for non-medical purposes.

2. Consider long-term care insurance

Thinking about a time when you aren’t able to take care of yourself or can no longer stay in your home is a difficult topic for most people. But many people end up needing long-term care near the end of their lives and the costs can be substantial. In 2023, the median cost for a private room in a nursing home was $116,800 annually, according to a report from Genworth. This is a hefty sum to come up with at any time, but especially near the end of your retirement and for an uncertain amount of time.

One way to plan for this is to purchase long-term care insurance. In this type of policy, you’ll pay premiums in return for the insurance company covering costs related to long-term care for a period of time or for the rest of your life.

These premiums can be expensive, however, so some people might be better off purchasing a life insurance policy with a long-term-care rider. By adding a long-term-care rider to an annuity or life insurance policy, you’ll be able to use some or all of the death benefit while you’re still alive to pay for long-term-care costs not covered by health insurance.

3. Understand what Medicare does and doesn’t cover

Medicare is the federal health insurance program for people age 65 and older. The different plans available through Medicare can get complicated quickly, but one thing that is not covered by Medicare is long-term care. Here’s what is covered by different parts of Medicare.

• Medicare Part A – this relates to hospital insurance and covers inpatient hospital stays, skilled nursing facility care, hospice care and some home health care. You typically don’t pay a monthly premium for Part A if you or your spouse paid Medicare taxes while working for a certain amount of time.
• Medicare Part B – this deals with medical insurance and covers certain doctors’ services, outpatient care, medical supplies and preventive services. The standard monthly premium for Part B will increase to $185 for 2025.
• Medicare Part D – this covers prescription drugs as well as recommended shots and vaccines.
• Medicare Advantage – Medicare Advantage plans are offered by private companies that are Medicare-approved as an alternative to Original Medicare and typically includes Medicare Part A, B and D. You may also get additional coverage for things like vision, hearing and dental that aren’t covered by Original Medicare.

How much should you budget for medical expenses in retirement?

Exactly how much you’ll need to save for medical expenses during retirement can be difficult to estimate and will depend on your individual circumstances. But studies suggest that the amount you’ll need can be substantial.

A typical retired couple who is 65 years old in 2024 could need about $330,000 after taxes to cover health care costs during retirement, according to Fidelity. The precise amount will depend on when and where you retire, your overall health, how long you live and how you plan to pay for health care expenses.

Another study from the Employee Benefit Research Institute estimates that a couple with high drug costs throughout retirement would need savings of about $413,000 by age 65 to have a 90 percent chance of covering their health care expenses during retirement.

These big numbers can be intimidating and feel out of reach for some, so it’s also worth looking at costs on an annual basis. In 2022, Medicare households spent an average of $7,000 on premiums and health care costs, accounting for 13.6 percent of their total household spending, according to a recent analysis by the Kaiser Family Foundation.

Keep in mind that health care costs are projected to increase, so you may end up needing more than these amounts in the future. Having regular checkups with your doctor and living a healthy lifestyle can help to minimize the medical expenses you’ll see during retirement, but many of the costs are a reality of getting older.

Bottom line

Health care costs are often overlooked when it comes to planning for retirement. People naturally think about how they’ll pay for the things they want to spend their time doing instead of spending on medical needs. But these costs are a reality, and you can take steps today to plan for them. Consider saving through an HSA plan or purchasing a long-term care insurance policy. Ask questions about what is and isn’t covered by different Medicare plans so that you’re not surprised during retirement.

Planning for these costs now can help make your golden years all that you imagine them to be.