Managing Healthcare Costs in Retirement

Quick Answer: Healthcare is consistently one of the top three retirement expenses. Fidelity's 2024 estimate projects the average couple will spend $330,000 on healthcare in retirement. Medicare Part B premiums in 2025 are $185/month per person — up from $174.70 in 2024 — and they rise each year with inflation. Planning for these escalating costs requires dedicated funding outside Social Security.

Why Healthcare Costs Are Central to Retirement Planning

For most retirees, healthcare is not just another line item in the budget — it is one of the two or three largest expenses they will face, alongside housing and food. Unlike housing costs, which are relatively predictable, healthcare costs are variable, inflation-sensitive, and tend to increase significantly in the later stages of retirement when health needs are greatest.

Managing healthcare costs effectively in retirement requires a multi-layered approach: understanding what Medicare covers and what it does not, supplementing coverage to minimize out-of-pocket exposure, planning for long-term care risk separately, and building retirement income that accounts for healthcare inflation over time.

Understanding Your Medicare Options

Original Medicare (Parts A and B)

Original Medicare — the federal program — covers hospital stays (Part A) and medical services, outpatient care, and preventive services (Part B). It does not cap out-of-pocket costs, meaning a retiree with significant health needs could face substantial annual expenses through deductibles, copays, and 20% coinsurance under Part B.

Medicare Supplement (Medigap)

A Medigap policy purchased alongside Original Medicare fills in the cost-sharing gaps. Plan G — currently the most comprehensive Medigap plan available to new enrollees — covers almost all out-of-pocket costs above the Part B deductible, providing significant cost predictability. Medigap plans have fixed monthly premiums that increase with age but provide protection against unexpectedly high medical bills.

Medicare Advantage (Part C)

Medicare Advantage plans are private insurance alternatives to Original Medicare. They typically include prescription drug coverage and may offer additional benefits such as routine dental, vision, and hearing. Premiums can be low or zero, but out-of-pocket costs through copays and coinsurance can be higher than Medigap — particularly for retirees who need frequent medical care. Network restrictions can also limit access to preferred specialists.

Part D Prescription Drug Coverage

A separate Part D plan (or a Medicare Advantage plan that includes drug coverage) is essential for managing prescription costs. The right plan depends on the specific medications needed — formularies and tier structures vary significantly across plans. Annual plan review during Medicare open enrollment (October 15 – December 7 each year) is important to ensure the current plan remains the best match for current medication needs.

The Costs Medicare Does Not Cover

Effective healthcare cost management requires knowing where Medicare falls short:

• Dental care: Routine dental care — cleanings, X-rays, fillings, crowns, dentures — is generally not covered by Original Medicare. Dental costs represent a meaningful recurring expense for most retirees, and dental disease can have serious downstream health consequences
• Vision care: Routine eye exams and eyeglasses are not covered. Retirees typically pay out of pocket or through supplemental vision insurance
• Hearing aids: Hearing loss is extremely common in older adults, but Medicare does not cover hearing aids or most audiologist services. High-quality hearing devices can cost $3,000 to $7,000 or more per pair
• Long-term care: The ongoing custodial care that most long-term care involves — help with bathing, dressing, eating, and daily activities — is not covered by Medicare. This is perhaps the most consequential gap, given the high probability and high cost of long-term care needs in later retirement

Strategies for Managing Out-of-Pocket Healthcare Costs

Maximize HSA Contributions Before Retirement

Health Savings Accounts (HSAs) are one of the most powerful tools for retirement healthcare planning. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. Unlike flexible spending accounts, HSA balances carry forward indefinitely. Building an HSA reserve during working years creates a dedicated, tax-advantaged fund for retirement healthcare expenses.

Consider IRMAA in Income Planning

Medicare Part B and Part D premiums are income-tested. Retirees with higher incomes pay IRMAA surcharges that can add hundreds of dollars per month to Medicare costs. Tax-efficient income planning — including strategic Roth conversions, careful timing of retirement account withdrawals, and management of capital gains — can help manage modified adjusted gross income and reduce or avoid IRMAA surcharges.

Budget for Dental, Vision, and Hearing

These recurring costs — often $2,000 to $5,000 or more per year across all three categories — should be built into the retirement budget explicitly. Some Medicare Advantage plans offer supplemental dental, vision, and hearing benefits, though coverage limits vary widely.

Plan for Long-Term Care Separately

Long-term care is best addressed through dedicated coverage — traditional LTC insurance, hybrid linked-benefit policies, or annuity-based LTC riders — rather than hoping that general retirement savings will absorb the cost. A single long-term care event of average duration and cost can consume more than two years of total retirement spending if not pre-funded.

Building a Healthcare-Resilient Retirement Income Plan

A retirement income plan that accounts for healthcare is built on predictability and flexibility. Guaranteed income streams — Social Security, pensions, and fixed or fixed indexed annuities — provide a foundation that covers essential expenses regardless of market performance. Supplemental coverage fills Medicare gaps. Long-term care insurance protects the savings pool from open-ended care costs. And a dedicated budget allocation for dental, vision, hearing, and prescriptions prevents these recurring costs from creating ongoing financial stress.

SafeMoney advisors help retirees integrate healthcare cost planning into their overall retirement income strategy — building plans designed to remain resilient as healthcare needs grow throughout retirement.

Take the next step, run the numbers with our free retirement calculators.