Don't Let Health Care Costs Wreck Your Retirement: Here's How

Many people see their day-to-day cost of living drop once retirement begins. But if one specific expense tends to rise among people as they age, it’s health care. It's a key piece of retirement planning that often gets overlooked.

Fidelity says that the typical 65-year-old who retired in 2024 can expect to spend $165,000 on health care expenses throughout retirement. That's a 5% jump from its 2023 estimate. And it doesn't include expenses like over-the-counter medication and long-term care. It’s no wonder that the idea of paying for health care in retirement is daunting to so many people.

The University of Michigan's 2024 National Poll on Aging found that among adults ages 50 and over, their top health-related concerns were the cost of medical care, the cost of long-term care, and the cost of prescriptions. And a lack of access to adequate and affordable health care was the greatest fear among 14% of retirees in a recent Transamerica survey.

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If you’re worried that the cost of health care will wreak havoc on your retirement budget, you’re not alone. But there are steps you can take to tackle them head on.

1. Control health care costs by never going without coverage

Going without health insurance is an enormous risk; it's just not worth it. But Medicare eligibility generally begins at 65. So, if you retire before then, you'll need a plan.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows workers to keep their employer-sponsored health insurance for a period of time after terminating a working relationship (voluntarily or otherwise). However, COBRA has two problems.

First, COBRA typically only lasts 18 months. If you plan to retire at age 62 (when you're first allowed to claim Social Security, COBRA may not see you through to age 65.

Also, with COBRA, you're typically paying full price for your employer's health plan — not the subsidized price employees get. So, all told, the cost may be prohibitive. Make sure to research options carefully if you will retire before turning 65.

2. Maximize your Medicare benefits

When you're new to Medicare, the program's numerous parts and rules might cause your head to spin. What you need to know on a basic level is that you can choose between original Medicare, which is Part A (hospital care), Part B (outpatient care), and Part D (prescription drug coverage), or Medicare Advantage.

Medicare Advantage plans are offered by private insurers as an alternative to original Medicare. They typically provide all-in-one coverage and don't require a separate drug plan.

Medicare Advantage plans are required to offer at least the same level of coverage as original Medicare. However, many offer supplemental benefits beyond what original Medicare covers, like dental care, eye exams, hearing aids, and fitness benefits. And in some cases, they can be more cost-effective than original Medicare, though not always, so it pays to compare your options.

Signing up for Medicare on time is another key way to keep your costs down. If you delay your enrollment, you could face a 10% surcharge on your Part B premiums for each 12-month period you were eligible to sign up but didn't. You could also face late enrollment penalties for Part D.

Another way to make the most of Medicare is to understand what free benefits you're eligible for. In addition to a one-time welcome checkup when you first enroll, Medicare offers no-cost wellness visits each year, vaccines, and certain screenings.

3. Reserve funds just for health care

Health savings accounts (HSAs) aren't available to everyone, since you can only participate in one if your health insurance plan is compatible. And the minimum deductible and out-of-pocket maximum requirements for HSA eligibility change every year.

But if you are able to fund an HSA, not only should you aim to max out, but you should also try to reserve all of that money for retirement. HSA funds never expire; unused funds can be invested and grown tax-free. Just be aware of the potential hidden costs of HSAs and check your plan's portability or exit fees.

Once you enroll in Medicare, you can no longer contribute money to an HSA. But you can absolutely take withdrawals from an existing HSA to cover various medical expenses you incur.

4. Have a plan for long-term care

An estimated 70% of people who reach age 65 will need some type of long-term care in their lifetime. Long-term care insurance isn’t necessarily the solution, since there can be high costs involved and limited coverage. However, it’s important to have a long-term care plan in place ahead of time.

If you have family nearby, it may be feasible to move in with a loved one or have them check in on you regularly as you age and need help with daily activities. It may also be possible to modify your home, if needed, to allow you to age in place.

Either way, be aware that generally speaking, long-term care is not an expense that Medicare is willing to cover. Long-term care often entails help with everyday activities, like bathing, dressing, and meal prep. But since Medicare’s coverage is strictly limited to medical issues, you shouldn’t expect it to pay for a home health aide or assisted living. Open discussions with family and researching options ahead of retirement are crucial so you’re not left scrambling.

Read More

• Average Cost of Health Care by Age
• How to Retire Early Due to Disability or Caretaking
• Signing up for Medicare While Still on an Employer Health Plan
• How Your HSA Can Reimburse You for Medicare Premium Payments Paid