Retirement planning isn’t just about travel and relaxation. It’s also about preparing for healthcare costs. After 65, healthcare expenses can take up a significant part of your budget, and they often increase as you age. Many seniors are surprised by how much they end up spending, especially since Medicare doesn’t cover everything.
If you’re approaching or already in retirement, understanding the true healthcare costs and how to prepare for them can make a big difference in your finances.
Understanding What Medicare Covers and What It Doesn’t
Medicare is a federal health insurance program for people 65 and older. However, it’s not free and does not cover everything. Original Medicare includes Part A (hospital insurance) and Part B (medical insurance). Part A is usually premium-free if you worked and paid into Medicare long enough, but Part B requires a monthly premium. There’s also Medicare Part D, which covers prescription drugs and comes with a monthly premium.
Original Medicare Part B covers 80% of approved medical services. The remaining 20%, along with deductibles, copayments, and non-covered services, can add up quickly. Because of this, many retirees choose to enroll in a Medigap policy to help with these gaps or enroll in a Medicare Advantage plan that may offer more bundled coverage.
Keep in mind that Medigap plans are not always guaranteed if you apply outside your one-time Medigap Open Enrollment Period. Many people find themselves asking, “Can I pass Medigap underwriting?” This is a question that becomes important if you have pre-existing conditions and want to apply for a Supplement plan later on.
Even with these additional plans, you’ll still likely have out-of-pocket expenses. Original Medicare does not cover routine dental, vision, and hearing care, and some Medicare Advantage plans may only offer limited benefits in those areas.
How Much Should You Budget for Healthcare?
Healthcare spending varies depending on age, health, and location. For example, Milliman estimated that, on average, a healthy 65-year-old male will spend about $281,000 on medical expenses during retirement. In comparison, a female will spend about $277,000.[1] This includes premiums, prescription drugs, out-of-pocket costs, and services not covered by Medicare.
It can help to build your retirement budget with healthcare as a separate category, not something miscellaneous. You’ll also want to plan for consistent increases if possible. To give you an idea, the Medicare Part B premium increased from $148.50 in 2021 to $170.10 in 2022, resulting in an estimated 14.5% increase.[2]
Don’t Forget About Long-Term Care
One of the biggest surprises for many retirees is long-term care, which can include help with daily activities like bathing, dressing, or eating. This care is often provided in assisted living or nursing homes. Unfortunately, in most cases, Medicare and Medigap plans do not cover this kind of custodial care.
For other options, you may consider speaking with a discharge planner, social worker, or an organization that can help, such as an Aging and Disability Resource Center. You can also enroll in a long-term care insurance policy to help cover costs.
Also, nursing homes and assisted living facilities are usually costly. Without long-term care insurance or a financial plan to cover them, these costs can quickly drain your savings.
How to Prepare Financially
Start by reviewing your current health and family history. If you’re in good health now, that’s good, but you’ll want to be prepared for potential changes. Look into all your Medicare options and understand what each plan does and doesn’t cover. You might want to consult with a Medicare insurance broker who can help you compare plans, costs, and coverage.
It also helps to have an emergency fund set aside for unexpected medical bills. Some people use Health Savings Accounts (HSAs) if they qualify before enrolling in Medicare since those funds can be used tax-free for medical expenses in retirement.
Bottom Line
Healthcare will likely be one of your most significant retirement expenses. Medicare provides a strong foundation, but it’s not a complete safety net. By understanding your options and preparing a healthcare budget, you can avoid financial stress down the road and focus on enjoying retirement.
[1] https://www.milliman.com/en/insight/retiree-health-cost-index-2024
[2] https://www.kff.org/medicare/slide/monthly-part-b-premiums-and-annual-percentage-increases/
