Health Care Costs in Retirement

Written By : Elaine Silvestrini
Fact-Checked

Annuity.org content is meticulously reviewed to ensure it meets our high standards for readability, accuracy, fairness and transparency.

Annuity.org articles are spellchecked, grammatically correct and typo-free. Annuity.org editors may revise content for clarity, logic, flow and meaning. Annuity.org only uses credible sources of information.

This includes reputable industry sources, select financial publications, credible nonprofits, official government reports, court records and interviews with qualified experts.

Financially Reviewed By : Rubina Hussein, Certified Financial Planner

Health care costs in retirement, including health insurance, are a significant concern for American workers. Losing your employer-sponsored health care coverage can leave you scrambling for a plan through the federal health insurance marketplace or a private insurer. Planning ahead and understanding your options will save you the stress of finding quality health care when you leave the workforce.

The cost of health care in retirement is a major worry across generations. A recent survey found that 61 percent of workers plan to work during retirement or postpone their retirement because of a lack of medical coverage.

The 2019 Employee Wellness Survey, by PwC, found that 73 percent of millennials, 70 percent of Generation X, and 61 percent of baby boomers think health care costs will have an effect on their retirement.

How Much Does Health Care Cost in Retirement?

According to a report by HealthView Services Financial, a healthy 65-year-old couple retiring in 2019 can expect to spend more than $387,000 for retirement health care costs, not including long-term care.

This projection is based on the current value of the U.S. dollar and includes Medicare premiums, the costs of supplemental insurance and other out-of-pocket expenses for a man whose life expectancy is 87 and a woman whose life expectancy is 89.

Estimated annual health care costs, not including long-term care, for an average, healthy 65-year-old couple retiring in 2019

Year Ages Cost
2019 65 $12,286
2024 70 $16,155
2029 75 $21,164
2034 80 $27,060
2039 85 $34,268

Source: HealthView Services

Another surprising fact from the HealthView report is that healthy retirees have higher total health care expenses than unhealthy retirees. That’s because healthy people tend to live longer. So even though short-term expenses for sick people are higher, longer life spans mean that total medical costs for healthy people exceed those for their less healthy counterparts.

Because of the effects of inflation, a 50-year-old couple in 2019 planning to retire at age 65 can expect to spend about $405,000 on health care in retirement. A 40-year-old couple faces $455,000 in expenses, the report says.

In addition, if long-term care is necessary, an expense that can reach into the hundreds of thousands of dollars can easily drain a retirement savings account.

How Can I Lower Retirement Health Care Costs?

As daunting as these expenses seem, there are some things you can do to mitigate their effect and lessen the risk that they will derail your retirement.

For example, following doctor’s orders and making small changes can reduce your overall costs.

According to the HealthView report, if a 45-year-old man with high blood pressure does as instructed by his doctor, he can lower his annual health care costs and extend his life.

“By taking medication as prescribed and maintaining a healthy level of physical activity, this individual could save an average of more than $3,600 in annual pre-retirement out-of-pocket healthcare costs,” the report states. “He can also expect to increase his actuarial longevity by more than two years.”

Retirement planning is also important when it comes to health care costs. Make sure you include these costs in your budget and consider how you will cover them.

One option is to dedicate the income from an annuity solely to out-of-pocket health care expenses.

If you have the option of using a health savings account (HSA), consider maximizing your contributions for use in retirement.

Health Savings Accounts (HSAs): Saving for Retirement Health Care

Health Savings Accounts (HSAs) can be a good way to save for health costs in retirement. But this option is not available to everyone, and it has limits.

HSAs are an option only for people with high-deductible health insurance plans and no other health insurance. To be considered a high-deductible plan, the insurance policy must have a deductible of at least $1,350 for self-only coverage and $2,700 for family coverage, as of 2019. These deductibles don’t apply to preventative care services.

HSA accounts are not available to people who qualify for Medicare or are claimed as dependents on someone else’s taxes.

The accounts take pre-tax deposits to cover health care costs that are not covered by insurance. The unspent money in an HSA rolls over from year to year. The accounts are also portable and stay with you when you change jobs or stop working.

According to the Society for Human Resource Management’s 2019 Employee Benefits Survey, HSAs are currently offered by 56 percent of employers. If your employer doesn’t offer an HSA, some banks and other financial institutions offer them for people with high-deductible health insurance.

