Planning for health care in retirement

Planning ahead for health care expenses in retirement is essential. Determining how much you'll need, however, depends on a variety of factors. Your costs will vary based on your income, age, health, location, your Medicare or supplemental plans and life expectancy.

In this article, we’ll cover:

How much a person could need for health care costs in retirement
What Medicare covers
Medigap and Medicaid
Long-term care insurance
High-deductible health plans and health savings accounts

What will health care cost in retirement?

Health care costs in retirement can be substantial, and even everyday medical expenses such as prescription drug costs and routine medical services can add up over time.

According to a recent estimate, the average couple with median prescription drug expense will need $270,000 in savings reserved for medical expenses to have a 90% chance of covering their health care costs in retirement.¹

Medicare

Medicare is a federal health insurance program that provides coverage for people age 65 and older, and for some disabled people under age 65. The program consists of four parts, each of which covers different health-related expenses.

What are the different parts of Medicare?

Medicare is a valuable program for many retirees, but it wasn’t designed to cover health care expenses in full.¹For example, it doesn’t cover vision, hearing or dental, and there is limited coverage for nursing home and other long-term care options. In some cases, premiums and copays for covered services may become significant.

Here are the parts of Medicare and what they cover:

Medicare Part A	Medicare Part B	Medicare Part C	Medicare Part D
Hospital Insurance	Medical Insurance	Medicare Advantage	Prescription Drug Plan
Helps pay for in-patient care in a hospital, skilled nursing facility (following a hospital stay), some home health care and hospice care	Helps cover services like lab tests, surgeries, and doctor visits in addition to supplies like wheelchairs and walkers that are considered medically necessary to treat a disease or condition.	Allows you to participate in PPO-, PFFS, and HMO-type managed care plans	Helps pay for medications prescribed by doctors
No premium if you and your spouse paid Medicare taxes during 40 or more quarters	Optional coverage	If you are enrolled in Medicare Part A and Part B, you are eligible to switch to Part C	Pays outpatient drug care costs
	Requires a monthly premium payment for all participants²		Requires a monthly premium payment for all participants³
			Deductible and cost-sharing limits may apply. In the coverage gap stage, there are different cost sharing percentages for brand name vs. generic drugs

Several types of Part C plans are available, including:

Preferred provider organization (PPO). This plan allows you to see any doctor or specialist; however, visiting doctors outside your PPO network will involve extra costs.
Health maintenance organization (HMO). You have access to doctors in the HMO network only.
Private fee-for-service (PFFS). You can see any doctor who is willing to accept the fees and terms of the PFFS.
Special needs. These plans are intended for people with certain chronic diseases or special health care needs.
Medical savings account (MSA). This plan includes a high-deductible health insurance plan and a savings account in which Medicare deposits money for you to use for health care costs.

Enrolling in Medicare

If you are already receiving Social Security, you are automatically enrolled in Medicare at age 65. If you want to enroll in Medicare but are not taking (or not eligible for) Social Security, you can enroll three months before the month of your 65th birthday and the three months after. For example, if your birthday is March 15, you can apply anytime from November through the end of June.

It’s important to know that if you don’t enroll during your initial window, you may face penalties for late enrollment – and the Medicare program doesn’t send reminders.

Download our Medicare guide

Choosing your retirement health coverage is an important decision that can be complicated. This guide will help you to understand Medicare and the choices available to you.

Medigap and Medicaid

Medicare is only one of the sources of health care coverage available to retirees. You may also be eligible for Medigap or Medicaid.

Medigap	Medicaid
Individuals enrolled in Medicare Parts A and B are also eligible to purchase Medigap coverage from insurance companies.	Individuals with limited income and resources who meet certain requirements may also be eligible to receive Medicaid.
Coverage and costs vary by state.	Medicaid is an insurance program sponsored jointly by states and the federal government.
Generally helps pay costs not covered by Medicare like deductibles, co-payments and co-insurance.	Covers some hospital care, prescriptions, personal care services, and nursing home costs
Enroll through private insurance agencies.	Contact your state Medicaid program for additional details.

Long-term care insurance

The average duration of long-term care for a retiree is estimated to be about three years. While long-term care costs vary widely by region and type of facility, the national median cost of one month in an assisted living care facility was $4,300 in 2020 – or $51,600 per year. A private room in a nursing home costs about $8,821 a month, or $105,850 per year⁴.

This adds up to $317,550 for three years of long-term care — a significant expense which is expected to rise in the future. It's also important to note that Medicare and Medigap policies offer limited, if any, coverage for long-term care.

One way to plan for these costs is to purchase long-term care benefit insurance or a hybrid policy. Hybrid policies combine life insurance with long-term care benefits that may help you pay for the costs of in-home care, assisted living, a nursing home or other related expenses that Medicare may not cover. Long-term or chronic care riders, available at an additional cost, may also be added to life insurance policies, allowing you to access a portion of your policy’s benefit early for care expenses.

Premiums for long-term care coverage vary by company but are generally based on your age, health status and the level of benefit you are purchasing. Make sure that the benefit on your long-term care insurance policy will be enough to cover the average cost of care in your region in the future.

High-deductible health plans (HDHP) and Health savings accounts (HSA)

A High-Deductible Health Plan (HDHP) may offer a practical way for retirees under age 65 (and therefore not yet eligible for Medicare) to deal with their medical costs. HDHP differs from other health insurance plans because its high deductible allows the policy to be offered at relatively low cost.

If an HDHP meets certain requirements, the policyholder may also open a health savings account (HSA) to pay for HDHP deductibles and other qualified out-of-pocket costs. Money withdrawn from the HSA to pay for qualified expenses is tax-free as long as the expenses were incurred after the HSA was established and funded.

For 2022, the maximum annual contribution rates to an HSA are $3,650 for an individual and $7,300 for family coverage. Those who have reached age 55 but are not yet age 65 may contribute an additional $1,000 for 2022.

You can use an HSA account to pay for medical expenses as they occur, or you can accumulate funds in the account to pay for future health care expenses. Note that any distributions taken prior to age 65 that are not used for eligible medical expenses are subject to income tax and a 20 percent penalty.

Get personalized advice for your situation

An Ameriprise financial advisor can work with you to help build a confident retirement that anticipates your health care costs and other major expenses in retirement.