5 questions to help plan for healthcare costs in retirement
Even with Medicare, medical expenses could put you at risk of outliving your savings. Here's how to prepare for healthcare costs in retirement.
If you're expecting Medicare to take care of all your healthcare needs once you retire, you may be in for a surprise. "Many folks just assume Medicare is going to pay for everything but, in reality, it only covers about two-thirds of your costs," says Ben Storey, director, Retirement Research & Insights, Bank of America.
Premiums, out-of-pocket expenses and critical services not covered by Medicare can deplete the retirement savings you're working so hard to build. To get an idea of future costs and develop a plan to address them, consider these five questions.
Many folks just assume Medicare is going to pay for everything, but in reality, it only covers about two-thirds of your costs.
— Ben Storey,
director, Retirement Research & Insights,
Bank of America
1. How much could medical expenses cost me in retirement?
Healthcare costs have historically increased at 1.5 to 2 times the rate of inflation,Footnote 1 growing 1% to 5% each year.Footnote 2 The amount you spend over your lifetime could put you at risk of outliving your retirement savings.
As you save for retirement, explore what Medicare does — and doesn't — cover. Next, estimate how much you may need to put aside for future healthcare costs and finally, develop a plan to help you get there. "Consider factors such as your current health, your family's health history, where you'll retire (medical costs can vary across the country) and whether your employer offers retiree health coverage," says Storey.
2. What will Medicare cover?
Medicare consists of several different plans, each of which covers different services.
Medicare Parts A and B, known as Original Medicare, cover a portion of hospital stays and medical services — but not vision, hearing or dental care; prescription drugs; or medical care outside the U.S. So, you may want to add a drug plan (Part D) and a Medicare Supplement Insurance policy, (commonly known as Medigap), which can help cover out-of-pocket costs as long as you have original Medicare. Medicare Advantage (Part C) is a private insurance alternative that bundles much of that coverage but often restricts you to a limited network of providers.
While Medicare Part A is typically premium-free, you must meet a deductible before Medicare starts to pay ($1,632 in 2024Footnote 4). There are monthly premiums for Part B, some Part C plans, Part D prescription coverage and Medigap. "Weighing these options is an important decision as you approach retirement," notes Storey.
Medicare plans at a glance
What the five major types of Medicare plans cover and how your costs can vary
| |
|
|
| Medicare plan |
Coverage |
Out-of-pocket costs |
Part A
(Hospital insurance) |
Inpatient hospital, skilled nursing, home healthcare, hospice care |
Deductibles, coinsurance and copays |
Part B
(Medical coverage) |
Doctors' visits, outpatient care, other medical services |
Monthly premiums, deductibles, coinsurance and copays |
Part C
(Medicare Advantage) |
Private alternative to Parts A, B and D, plus optional benefits; network limits common |
Variable costs determined by insurer |
Part D
(Prescription drugs) |
Brand name and generic drugs |
Monthly premiums, deductibles, coinsurance and copays |
Medicare Supplement Insurance
(Medigap) |
Paired with Parts A and B to help with some of the costs those plans don't cover |
Monthly premiums |
3. What if I retire before I'm eligible for Medicare at age 65?
Unless your employer offers retiree coverage, you'll need to consider alternate options. You could stick with your employer's health insurance plan under the Consolidated Omnibus Budget Reconciliation Act (COBRA) for up to 18 months, but your premiums will be considerably higher than they were. Other possibilities could include coverage under a spouse's plan or buying coverage through the
Go to third-party website Health Insurance Marketplace popup or a private insurer.
4. How can I plan for my future long-term care needs?
Even with all the medical coverage available through Medicare, there's one piece that falls through the cracks: long-term care. Someone turning 65 today has a nearly 70% chance of requiring some type of long-term care during their lifetime.Footnote 5 Here's what it might cost you today.Footnote 6
What you could spend on long-term care services in retirement
| Service |
Annual median cost |
| Private room in a nursing home |
$116,800 |
| Semi-private room in a nursing home |
$104,000 |
| Assisted living facility |
$64,200 |
| Home health aide for 44 hours/week |
$75,500 |
| Homemaker services for 44 hours/week |
$68,600 |
If you have not purchased long-term care insurance by the time you're in your 60s, the premiums on traditional long-term care policies may be out of reach.
— Ben Storey,
director, Retirement Research & Insights,
Bank of America
Long-term care insurance can help improve the chances that your savings will last through your full retirement. However, time is of the essence. "If you have not purchased it by the time you're in your 60s, the premiums on traditional long-term care policies may be out of reach," Storey says. "
Other options to consider include hybrid life insurance/long-term care policies, which are designed to provide long-term care coverage as well as cash value you could tap."
5. Can a health savings account help with my planning?
A health savings account (HSA), with its multiple tax advantages,Footnote 7 is a particularly powerful way to save for medical expenses, such as long-term care services, prescriptions, insurance premiums and more. With an HSA, you won't owe income taxes on your contributions, earnings grow tax-free, and withdrawals for qualified medical costs are tax-free.
To qualify for an
HSA you must be enrolled in a high-deductible health plan, and you can't be covered by any other medical plan or be enrolled in Medicare. There are
annual limits (PDF) to how much you can contribute each year, but the impact of those savings over the long term can be substantial.
Your healthcare needs are too important to leave to chance. "The more you can earmark for healthcare as you save for retirement, the better," Storey sums up. Doing so is good for your financial health in retirement.
This material should be regarded as general information on Healthcare and Medicare considerations and is not intended to provide specific advice. If you have questions regarding your particular situation, please contact your legal or tax advisor.
Footnote 1 HealthView Services, "2022 Retirement Healthcare Costs Data Report," March 2022.
Footnote 2 Peterson-KFF Health System Tracker, "How does medical inflation compare to inflation in the rest of the economy?" July 2023.
Footnote 3 Employee Benefit Research Institute, "Projected Savings Medicare Beneficiaries Need for Health Expenses Increased Again in 2023 — Some Couples Could Need as Much as $413,000 in Savings," January 2024.
Footnote 4 Medicare. "Costs". Accessed April 2024.
Footnote 5 U.S. Department of Health and Human Services, "How Much Care Will You Need?" 2020.
Footnote 6 Genworth, "Cost of Care Survey 2023, March 2024.
Footnote 7 You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax, unless an exception applies. Any interest or earnings on the 411 assets in the account are tax-free. You may be able to claim a tax deduction for contributions you, or someone other than your employer, make to your HSA directly (not through payroll deductions). In addition, HSA contributions may reduce your state income taxes in certain states. Certain limits may apply to employees who are considered highly compensated key employees. Bank of America recommends you contact qualified tax or legal counsel before establishing an HSA.
Footnote 8 HealthView Services, "The Role of Healthcare Cost Planning in Financial Wellness," March 2023.
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