8 min read August 17, 2021
3 ways to save for the cost of health care in retirement

You can make progress toward planning and saving for future medical expenses in retirement.

Photo of a woman with a young child.

Health care: It’s one of the largest expenses you can expect in retirement, after housing and food.1 And it’s not likely to go down. Why?

  • Lifespans have increased (a lot) since Social Security was developed.1
  • Heath care inflation is typically greater than general inflation.2
  • Chronic illnesses and age-related health problems have increased.3
  • The median retirement age is 62. Medicare kicks in at 65.4

So, how much will health care cost in retirement?

In real numbers: A couple who retires at 65 will spend more than $660,000 in retirement to cover health care costs, consuming 68% of their Social Security benefits.5

But Medicare saves the day, right?

Not quite. Some people think it’s “free,” but you do pay premiums for coverage. And it doesn’t pay for everything. A study by Principal® found that 44% of retirees struggle to predict and manage health care and long-term care costs.6 Out-of-pocket expenses depend on your age, overall health, where you live, income, and if you have supplemental Medicare policies.

Graphic stating that 44% of retirees struggle to predict and manage health care and long-term care costs.

While people often worry about how they’ll pay for health care in retirement, they tend to think of it as medical costs. It’s really a broad category of expenses, including:

  • dental,
  • vision,
  • hearing aids,
  • prescriptions,
  • and even long-term care.

“With costs climbing, it’s never too early to plan for health care expenses in retirement, even if that’s still 10 to 20 years away,” says Heather Winston, assistant director of financial advice and planning at Principal.

Find out how much Medicare may cost you with the out-of-pocket estimator tool on Medicare.gov.

How to cover future health care costs

Since Medicare won’t cover everything, beefing up your long-term savings can help you make up the difference. There are several ways you can tackle that task:

1. Health savings account (HSA)

An HSA is an ideal starting point, if you’re currently enrolled in a high-deductible health plan.

Pros: With an HSA, you “own” the account, and the money in it can grow from year to year. You can contribute to an HSA until you turn 65, even when you're not working.

“An HSA offers a triple advantage on federal income taxes: The money isn’t taxed, it grows tax-free, and you’re not taxed when you take it out for eligible medical expenses,” Winston says. “Those funds may help you cover health-related expenses in retirement, such as premiums for long-term care insurance.”

Cons: The limitations.

Account type 2021 contribution limit Catch-up limit (if you’re 55+)
Self-only coverage HSA $3,650 An additional $1,000
Family coverage HSA $7,300 An additional $1,000

You can withdraw HSA funds at any age for eligible health care expenses but doing so may mean you have less money available in retirement.

Get your full retirement picture. If you have a 401(k) with Principal, log in to view your Retirement Wellness Planner. You’ll have the option to add your HSA account so it’s calculated into your wellness score, giving you a better picture of your total savings for retirement.

2. Traditional and Roth individual retirement accounts (IRAs)

A decent-sized portion of money you put into retirement savings accounts might be used for health care.

Pros: Contributing to a range of retirement accounts allows you to build long-term savings that you can direct to health care costs someday—and you can continue to increase your retirement savings contributions until you max out. Note that traditional and roth IRAs offer different tax advantages.

Account type 2021 contribution limit Catch-up limit (if you’re 55+)
Employer-sponsored plan such as a 401(k) or 403(b) $20,5008 An additional $6,5009
Traditional IRA $6,000 An additional $1,000
Roth IRA $6,000 An additional $1,000

“A good time to consider increasing your contributions is when you get a salary increase, bonus, or lump sum. If your salary goes up 3%, taking 1–2% of that and directing it toward your retirement is money you likely won’t miss over the course of the year,” Winston says.

Cons: With employer-sponsored retirement accounts and traditional IRAs, withdrawals are taxed. And if you take the money out before age 59.5, you’ll pay a penalty. (Though, there are better options for emergency cash than an early 401(k) withdrawal.)

3. Emergency fund

As you get closer to retirement age, it’s a good idea to build a robust emergency fund to cover unexpected medical costs in retirement.

Pros: Because you’re likely keeping an emergency fund in a bank account that’s liquid and accessible, it’s quicker and easier to get to your money. This may come in handy for an unexpected (and expensive) medical bill, or when you need to quickly replace a pair of broken eyeglasses, for example.

Cons: Your emergency fund in a bank account usually generates a low rate of interest (it’s not going to grow much).

For tips to get started, read “Why you need an emergency fund and how to build it.”

Bonus coverage: Long-term care (LTC) and disability income insurance

Since LTC isn’t covered by Medicare, you may want to consider buying a policy that covers nursing home, assisted-living, or at-home care costs, so you’re less likely to tap your retirement savings to cover them. You select the amount of coverage and pay premiums.

Similarly, having disability insurance allows you to continue to receive income if an illness or injury prevents you from working, which may help preserve your HSA or retirement accounts.

What's next?







7https://www.irs.gov/pub/irs-drop/rp-21-25.pdf 8 https://www.irs.gov/newsroom/irs-announces-changes-to-retirement-plans-for-2022 9 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions



Principal® does not make available products related to Health Savings Accounts.

The Retirement Wellness Planner information and Retirement Wellness Score are limited only to the inputs and other financial assumptions and is not intended to be a financial plan or investment advice from any company of the Principal Financial Group® or plan sponsor. This calculator only provides education which may be helpful in making personal financial decisions. Responsibility for those decisions is assumed by the participant, not the plan sponsor and not by any member of Principal®. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs.  

Investment advisory products offered through Principal Advised Services, LLC. Principal Advised Services is a member of the Principal Financial Group®, Des Moines, IA 50392.