As of 2019, if you have a high-deductible health plan, you can contribute up to $3,500 to an HSA for self-only coverage and up to $7,000 for family coverage, according to Healthcare.gov. For 2020, you may contribute up to $3,550 for self-only coverage and up to $7,100 for family coverage.

If you are age 55 by the end of the tax year, you can contribute an additional $1,000 to your HSA, according to the Internal Revenue Service.

How Can I Use HSA Funds?

HSA withdrawals to cover qualified medical expenses are tax free. This gives them a major advantage over IRAs or 401(k)s, which require taxes to be paid on withdrawals.

If you are younger than 65 and you withdraw the money for other purposes, you will owe a 20 percent tax penalty. However, if you are older than 65, withdrawals for other purposes are taxed the same as withdrawals from other qualified retirement savings accounts, such as 401(k)s.

Qualified health expenses include things not covered by Original Medicare, such as dental care and hearing aids. Some Medicare Advantage Plans offer extra benefits that Original Medicare doesn’t offer, such as vision, hearing, and dental.

HSA funds can also be used to cover specific health insurance premiums:
  • Long-term care insurance (within specified limits)
  • Health care continuation coverage (such as COBRA)
  • Health coverage while receiving unemployment compensation
  • Medicare and other health coverage if you are 65 or older (with the exception of Medicare supplementary policies, such as Medigap)

To get the most out of your HSA for retirement savings, you should contribute the maximum possible. If you can avoid it, don’t use your HSA funds for medical expenses before retirement. Consider this money earmarked for your retirement health care costs.

Also, shop around for HSA administrators that allow you to invest the money in high-quality, low cost options.

How to Get Health Insurance Before You’re Eligible for Medicare

Although you can retire at age 62 and still receive social security benefits, if you retire before the age of 65, you will need to find health insurance to cover your medical costs until you’re eligible for Medicare. The price of health insurance can come as a shock to workers who are used to having their employers contribute to their plan premiums.

If possible, it’s good to research these costs and options before you retire so you can plan according to the market and your needs.

Employer-Provided Insurance

Ideally, your employer would offer retiree health coverage, which is a continuation of your pre-retirement coverage. Some employers offer this benefit for a set period of years or until you’re eligible for Medicare.

If your spouse is still employed and has health insurance at work, investigate having yourself added to that plan.

Affordable Care Act Marketplace

You may be able to buy insurance through a health insurance marketplace offered through the Affordable Care Act, also known as Obamacare. Policies offered through state and federal exchanges created by the law are generally more affordable than insurance purchased on the open market.

You may also be eligible for tax credits to help you pay for a plan through one of the exchanges if your income is below a certain threshold.

COBRA

Another option is COBRA coverage, available through your former employer under a law known as the Consolidated Omnibus Budget Reconciliation Act. This is the most expensive option because few employers subsidize these plans.

COBRA is available for up to 18 months after you leave your job. If you need coverage longer than that, you will have to seek other options.

What Does Medicare Cost and What Does it Cover?

Medicare is a popular government health insurance program available to Americans age 65 and older. But even with Medicare, retirees face significant out-of-pocket costs because the program doesn’t cover all health care needs. In addition, several Medicare services have copays, premiums and other costs.

Health care costs not covered by Medicare:
  • Long-term care
  • Most dental care
  • Dentures
  • Routine vision care
  • Routine foot care
  • Hearing aids
  • Acupuncture

Medicare offers three parts — A, B and D — and private supplementary plans, including Medigap plans and Medicare Advantage plans available for purchase under Part C.

Medicare Part A

Medicare Part A generally covers inpatient hospital care, up to 100 days of skilled nursing facility care and home health care. It also pays for hospice care in the last six months of life.

Most retirees pay no premium for Part A coverage. However, if they didn’t pay Medicare taxes for a total of 10 years, they may be required to pay a premium of up to $437 a month.

Medicare Part B

Medicare Part B covers more routine medical services and supplies, including preventative services, ambulance services and mental health treatment.

According to Medicare, the standard monthly premium for Part B is $135.50 for 2019. People with income above a certain amount will also be charged an additional monthly adjustment.

