According to a recent Fidelity report, the average couple would need to spend almost $315,000 in today’s dollars to cover medical expenses during retirement. Even more daunting is that this estimate doesn’t even account for long-term care, with some studies reporting median nursing home costs to be well over $95,000 a year!

The likelihood of living a longer life also of course means you’ll need to save more for retirement and medical expenses. It's perhaps worth noting that while the Centers for Disease Control and Prevention (CDC) recently stated that life expectancy rates in fact decreased in 2021 (to slightly above age 73 for men and age 79 for women), this decline was largely driven by impacts associated with the COVID-19 pandemic. Therefore, it's expected these rates will likely rebound over time akin to pre-pandemic projections as the recent two-year drop was the worst in decades. Consequently, for many retirees, the concern of sustaining a comfortable retirement—without drastically altering their lifestyle—is now very real. As disheartening as planning for potential medical expenses can be, it is in fact possible to ensure a comfortable retirement; the key is a well-executed financial game plan.

Understand how Medicare works

Providing coverage for over 62 million Americans, Medicare is the most common insurance option for retirees. It’s therefore difficult to argue against this as an essential component of retirement planning. That said, one might assume a large proportion of people have at least a broad understanding of Medicare and how it works. Yet, a recent Harris Poll survey claims more than 7 out of every 10 participants over age 50 wish they had a better understanding of Medicare coverage! In fairness, there’s no disputing that Medicare particulars are sometimes very complicated and—quite frankly—overwhelming to digest.

The four parts of Medicare
Medicare consists of four parts, each covering specific services. Known as “Original Medicare,” Medicare Part A and Part B task the government with paying providers directly for services received. Almost all physicians and hospitals in the United States accept Original Medicare.

More specifically, Medicare Part A covers patient care in a hospital or skilled nursing facility, in-home hospice, and limited home healthcare services. Those who enroll in Medicare receive Part A automatically, with most incurring no monthly premium cost but a $1,600 deductible instead (as of 2023). You must typically pay the deductible each time you are hospitalized and are responsible for covering a portion of daily expenses if your hospital stay extends beyond 60 days.

Medicare Part B covers medical services and supplies that are necessary to treat various health conditions: including visits to physicians and other healthcare providers, medical equipment, and ambulance services. It also covers some preventive services. You are required to enroll in Part B if you lack “creditable coverage” from another source, such as an employer. A failure to do so may result in a 10% monthly premium fee for each 12-month period you could’ve had Part B but didn’t. Most patients pay a monthly premium for Part B, and all must meet a deductible before benefits kick in.

Medicare Part C (Medicare Advantage) are bundled plans that are an alternative to Original Medicare (Parts A and B) and offered by private companies approved by Medicare. Most Part C plans also include optional vision, dental, hearing, and prescription drug coverage and additional services including transportation to doctor’s visits—none of which are generally covered by Original Medicare. You can purchase Medicare Part C provided you are enrolled in Original Medicare, and monthly premiums vary based on the benefit type and required deductible.

Administered by Medicare-approved private insurance companies, Medicare Part D helps pay for both brand-name and generic drugs. To qualify for this optional plan, you must have Medicare Part A and/or Part B. If your Medicare Advantage plan includes prescription drug coverage, you don’t need Part D (note that Part B doesn’t cover most prescription drugs). Part D premiums vary by provider, and coverage typically includes deductibles.

Medigap policies
Medicare Supplement plans (Medigap) are offered through various insurance companies and cover many out-of-pocket costs Original Medicare does not: such as copayments and deductibles. Some policies also include medical care when you travel beyond U.S. borders (a service not offered by Original Medicare).

Medicare surcharges
IRMAA—income-related monthly adjustment amount—is the additional amount you may need to pay along with your Medicare premiums: as Medicare imposes surcharges on higher-income beneficiaries.

This surcharge is based on tax returns from two years prior, meaning 2023 surcharges are based on your 2021 income. You can avoid these surcharges under various circumstances, especially if you experienced a life-changing event such as the death of a spouse, marriage, divorce or annulment, work reduction or stoppage, reduction or loss in pension income, or a loss of income-producing property.

Other Medicare considerations
While keeping your coverage on autopilot can eliminate the headache of dealing with some Medicare complexities, it’s critical to shop around every year for better deals—specifically with respect to Part C, Part D, and any supplement plans.

Although there’s no guarantee you’ll find a better plan, it’s not uncommon for those who shop around to save hundreds of dollars by taking advantage of Medicare’s open enrollment period: the time when you’re allowed to make changes to your coverage.

