Retirement Basics: Health Care

Financial advisors create investment plans with their clients using technology

When planning for retirement, it is extremely important to understand and account for health care expenses. Typically, these expenses consist of Medicare or Medicare Advantage premiums, supplemental plan premiums, and out-of-pocket expenses (deductibles, copays, coinsurance, etc.).


Most individuals age 65 or older in the U.S. will participate in a Medicare or Medicare Advantage plan. Medicare – often referred to as “Original Medicare” – includes coverage for hospital insurance (Part A) and medical insurance (Part B). While there is usually no cost associated with Part A, Part B currently costs individuals in the lowest income bracket $1,626 per year. For 2020, annual Part B premiums for individuals in the lowest income bracket will rise to $1,732. Individuals in higher income brackets pay higher premiums for Part B coverage, with the highest tier currently paying $5,526 per year. The deductible for Part B is currently $185 per year; once this is met, individuals typically pay 20% of the Medicare-approved costs associated with doctor services, outpatient therapy, and durable medical equipment.

Because Medicare Parts A and B do not provide coverage for most medications, many enrollees choose to add a prescription drug benefit (Part D) to their plans. Part D plans vary depending on such factors as deductibles, copayments, and coinsurance, with higher premiums plans associated with lower out-of-pocket expenses. The national average Part D premium is currently $398 per year. In addition, enrollees can purchase Medigap insurance to help pay for the out-of-pocket expenses not covered by Parts A, B or D.

Medicare Advantage

Medicare Advantage plans (Part C) are administered by private companies to provide the same types of coverage as Medicare Parts A, B, and typically D. These plans can include:

  • Health Maintenance Organizations (HMOs)
  • Preferred Provider Organizations (PPOs)
  • Private Fee-For-Service Plans
  • HMO Point-Of-Service Plans
  • Special Needs Plans

Premiums for Medicare Advantage plans vary depending on plan features. According to CMS, which administers Medicare, the average annual premium for Medicare Advantage plans is currently $336.

Assessing Health Care Costs

Unfortunately, health care costs can far exceed Medicare/Medicare Advantage premiums. According to a comprehensive pricing model developed by Mercer Health and Benefits, a typical 65-year old woman was estimated to pay $5,200 in annual health care expenses in 2018. Not surprisingly, this figure increased with age: a typical 75-year old woman was estimated to pay $7,900 annually, and an 85-year old woman, $10,100 annually. These figures include Medicare/Medicare Advantage (or equivalent) premiums as well as out-of-pocket expenses, but do not include any long term care expenses.

Over the course of an entire retirement, the cumulative burden of health care expenses can prove quite significant. The Boston College Center for Retirement Research (BCCRR) estimates that a typical 65-year old couple will spend $197,000 on health care during retirement. Of course, there is a risk to planning for a “typical” retirement when it comes to health care. A more conservative analysis, conducted by the Employee Benefit Research Institute (EBRI), suggests that a 65-year old couple should expect to save $265,000 in order to have a 90% chance of covering total health care expenses in retirement.

It is also important to note that the price of health care – as distinct from utilization – has been rising at a higher rate than the cost of other goods and services in the United States. In the past twenty years, for example, the growth in the Consumer Price Index (CPI) for medical care has risen at approximately 3.5% per year, significantly exceeding the 2.2% annual growth in the broader CPI. Assuming this rate of medical inflation, and using the EBRI figure above, a current 55-year old couple should expect to save nearly $374,000 by the time they turn 65 in order to have a 90% likelihood of covering health care costs in retirement.

For anyone interested in a more precise estimate of his/her health care expenses in retirement, Medicare has developed a free online “Out of Pocket Cost Estimator” that factors in, for example, health status, geography, and supplemental insurance desired.


Leave a Comment

Your email address will not be published. Required fields are marked *

Good things come to those who plan for them

Download our free 401(k) primer

A man waters a plan with currency growing from it

We can help you plan for healthcare in retirement

Download our primer on retirement healthcare options and expenses

A man holds currency while a financial advisor gestures to a security icon

Get Started Saving for College

From opening 529 account to calculating how much to save, we’ll help you create a college saving plan with our free guide.

Two people shake hands while a woman on a laptop and a man pointing to a chart track financial growth

Consider a Financial Caretaking Plan

A Financial Caretaking Plan outlines the steps you take to transfer bill paying, investment management, estate planning, and tasks you need to complete to prepare for the day you can no longer manage finances on your own. 

This enables us to help you prepare for transition of financial management to your financial caretaker(s). If portions of the questionnaire are not applicable, that’s ok! We can work on this report together to reflect your plans.

A man holds currency while a financial advisor gestures to a security icon

Do You Need a Trust?

Download our guide which provides a broad overview of some of the most commonly used trusts FAQ. We collaborate with estate planners and can explore with you if a trust could benefit you and your family.

A man holds currency while a financial advisor gestures to a security icon

We're here to help.

Download our guide to understanding long term care expenses and options.

Financial advising team meeting for retirement planning