Are You Prepared for Medical Expenses in Retirement?
By Angela Dorsey
Medical expenses in retirement are one of the largest, most often underestimated expenses you’ll face after you stop working.
In fact, Fidelity estimates that a 65-year-old retiring today can expect to spend around $165,000 on healthcare alone, and for couples, that number jumps to $330,000.
The earlier you start planning, though, the better prepared you’ll be to manage those costs without draining your retirement savings.
This article looks at what to expect with medical expenses in retirement, what drives those costs, and what you can do now to build a plan that supports your health well into the future.
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 D: Helps with prescription 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 quietly 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 Accounts
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 in the U.S. are expected to double from $2.8 trillion to $5.6 trillion by 2047, with the lifetime cost on an individual level being anywhere from $130,000 (in Nebraska) to $244,000 (in Connecticut). Considering that about 70% of retirees may need some kind of long-term care in the future, this isn’t something to take lightly.
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 reverse mortgage.
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.
Partner With a Financial Advisor You Can Trust
Smart planning allows you to handle big medical expenses in retirement without draining your hard-earned savings. With long-term care costs expected to double by 2047, waiting to prepare isn’t an option. The sooner you act, the more options you’ll have to protect your nest egg.
At Dorsey Wealth Management, we focus on creating a retirement that’s secure and fulfilling. Let us help you build a plan that helps cover health costs while preserving your legacy. You can reach us at (310) 370-7776 or angela@dorseywealth.com.
About Angela
Angela Dorsey is the founder and financial advisor at Dorsey Wealth Management, a fee-only financial planning firm based in Torrance, California, helping women prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a CERTIFIED FINANCIAL PLANNER® professional and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.