Your Essential Guide to Managing Healthcare Costs in Retirement

Retirement is often seen as a time of relaxation and enjoyment after years of hard work. However, one aspect that often gets overlooked in retirement planning is the cost of healthcare. As we age, healthcare becomes an increasingly significant part of our expenses. Most retirees will have access to Medicare at age 65, but many planning for retirement do not have a clear understanding of what Medicare covers, what additional options are available, or, most importantly, what their retiree healthcare will cost. Today we’ll shed light on these hidden costs and provide a comprehensive guide to planning your savings for healthcare in retirement.

The Average Projected Cost

An average 65-year-old retiring in 2022 is projected to pay north of six figures for healthcare over the course of their remaining lifetime. It is important to keep in mind that just how much you will pay in retirement may vary substantially from the average amounts and is dependent on your individual circumstances. There are factors you can control such as when you retire, where you live during retirement, or what benefit plan you choose. You will have less control over factors such as your health status or how long you will live, both of which are primary drivers of how much your healthcare will cost.

The costs for the average retiree are a helpful starting point, but you must consider all of these factors and more in order to ensure you are financially prepared to address your healthcare needs during retirement. Most retirees are eligible for Medicare at age 65 (or earlier, in some cases). We review costs under the two most common pathways taken by Medicare-eligible retirees.

Medicare Coverage Options

Although the majority of Medicare beneficiaries are covered under either Medigap or Medicare Advantage, retirees may have other coverage such as employer-sponsored coverage, Medicaid, or Veterans Affairs (VA) healthcare that would likely reduce their cost of healthcare during retirement. Retirees may also choose not to add any supplemental coverage to Original Medicare, which may increase or decrease overall healthcare spending, depending on utilization.

A healthy 65-year-old male retiring in 2022 is projected to spend approximately $264,000 on healthcare expenses during his retirement. The retiree is assumed to have a life span of 88 years. To cover this future spend in today’s dollars, he needs $177,000 in savings in 2022. A healthy 65-year-old female retiring in 2022 is projected to spend approximately $300,000 on healthcare expenses during her retirement. The retiree is assumed to have a life span of 90 years. To cover this future spend in today’s dollars, she needs $194,000 in savings in 2022.

Choosing the Right Coverage Option

Choosing which coverage option is right for you will depend on your individual situation. A healthier retiree who values lower premiums over freedom to choose any healthcare provider may prefer Medicare Advantage. A retiree with higher expected healthcare utilization either currently or expected in the future may prefer Medigap. Whatever your situation, it is important to understand the options available to you and their differences so you can make the best decision for both your health and your finances.

Most people cannot apply for Medicare until age 65, and if you retire before then your healthcare costs will generally be much higher. For example, if you retire five years earlier, at age 60, you can expect to pay approximately the following over your remaining lifetime. Note that the healthcare costs prior to age 65 are the same in each scenario.

Planning for Healthcare Costs in Retirement

Out-of-pocket costs for healthcare are an important part of retirement planning, and how much you will spend depends on a variety of health factors. Healthier retirees (representing the average of the lowest-cost third of Medicare beneficiaries) can expect to spend approximately the following over their remaining lifetime. Retirees with below average health (representing the average of the highest-cost third of Medicare beneficiaries) can expect to spend approximately the following over their remaining lifetime.

Even if you don’t have any current health issues, it is important to consider that your health status can change rapidly. There is great potential for considerable healthcare spending in the later years of life, especially if you have a chronic condition or an acute episode such as a heart attack or stroke. If you have health issues or are at risk for developing health issues, consider addressing this potential risk by budgeting for a below average health status in retirement.

Considering Your Lifespan

While you can’t control your life span, you should plan for it. A range of plus or minus five years in life span can increase or lower retirement healthcare costs significantly. Under either plan option, when it comes to the amount you will pay for healthcare in retirement, where you live can also be a significant factor. Although Original Medicare has standardized costs that are the same in each state, the cost of Medicare Advantage, Medigap, and Part D plans can vary greatly by state.

Geographic Variations in Healthcare Costs

The maps in Figures 4 and 5 show which states have higher, lower, and average costs for both pathways; for Original Medicare plus Medigap plus Part D, and for Medicare Advantage plus Part D. Healthcare expenses are an important, and sometimes overlooked, component of overall retirement planning. Start by asking yourself the following questions, and even discuss some of them with your healthcare and financial advisors.

Planning for a Healthier and More Secure Retirement

By taking a realistic look at your health and healthcare expenses as part of your overall retirement plan, and budgeting accordingly, you position yourself to enjoy a less stressful, more healthy retirement. Projected costs have been calculated using the following assumptions.