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How much will I really need for health care in retirement?

Shelly  Gigante

Posted on March 09, 2023

Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Health care costs
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This article will...

Outline the factors that may affect your health care costs in retirement. 

Offer tips on how to reduce your health care costs as you age. 

Highlight specific financial tools that may help you mitigate longevity risk. 

Determining how much you may need to retire comfortably demands more than back-of-the-envelope math. It requires realistic projections of future expenses, including housing, utilities, and insurance premiums. Trouble is, one of the biggest potential expenses during your golden years is also the most difficult to predict — health care.

The cost of medical services and medications often soar as we age. They also vary dramatically depending on:

According to Fidelity Investments, the average couple who retires today at age 65 with traditional Medicare coverage can expect to spend roughly $315,000 (after tax) during retirement on copays, deductibles, insurance premiums, and other expenses not covered by insurance.1 That does not include costs associated with long-term care (LTC), the median annual cost of which was $108,000 per year in 2021 for a private room at a nursing home facility.2

Yet, many seniors underestimate how much medical care may set them back — by a lot. Fidelity found that the average American expects health care costs during retirement to be about $41,000. That’s $274,000 less than they’ll likely need, a potential shortfall that puts their financial security at risk.3

“In my experience, many clients drastically underestimate the overall cost of health care services in retirement,” said Daniel Drabinski, managing director of business and estate planning for Bluecrest Financial Alliances in Dallas, Texas. “Some have been misinformed over the years regarding the extent of Medicare coverage, while some have simply underestimated the recurring costs of prescriptions and medical emergencies.”

Indeed, Medicare (including Medigap supplemental coverage) generally does not provide coverage for long-term care or services and support for activities of daily living.4

To reduce the risk of outliving your savings, those planning for retirement must budget carefully for health care expenses. They may also wish to explore financial tools that can potentially provide a safety net.

Those include:

  • Health savings accounts (HSAs)
  • Annuities
  • LTC coverage

How much will I really need for health care?

National averages offer some useful perspective, but your own need for medical support and services in retirement may be significantly higher or lower.

For the purposes of budgeting, it helps to view your health care costs as two separate buckets.

  • Your health insurance premiums, for one, are a fixed expense that can be most easily factored into your monthly budget (allowing for inflation).
  • Your out-of-pocket expenses for copays and deductibles, on the other hand, are less predictable. They will vary depending on your health, gender, relationship status, and retirement age.

Your health and family history play a big part in personalizing your out-of-pocket projections.

Do you currently have a chronic illness or disability that may limit your life expectancy? Did your parents experience cognitive decline prematurely due to Alzheimer’s or dementia?

Your family medical history does not mean your health is predetermined, but it can highlight risk factors that may affect your future cost of care.

Women on average spend more on health care in retirement than men. Why? They outlive men by an average of about 6 years and, as a result, spend more on medications and procedures.5

Couples who live together may need less banked for health care overall as they can help nurse each other back to health after surgeries, illnesses, or medical setbacks. And those with kids who are willing to help care for them as they age may also rack up fewer health care-related costs. But it’s important for aging parents and their children to speak candidly about expectations for the future. (Learn more: Why seniors pay more for health care)

Ways to reduce health care expenditures

You can potentially slash your retirement health care costs by waiting to retire until you are Medicare eligible at age 65. Working a few years longer not only permits you to save more for future health care needs, but also potentially allows you to delay claiming Social Security benefits and boost the size of your future benefit. (Learn more: 4 simple ways to delay Social Security)

Those who retire younger will either need to join their spouse’s health insurance plan (if their employer allows it) or pay for private health insurance coverage, which can be costly and could potentially drain their retirement nest egg. (Learn more: Retiring early? A guide to understanding your health insurance options)

You may also be eligible to continue group health insurance coverage from your former employer for up to 18 months under COBRA, the federal law providing for continued health insurance coverage for certain workers. You would pay out of pocket for the entire premium and may be required to pay an extra administrative fee (of around 2 percent), but you may also benefit from better coverage or a negotiated reduced rate.

