How much does healthcare really cost in retirement?

Although Medicare will cover some of your healthcare, it doesn't cover it all. Learn what you need to do now to plan for healthcare expenses in retirement.

In the midst of all your productive and careful retirement planning, it’s possible you haven’t paid that much attention to what healthcare costs might be in the next phase of your life. After all, that’s what Medicare is for, right? Not entirely. 

“What a lot of people don’t realize is that even after you retire and you’re getting Medicare, you’re still paying a lot of money for healthcare,” says Dan Keady, Chief Financial Planning Strategist at TIAA. “That’s because Medicare reduces the cost of healthcare, but it doesn’t eliminate it.” 

There’s a saying: “Medicare covers everything below the head and above the ankles.” So that means things like podiatry and the following are not included in Traditional Medicare: 

  • Dental care, including routine exams,​ X-rays, fillings and dentures​
  • Routine eye exams, glasses and ​contact lenses​
  • Medical costs incurred outside the United States
  • ​Long-term care that is custodial and not “medically necessary,” including assisted living and home care aides 

According to the most recent (2020) Employee Benefit Research Institute (EBRI) figures, in order for a healthy couple with average drug expenditures to have a 90% chance of having enough money to cover healthcare expenses for life, they would need $270,000 saved at age 65. So it’s important to know what will be covered by Medicare and what won’t be—and how you will make up the difference.

How much does healthcare really cost in retirement? 2021 Retirement Healthcare Costs Data Report

What you’ll pay for Medicare coverage

Medicare Part A (Hospital Insurance) covers inpatient hospital care, skilled nursing facility care, hospice and some home health services. Almost nobody—as long as they’ve worked and paid Medicare tax for at least 40 quarters (ten years)— pays a premium for Part A. There is a deductible (it was $1,484 in 2021), as well as co-insurance for hospital stays beyond 60 days.

Medicare Part B (Medical Insurance) covers doctor and other healthcare providers' services and outpatient care. Part B also covers durable medical equipment, medically-necessary home healthcare and some preventive services. The monthly premium for Part B in 2022 is $170.10; this can change year to year.

Medicare Part C—also known as Medicare Advantage—is available through private insurance companies. It will provide the same coverage as Medicare Parts A and B, but with supplemental coverage that depends on the plan you choose. The cost can be up to $200 monthly.

Medicare part D covers prescription drugs. Part D premiums are generally in the $30-50 range per month, though they may be higher where you live.

There’s also something called Medigap—also available through private insurance companies—that, literally, helps fill in the gaps in Traditional Medicare.

For a more complete breakdown and explanation of costs and coverage, refer to our booklet, “Medicare fundamentals: A guide to planning for healthcare in retirement.”Opens pdf

Planning pointers

A good nest egg, high income—even robust health—won’t get you off the hook for retirement healthcare expense planning. In fact, if your income is above $88,000 as an individual or $176,000 as a couple, you’ll pay multiples of the normal amounts for Medicare Part B or Part D because of something called IRMAA—the Income Related Monthly Adjustment Amount—which is set by the Social Security Administration. So, you might want to consider tax- and income-planning strategies that can minimize what you’ll pay in healthcare surcharges.

Sometimes people think, “I’m 65; I’m in good shape; I’m only taking one prescription. Supplemental healthcare isn’t going to cost me that much.” And while it’s true you likely have a long life ahead, that also means a lot of years of paying for healthcare. And even if your healthcare expenses are low now heading into retirement, they might not stay low forever. Plus, don’t forget to factor in inflation: Healthcare costs are projected to continue their historical trend of rising at a rate of 2-2.5 times that of U.S. inflation.

To offset those unknowns, TIAA builds healthcare costs into its retirement planning tools, so the good news is it’s likely you’re already preparing for them without recognizing it.

Timing matters, too

According to Shelly Eweka, Senior Director of Financial Planning Strategy at TIAA, “When you retire matters to your healthcare expenses decisions. For example, if you decide to retire before age 65, you will not be eligible for Medicare yet. So, you’ll need to make accommodations for healthcare expense coverage until then through some other source, like your spouse’s plan or the healthcare marketplace.”

One possible break: Look at what benefits your employer offers. Some employers extend healthcare coverage to retirees. The amount can depend on how long you’ve been at your employer, whether you have tenure or how old you are.

“This is all critical to think about and talk about before you hit 65,” says Eweka.

In addition: Explore health savings accounts, or HSAs. Employees who have actively contributed to their HSAs have the ability to save for healthcare expenses now and in the future. HSAs’ most significant benefit comes from their ability to provide triple tax savings—not only are contributions tax-deductible, earnings and withdrawals for qualified medical expenses are tax-free.

“It’s important to keep in mind that once you enroll in any part of Medicare, you can no longer contribute to your HSA,” says Kendra Smith, Senior Director, TIAA Health Solutions. “However, you can use your HSA to cover out-of-pocket medical expenses, including Medicare premiums part B, C and D, except for Medigap.”

No need to go at it alone

One way to get a quick estimate of your healthcare costs in retirement is to use the TIAA Healthcare CalculatorOpens in a new window.  

But for a more personalized and detailed look, as well as strategy advice, it’s best to talk to a financial advisor—and the sooner, the better. Some of the questions you might ask them include:

  • How do I estimate my future healthcare costs?
  • Is long-term care insurance right for me? and,
  • What if I discover gaps in my healthcare expense coverage?

Everyone is different, so you’ll need to look at your own circumstances and decide what makes sense for you today and down the road.

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This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.