Health Care in Retirement

In the category of “we like good news too”, the 2024 Medicare Trustees Report showed improvement. Yes, there are still long-term structural problems, caused by a combination of an aging population and rising health costs, but the Hospital Insurance program deficit narrowed and “the year of depletion of trust fund reserves has been pushed out five years to 2036,” according to the Center for Retirement Research at Boston College .

As a reminder, Medicare provides medical care and health insurance to individuals aged 65 or older and those who are entitled to federal disability insurance benefits. It is comprised of four parts : Medicare Part A (insurance for hospitalization, home or skilled nursing, and hospice), Medicare Part B (medical insurance), Medicare Part C (“Medicare Advantage Plans”, which are private options that bundle Part A, Part B, and usually Part D coverage into one plan), and Medicare Part D (prescription medications). Importantly, if you are married, each spouse has to apply individually to Medicare.

This year, the cost of Medicare Part B starts at $174.70 per month, with an annual deductible of $240. However, if you have modified adjusted gross income over a certain amount ($103,000 for singles, $206,000 for married filing jointly), you could be subject to additional surcharges. The extra amount, the Income Related Monthly Adjustment Amount (“IRMAA”), is a surcharge that applies to premiums for the entire year, even if you only go over by one dollar.

Most Americans pay the base amount of $174.70 per month, but when tallying up ALL health care costs in retirement, the numbers are steeper. According to Fidelity Investments ’ annual Retiree Health Care Cost Estimate , “a 65-year-old retiring this year can expect to spend an average of $165,000 in health care and medical expenses throughout retirement.”

This huge number breaks down as follows: Medicare, Parts A and B premiums (43 percent), prescription drug costs (10 percent), and all other health care costs, like co-payments, co-insurance and deductibles (47 percent). These numbers do not include any costs that someone would have to pay for long term care, and if you are married, the $165,000 number is actually double, yowsa!

How can workers plan for these future healthcare and medical expenditures? Ryan Viktorin, CFP at Fidelity Investments suggests that “everyone needs to factor in these costs today, and also plan on 5 percent annual increases in the future.” In practical terms, that means you need to add about $600-$700 per month, per person (in today’s dollars) to your future expenses, in order to cover 25-years of health care costs during retirement.

One way to do that, says Viktorin, is to use a Health Savings Account (HSA ), if one is available through your workplace. “The beauty of an HSA is that not only can it be used to pay for health care costs down the road, but it also offers triple tax savings”, meaning that contributions go into the account pre-tax, the earnings grow without taxes, and when you pull the money out later for qualified medical or health care expenses, there is no tax due! If you leave your job, you can take your HSA with you, and even use it decades in the future.

If you do not have access to an HSA, consider creating a distinct account earmarked for health care. This is a form of “bucketing”, whereby you fund separate accounts for specific purposes. Whatever method you choose and even if you are already enrolled in Medicare, Viktorin says that health care planning is not a “set it and forget it” event. Retirement plans and Medicare choices need to account for annual financial and health changes.