Plan for long-term care

Long-term care insurance policies typically cover out-of-pocket expenses that accompany home care, assisted living, and nursing homes: benefits not covered by Medicare and other public programs. Ultimately, these policies offer a few key benefits. In addition to helping protect your savings, they also provide you with additional care choices. For example, even if you qualify for Medicaid, you’re still restricted to facilities that accept payments from the program.

While everyone’s situation is different—especially if you have a family history of illness at a young age—experts recommend you obtain a policy in your mid-to-late fifties so you can lock in a lower premium.

While there are several reasons for this, the primary one is that you must qualify for long-term care insurance—meaning you must be healthy to buy coverage. Many people begin seeing a slight decline in health in their 50s, explaining why 30.4% of people aged 60-64 who submitted long-term care applications were denied in 2021. This number increased to over 38% for those between the ages of 65 and 69 and was significantly higher for those aged 70+ during this same time period.

Another reason to buy a policy when you’re younger is that long-term care premiums are based on your age at the time you apply. That said, you don’t want to do so too early since those aged 70 or older are responsible for filing more than 92% of long-term care insurance claims. In other words, if you buy a policy in your 40s, you’ll likely pay premiums for more than two decades before you ever file a claim.

Consider a health savings account

You can use a health savings account (HSA) to pay for qualified out-of-pocket healthcare expenses, including deductibles and copays. Eligible expenses include anything from Medicare premiums and long-term care costs to dental and vision expenses for yourself, your spouse, and/or eligible dependents.

Not everyone can open an HSA, as you must meet specific qualification requirements. For example, you must be at least 18 years of age and maintain a high-deductible health plan as your only insurance. A high-deductible plan—as of 2023—means your health plan has a minimum annual deductible threshold of $1,500 for individuals (or $3,000 for families). Additional prerequisites dictate that you cannot be enrolled in Medicare (Part A or Part B) or Medicaid to contribute to an HSA, nor can you be claimed as a dependent on anyone else’s tax return.

The fact is that HSAs remain an attractive investment vehicle for future medical expenses and are sometimes used as a de facto retirement account: as you can roll your contributions over from year to year and use them later in life when facing higher medical costs as a retiree. Click here to read more about HSAs.

Review your life insurance policy

Although not inexpensive, a permanent life insurance policy is a valuable strategy used to supplement retirement savings as these policies typically allow you to build or “accrue” cash value (funded by a portion of your premiums) in addition to your death benefit.

Think of a cash value insurance policy as an investment-like savings account that includes a death benefit. One specific advantage is that you’ll enjoy the ability to withdraw from the cash value/savings you’ve built and use the money for anything you want as needed.

Most permanent life insurance policies (recently also offered through many term policies) also offer an accelerated death benefit rider (also referred to as “living benefits”). These policy provisions enable you to receive benefits that can help offset financial stressors for you and your family while you’re alive but deemed terminally, critically, or chronically ill.

Delay claiming Social Security benefits

For many, this option is easier said than done—especially if you’ll depend on Social Security as your primary source of income. However, if you can delay your claim, you should for the reasons outlined below.

While you can collect benefits as early as age 62, you’ll receive a more robust amount (about 7% higher) each year you wait until reaching your full retirement age (the age at which you first become entitled to your full Social Security benefits). If you wait even longer, this number climbs to approximately 8% each year between your full retirement age and age 70.

To illustrate, let’s assume your full monthly Social Security benefit is $2,000: the amount you’d receive if you wait until your full retirement age. If you claim benefits starting at age 62, your benefit will fall approximately 30% to$1,400. As you can see, collecting too early means you could miss out on thousands of dollars a year that can help cover retirement-related expenses such as housing and healthcare.

If you’ve already started claiming benefits, reached full retirement age, and are under 70 years old, you can suspend your retirement benefits to earn a higher amount. In this scenario, you aren’t forced to repay any of your benefits, and your benefit will earn credits of approximately 8% per year: resulting in a higher monthly payment. You can reinstate benefit payments at any point until the month you turn 70, which is when they’ll automatically kick in again if you take no action. Keep in mind, however, that suspending your benefit also suspends benefits for anyone else receiving checks based on your work history.

The bottom line: how to plan for healthcare expenses during retirement

When you retire, you’ll want to ensure you can live comfortably and without the constant worry of how to pay your medical bills. This guide offers a good place to start as you prepare and consider your options.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.