Part B participants must also pay deductibles and coinsurance. The 2019 deductible is $185 a year. After that, patients pay 20 percent of the Medicare-approved charge for most doctor services, outpatient therapy and durable medical equipment.

Medicare Part D

Medicare Part D covers prescription drugs. Medicare Part D premiums vary by plan and income, as well as the type of medication purchased and whether it’s purchased at an in-network pharmacy or an out-of-network pharmacy. The estimated premiums range from $0.00 to more than $77.40 for people making $500,000 and above.

Private Plans to Supplement Medicare Coverage

In addition, private insurance companies contract with Medicare to offer what are known as Medicare Advantage and Medigap plans.

Medicare Advantage: Part C

Medicare Advantage plans are sometimes referred to as Part C. They are private plans that take the place of Part A and B and often D and cover expenses that are not covered by Parts A and B. This coverage varies by plan.

Advantage plans include additional premiums that vary by plan. In other words, you pay the Part B premium, plus an additional monthly premium for most Medicare Advantage plans. Not all Part C plans have monthly premiums.

Medicare Advantage doctors are generally part of a network, so your choice of physician is limited. In addition, the plans typically provide coverage only within geographic regions. Some specialists may require referrals in some of the plans, and some do not cover out-of-network treatment. Premiums are lower than Medigap plan premiums because you are paying copays as you go.

Medigap

Medigap plans are private plans that supplement Parts A and B. These plans generally cover coinsurance and hospital costs up to an additional year after Medicare Part A benefits have been used up. They also generally cover all or a portion of Part B coinsurance or copayments and some Medicare coverage when traveling in different countries and across the United States.

Medigap plans are typically accepted by any doctor who accepts Medicare. These providers do not require referrals. The out-of-pocket expenses are lower than with Medicare Advantage plans, but the premiums are higher. These plans generally do not include drug coverage, so you’ll need Medicare Part D along with your Medigap plan.

Long-Term Care

One of the most daunting expenses and experiences in retirement is long-term care. According to the U.S. Department of Health and Human Services, most Americans who reach age 65 will need long-term care at some point in their lives.

Long-term care services include anything from assistance with normal daily tasks, such as bathing and dressing, to specialized medical care. Assisted living facilities focus on daily tasks for people who are able to function on their own for the most part. They do not provide the same level of medical care, including medication management and mobility assistance, as nursing homes offer.

What Does Long-Term Care Cost?

According to the U.S. Health and Human Services department’s Administration for Community Living, in 2016 the average cost of a semi-private room in a nursing home was $6,844 a month, while a private room cost $7,968 a month. An assisted living facility cost nearly $4,000 a month.

A 2016 study published in Inquiry: The Journal of Health Care Organization, Provision, and Financing stated that retirees who couldn’t afford the yearly price tag of $80,000 and up for a nursing home in 2015 were limited to Medicaid and family members for long-term care. And people without access to these financial alternatives would be denied care.

How Do I Pay for Long-Term Care?

Medicare and other health insurance plans don’t generally cover long-term care. This means most retirees who don’t have long-term care insurance have few options.

Medicaid

The majority of people must consume virtually all of their retirement savings paying for care and, ultimately, turn to Medicaid, the government insurance plan for the impoverished. In fact, according to a report by the Henry J. Kaiser Family Foundation, Medicaid covers 62 percent of nursing home residents’ care.

Medicaid may or may not cover care in assisted living facilities, depending on the state in which you live.

Because Medicaid has strict income limits, you will be required to spend nearly everything you have on care before Medicaid will step in. If you are married and anticipate one spouse will need this option, you should investigate whether a Medicaid annuity can help the healthier spouse retain some assets.

Private Long-Term Care Insurance

According to the Inquiry study, only 7.4 million people owned long-term care insurance policies in 2015, and cost was the primary deterrent against purchasing these products.

In addition, the study claimed, ownership of long-term care policies had “become dominated by the highest earners and the wealthy” from 1990 to 2015 and the private market remained “ill-equipped to cope with the increasing demand” for long-term care.

Tips for buying long-term care insurance
Source: The Health and Human Services Department

Some insurers are pulling out of the long-term care market, while others are grappling with how to provide coverage. The number of insurers offering long-term care policies has gone from about 1,000 in 2002 to about a dozen.

Interested in Buying an Annuity?