Financial products that might help

You can potentially insulate yourself against the unknown cost of future health care needs by taking advantage of financial protection products.

Chief among them is a health savings account (HSA). HSAs allow you to set pretax money aside during your working years to pay for qualified medical costs not covered by your insurance, including copays and deductibles. For 2023, the HSA annual contribution limit is $3,850 for singles and $7,750 for families. (Related: HSA basics)

You may contribute to an HSA only if you enroll in a high-deductible health insurance plan, including a Marketplace plan. Not every employer offers an HSA-eligible health plan.

Unlike flexible spending accounts (FSAs), unused contributions to your HSA are not forfeited. They can be left to accumulate year after year and, in many cases, be invested for growth.

If not needed in the year you contribute, you can save your HSA funds for health care expenses during retirement that are excluded from traditional Medicare, such as hearing aids and dental and vision care. (Learn more: HSA vs FSA for medical costs, which is better?)

“A little-known fact about HSA plans is the ability to invest the unused portion of the account in a similar fashion to a traditional IRA,” said Drabinski, “Thus, the client can actually generate tax-deferred investment gains through their HSA account. For these reasons. we tend to recommend our clients maximize their contributions to available HSA accounts, assuming they have excess free cash flow.”

Earnings in an HSA grow tax free and withdrawals that are used to pay for qualified health care expenses become tax free. Withdrawals not used for qualified expenses are taxed as ordinary income and also assessed a 20 percent penalty.

After age 65, you can withdraw money from your HSA for any reason penalty free, but the withdrawal will still be taxed at your ordinary income tax rate unless used for qualified health care expenses.


Creating income streams to cover your projected expenses in retirement is the key to managing longevity risk. Many rely on a combination of Social Security, bond funds, life insurance cash value, pensions (if available), and withdrawals from their savings and investment accounts. (Learn more: Cash value in life insurance explained)

Annuities can also potentially fill the income gap. They fall into two broad categories:

  • Variable annuities, which can either increase or decrease in value, are a type of tax-deferred retirement vehicle that allows you to invest for growth. In exchange for a lump-sum payment or series of payments, they deliver an income stream either immediately or at some predetermined date in the future, the amount of which is based on market performance. Most variable annuity contracts also include an insurance component that provides a death benefit.
  • Fixed annuities provide a guaranteed fixed income stream over a specified period of time (potentially for life) either immediately or deferred until some point in the future. In the case of a fixed deferred annuity, earnings grow tax deferred until they are withdrawn. Some also offer the opportunity to earn market-based interest without risking principal (the money you contributed or earned).

Guaranteed income streams that cover your fixed expenses in retirement can help alleviate a significant source of stress, said Jason Applebaum, a financial professional with Coastal Wealth in West Palm Beach, Florida.

“Products like fixed annuities provide a steady source of income, which provides peace of mind that your bills will get paid,” he said.

Long-term care riders

The costs associated with LTC, including assisted living, home health care, and nursing homes, can add up fast.

But premiums for standalone long-term care insurance coverage can also be expensive. With many of his clients expressing concern over the use-it-or-lose-it nature of traditional LTC policies, Drabinski said he often recommends alternatives, such as life insurance policies or annuities with LTC benefits, depending on the needs of the client. Because certain life insurance policies offer a death benefit and cash value that increases over time, and annuities can generate guaranteed cash flow in retirement, these products can address other retirement needs while providing a level of LTC coverage.


No one knows for sure how high their health care bills may climb during retirement, but with careful planning and the use of financial protection products, we can take some of the uncertainty off the table.

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1 Fidelity Investments, “How to plan for rising health care costs,” August 29, 2022.

2 Genworth, “Cost of Care Survey,”  June 2, 2022.

3 Fidelity Investments, “Retiree Health Care Cost Estimate,” May 16, 2022.

4, “Long-term care.”

5 Centers for Disease Control and Prevention, “Life Expectancy in the U.S. Dropped for the Second Year in a Row in 2021,” August 31, 2022.

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