Healthcare Costs in Retirement Are Rising— Here's What You Can Do To Keep Up

Key Takeaways

• A 65-year-old retiring this year can expect to spend an average of $165,000 in medical expenses in retirement, according to Fidelity. 
• Experts, however, don’t recommend looking at average medical expenses or thinking about how much you need to save based on one lump sum amount. 
• Consider working with a financial planner or health insurance broker to figure out what Medicare plans are best for you.

Medical expenses can add up in retirement. According to a recent "Fidelity Retiree Health Care Cost Estimate," a retiring 65-year-old can expect to spend an average of $165,000 in medical expenses throughout retirement. That’s up nearly 5% from last year. 

While retirees are eligible for insurance through Medicare—the federal health insurance plan for people age 65 or older—they still have to pay premiums, dental care, vision, and other out-of-pocket expenses. 

Break Down Expenses To Make Them Manageable

Stuart Ritter, a certified financial planner and Retirement Insights Leader at T. Rowe Price, encourages people not to focus too much on the total amount they may spend on medical expenses in retirement. 

Instead, he recommends thinking about medical spending in terms of fixed costs (premiums) versus variable costs (out-of-pocket expenses).

“Healthcare expenses are encountered monthly. Most of the expenses are Medicare premiums so they're fixed and budgetable,” Ritter said. “You kind of know them in advance, which means you work most of your health-care expenses into the ongoing retirement budgeting.”

Ritter also suggests keeping an additional cushion of money like an emergency fund for out-of-pocket medical expenses. As for predicting how much your out-of-pocket expenses might be, one expert warns against looking at averages.

“We don’t think that looking at averages is very useful when we’re looking at healthcare costs,” Sudipto Banerjee, vice president of Retirement Thought Leadership at T. Rowe Price, said. “The average costs are driven by a small group of people who are sick and need a lot of care.”

Biggest Health Expenses Go to 10% of Retirees

In Banerjee's research, he’s found that half of retirees (who are enrolled in Medicare Parts A, B, and D) pay less than $700 annually in out-of-pocket expenses. In contrast, 10% of retirees spend more than $5,100 in out-of-pocket costs.

Whenever Banerjee helps people plan for retirement, he advises them to save based on the type of Medicare coverage they have and whether they're high or low healthcare consumers.

“The way that people should plan for health-care costs in retirement is to understand what their general expenses are and what type of health-care consumer they are,” Carolyn McClanahan, CFP and founder of Life Planning Partners, said. “You have some people that never, ever go to the doctor. And then you have some people [who] go to the doctor for everything, so those are high health-care consumers.”

Think About Getting Help and Saving Early

When planning for medical expenses in retirement, experts suggest seeking professional help to fully understand the nuances among the different types of Medicare. 

Banerjee notes that retirees often have a lot of choices to make when it comes to enrolling in Medicare, and, for some, making the wrong decision can be costly. 

For example, if you don’t sign up for Medicare Part B (medical insurance) during the initial enrollment period, you may have to pay a late enrollment penalty on your monthly premium for as long as you have coverage.

“Healthcare is a serious decision, and when you are looking when you are getting close to age 65 you need to be working with someone who can take you through a lot of the options. I strongly advise clients to work with a healthcare broker who can help you assess all the different coverages,” Megan Gorman, founder of Chequers Financial Management, said.

And for those who are further away from retirement, Gorman suggests enrolling in a high deductible health-care plan (HDHP) if you’re healthy. With an HDHP, you may be eligible for a Health Savings Account (HSA), which is a tax-advantaged investment account for medical expenses. 

“​​If you invest the money in an HSA, it will grow over the long term,” says Gorman. “At age 65, it converts into an IRA, so if you want to put money aside in your 20s, grow it, and in your 60s, have it to pay for medical expenses, that’s one technique out there.”