An annuity can provide you with a reliable income stream in retirement.

Annuities Offer Help for Long-Term Care

Some annuities offer the option of purchasing a long-term care rider, which would increase the annuity payout for a specified period of time, should long-term care be necessary. Money from this rider can be used tax-free to pay for care. The riders can be easier to get than long-term care insurance.

Another option is to buy a deferred annuity with payout scheduled for a later age, such as 70, with the idea that the money will be available for long-term care if needed. The older you are when you start receiving annuity payments, the greater the payments will be. And the older you are, the more likely you are to need long-term care.

Among your annuity options is a qualified longevity annuity contract (QLAC), which is a deferred annuity held inside a tax-preferred retirement savings plan. QLACs lower your obligation to withdraw legally mandated sums from retirement accounts at age 70½. These withdrawals are known as required minimum distributions, or RMDs.

Under the law, 25 percent of savings, up to $125,000 can be invested in a QLAC, and those funds are exempt from RMD requirements. These annuity payments can be deferred until the age of 85.

An annuity that starts payments at that age can be helpful should long-term care be necessary.

Hybrids and Other Options

This situation has caught the attention of some lawmakers in Washington, D.C., who are looking for solutions, including allowing long-term care coverage in Medigap insurance policies.

In the meantime, some companies are offering hybrid policies that include long-term care and another kind of insurance, such as life insurance. These policies may require large sums of money — as high as $100,000 — up front or paid in installments, which can be left to beneficiaries if the policy holder doesn’t require long-term care.

It’s also possible to get short-term care insurance, which can cover stays of up to 360 days.

