After years of building your wealth, you want retirement to be about enjoying the life you've created, not watching unexpected healthcare costs erode your savings. Yet medical expenses in retirement are often one of the largest and most overlooked components of a retirement plan, making proactive planning essential.
In fact, estimates that a a 65-year-old retiring today can expect to spend approximately $172,500 on healthcare throughout retirement. For a retired couple, that figure rises to roughly $345,000. Those estimates don't include many long-term care expenses, making it even more important to plan ahead.
Understanding the potential costs early gives you more opportunities to prepare, helping you maintain your retirement lifestyle, preserve your savings, and make informed decisions about your future. This guide explores what contributes to medical expenses in retirement and strategies to help you plan with greater confidence.
Understanding Medical Expenses in Retirement
Medicare premiums are the first thing you might have to budget for. You'll pay monthly for:
- Part A: Covers hospital stays, skilled nursing care, and some home health services
- Part B: Covers doctor visits, outpatient care, preventive services, and lab work
- Part C: (Medicare Advantage): An alternative to Original Medicare offered through private insurers that often bundles Parts A, B, and sometimes D into a single plan. Coverage, provider networks, and out-of-pocket costs vary by plan.
- Part D: Helps with prescriptions drugs, but you'll need to enroll through a private plan
Then there are out-of-pocket expenses like co-pays, deductibles, and the cost of medications that aren’t fully covered. The problem is that these expenses can add up fast, even if you have decent coverage. And because they’re ongoing, they can gradually reduce your retirement budget over time.
Funding Strategies for Medical Expenses in Retirement
Below are some approaches you need to consider for your healthcare costs.
Health Savings Account
If you're still working and have a high-deductible health plan, getting a health savings account (HSA) might be a smart move. This is because it allows you to:
- Save tax-free: Contributions can lower your taxable income, growth typically isn't taxed, and withdrawals for medical costs are penalty-free.
- Invest for growth: Unlike FSAs (flexible spending accounts), unused HSA funds often roll over yearly. You can let them grow for decades.
- Cover gaps: After age 65, you can use HSA money tax-free for Medicare premiums (except Part A), dental work, or even long-term care.
If you can afford to pay your current medical expenses out of pocket, letting your HSA grow untouched can be a great way to create a strong healthcare fund for retirement.
Planning for Long-Term Care
Long-term care can wipe out a retirement budget quickly if you're not prepared.
Total long-term care costs can be significant and vary widely based on the type of care, the setting in which it's provided, and your location. For instance, the average for a private room in a nursing home isapproximately $147,168 per year in the Charlottesville area.
A few strategies recommended by financial advisors include:
- Long-term care insurance: Buying before age 60 lowers premiums, and policies often cover home aides, assisted living, or nursing homes.
- Hybrid life insurance: This combines a death benefit with long-term care coverage, meaning there's no "use it or lose it" risk.
- Self-fund: Save aggressively or use home equity via a HELOC.
Planning ahead, whether through insurance or savings, is one of the best approaches for shielding your retirement from the high cost of long-term care and medical expenses in retirement.
Roth IRAs and Tax-Savvy Withdrawals
Roth IRAs can be a great way to manage medical expenses in retirement, largely because qualified withdrawals don’t count toward your adjusted gross income. This means you can avoid triggering Medicare premium surcharges and may get the care you need without paying more than you have to.
Start Planning for Medical Expenses in Retirement Today
Planning ahead can make it easier to manage medical expenses in retirement without putting unnecessary strain on the savings you've worked hard to build. As healthcare and long-term care costs continue to rise, taking action early gives you more flexibility and a wider range of planning options.
At Wilkinson Wealth Management, we help clients create retirement strategies that account for future healthcare costs while supporting the lifestyle and legacy they envision. Reach out to us at 434-202-2521 or use our Contact Us page to schedule an appointment.
About Mitchell
Mitchell Moore is a financial planner with Wilkinson Wealth Management, a financial services firm of CFPs in Charlottesville, Virginia, providing customized financial planning and investment strategies with a personal approach. After completing a BS in Business Financial Planning from Virginia Tech, as well as a financial services internship, Mitchell found himself ready for the chance to jump-start his career. He applied for a position at Wilkinson and moved to Charlottesville after accepting the offer. He is very excited to grow and learn alongside our team.
Mitchell enjoys spending time exploring the local scene. He is the youngest of three boys and a tinkerer like his father. When he isn’t working on his current project restoring an old boat, he loves getting outdoors to fish and hike. He’s also an avid VT football fan and likes to watch their games.
This article was prepared for Mitchell Moore's use.