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.
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.
Retiring early? You have options for health insurance if you quit work before age 65.
What's next?
- How much have you saved for retirement — and health care in retirement? Log in to your Principal account to review. First time logging in? Create an account.