32 Cited Research Articles

  1. Allaire, B.T., Brown, D.S., & Weiner, J.M. (2016, August 16). Who Wants Long-Term Care Insurance? A Stated Preference Survey of Attitudes, Beliefs, and Characteristics. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5812045/
  2. Connick, W. (2017, June 12). Medicare Advantage vs. Medigap: Which Is the Best Choice? Retrieved from https://www.fool.com/retirement/2017/06/12/medicare-advantage-vs-medigap-which-is-the-best-ch.aspx
  3. Fidelity Viewpoints. (2019, April 1). How to Plan for rising health care costs. Retrieved from https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
  4. Fontinelle, A. (2019, June 25). Paying for Long-Term Care: How It’s Changing. Retrieved from https://www.investopedia.com/insurance/paying-longterm-care-how-its-changing/
  5. Fontinelle, A. (2019, May 15). Retirement Uses for Your Health Savings Account – HSA. Retrieved from https://www.investopedia.com/articles/personal-finance/091615/how-use-your-hsa-retirement.asp
  6. Genworth. (2018, November). Cost of Care Survey 2018. Retrieved from https://www.genworth.com/aging-and-you/finances/cost-of-care.html
  7. Hartman, R. (2018, September 12). 8 Misconceptions About Health Care Costs in Retirement. Retrieved from https://money.usnews.com/money/retirement/medicare/articles/2018-09-12/8-misconceptions-about-health-care-costs-in-retirement
  8. HealthCare.gov. (n.d.). Health coverage for retirees. Retrieved from https://www.healthcare.gov/retirees/
  9. Healthcare.gov. (n.d.). Health Savings Account (HSA). Retrieved from https://www.healthcare.gov/glossary/health-savings-account-hsa/
  10. HealthView Services. (2019, July). Why Health Needs To Be Part Of Retirement Planning. Retrieved from http://www.hvsfinancial.com/wp-content/uploads/2019/07/Health-in-Retirement-Planning.pdf
  11. Henry J. Kaiser Family Foundation. (2017, June 20). Medicaid’s Role in Nursing Home Care. Retrieved from https://www.kff.org/infographic/medicaids-role-in-nursing-home-care/
  12. Hiltzik, M. (2019, July 25). Column: Insurance firms’ blunders on long-term care insurance create disaster for millions. Retrieved from https://www.latimes.com/business/story/2019-07-24/long-term-care-insurance-disaster
  13. Hopkins, J. (2016, October 14). Annuities Offer Long-Term Care Funding Flexibility. Retrieved from https://www.forbes.com/sites/jamiehopkins/2016/10/17/annuities-offer-long-term-care-funding-flexibility/#5cae79b02529
  14. Internal Revenue Service. (n.d.) Publication 969 (2018), Health Savings Accounts and Other Tax-Favored Health Plans. Retrieved from https://www.irs.gov/publications/p969#en_US_2018_publink1000204083
  15. Konrad, W. (2018, May 23). The ever-rising cost of long-term care insurance. Retrieved from https://www.cbsnews.com/news/the-ever-rising-cost-of-long-term-care-insurance/
  16. Laise, E. (2018, July 30). Finding Health Insurance Before Medicare. Retrieved from https://www.kiplinger.com/article/retirement/T027-C000-S004-finding-health-insurance-before-medicare.html
  17. LongTermCare.gov. (2017, September 10). Buying Long-term Care Insurance. Retrieved from https://longtermcare.acl.gov/costs-how-to-pay/what-is-long-term-care-insurance/buying-long-term-care-insurance.html
  18. LongTermCare.gov. (2017, September 10). Costs of Care. Retrieved from https://longtermcare.acl.gov/costs-how-to-pay/costs-of-care.html
  19. Medicare. (n.d.). Drug coverage (Part D). Retrieved from https://www.medicare.gov/drug-coverage-part-d
  20. Medicare. (n.d.). How to compare Medigap policies. Retrieved from https://www.medicare.gov/supplements-other-insurance/how-to-compare-medigap-policies
  21. Medicare. (n.d.). What’s not covered by Part A & Part B? Retrieved from https://www.medicare.gov/what-medicare-covers/whats-not-covered-by-part-a-part-b
  22. Medicare. (n.d.). What Part A covers. Retrieved from https://www.medicare.gov/what-medicare-covers/what-part-a-covers
  23. Medicare. (n.d.). What Part B covers. Retrieved from https://www.medicare.gov/what-medicare-covers/what-part-b-covers
  24. Parker, T. (2019, April 23). Medigap vs. Medicare Advantage: What's the Difference? Retrieved from https://www.investopedia.com/articles/personal-finance/071014/medigap-vs-medicare-advantage-which-better.asp
  25. Preston, R. and Hanson, B. (2016, September 2). How a Health Savings Account Can Help You Save for Retirement. Retrieved from https://money.usnews.com/money/blogs/on-retirement/articles/2016-09-02/how-a-health-savings-account-can-help-you-save-for-retirement
  26. PwC. (2019, June). Employee Financial Wellness Survey 2019 Results. Retrieved from https://www.pwc.com/us/en/private-company-services/publications/assets/pwc-2019-employee-wellness-survey.pdf
  27. Richtman, M. (2019, July 22) Opinion: America’s long-term care crisis is worsening. Retrieved from https://www.marketwatch.com/story/americas-long-term-care-crisis-is-worsening-2019-07-22
  28. The Society for Human Resource Management. (2019, June) Health Care and Health Services. Retrieved from https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/SHRM%20Employee%20Benefits%202019%20Healthcare%20and%20Health%20Services.pdf
  29. Tarver, E. (2019, June 25). The 4 Best Alternatives to Long-Term Care Insurance. Retrieved from https://www.investopedia.com/articles/personal-finance/100515/4-best-alternatives-longterm-care-insurance.asp
  30. Tracy, T. (2019, May 6). Top 3 Health Insurance Options If You Retire Early. Retrieved from https://www.investopedia.com/articles/personal-finance/080516/top-3-health-insurance-options-if-you-retire-early.asp
  31. Vernon, S. (2018, August 7). Shopping For Health Insurance Before Medicare Kicks In. Retrieved from https://www.forbes.com/sites/nextavenue/2018/08/07/shopping-for-health-insurance-before-medicare-kicks-in/#6a6c2e455b59
  32. Weston, L. (2019, July 19). This is how much long-term care could cost you, and don’t expect Medicare to help. Retrieved from https://www.marketwatch.com/story/this-is-how-much-long-term-care-could-cost-you-and-dont-expect-medicare-to-help-2019-07-19
Who Am I Calling?

Calling this number connects you to Senior Market Sales (SMS), a trusted partner of Annuity.org.

If you're interested in buying an annuity, a representative will provide you with a free, no-obligation quote.

SMS is committed to excellent customer service. The company can help you find the right insurance agent for your unique financial objectives.

877-918-7024