Retirement, Investments, & Insurance for Individuals Build your knowledge How to budget for the cost of health care in retirement

How to budget for the cost of health care in retirement

The answers to a few key questions about your plans and your health can help you understand health care costs in retirement.

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4 min read |

A budget is just as important in your retirement years as it is when you’re working. One key category that’s necessary but hard to estimate: health care costs in retirement.

While some expenses such as transportation or clothing may shrink in retirement, health care expenses often do the opposite. “Health care becomes a higher proportion of your budget at the same time you have less income you’re living on,” says Sri Reddy, senior vice president of Retirement and Income Solutions at Principal®.

These questions can help you find a retirement health care budget solution that works for you.

What current health care coverage do you rely on, and how do you budget for it?

Health care insurance plans don’t cover the same things at the same level. Your current health status—the cost of eyeglasses and prescriptions, for example—has helped drive your current budget. It can be a guide as you create a retirement budget that includes health care costs.

What supplemental Medicare coverage meets your current health care needs?

Medicare is just like health care plans: Some expenses are covered; some aren’t. For example, in most states Medicare Part A covers inpatient care in a hospital(1) but it doesn’t cover preventive treatment. For that, you’ll need Part B, which is not free.(2)

As you review supplemental Medicare coverage, look closely at the fine print. In Part D, for example, drugs are tiered into categories of more or less expensive.(3) A name brand drug you take now may be much more costly than a generic version. The additional coverage costs can serve as your health care retirement budget baseline.

Some things Medicare Part A covers Some things Medicare Part A doesn’t cover(4)
Inpatient hospital care Long-term care
Skilled nursing facility care Most dental care
Nursing home care (with exceptions) Eye exams
Hospice care Dentures
Home health care Hearing aids

Of note: Planning to travel outside the United States during retirement? Medicare doesn’t provide coverage outside the U.S., so you’ll need other care in case of an unexpected illness or accident.

What is your modified gross income in retirement?

Medicare costs for coverage vary based on your modified gross income and typically jump from year-to-year. For example, in 2023 the lowest Part B premium was $164.90; in 2024 it jumped to $174.70 a month.(5)

Your financial planner and tax advisor can work through different scenarios and strategies, such as bunching income in a single year, that may help you save on your health care costs in retirement.

How will you plan for inflation?

Inflation is simply how expensive goods and services are over time. Health care costs, unfortunately, typically outpace the rate of inflation.(6) So whatever you budget today won’t be the same as what you’ll need to budget in subsequent years.

Here’s an example: The long-term rate of health care inflation has averaged just over 5%. That means the same $100 you budget today for health care costs may only be worth $95 in a year. Your financial professional can help you assess your budget and planning to account for health care inflation.

Who else in your family will be retired?

Deductibles in supplemental plans for Medicare are per person, not per family. That means you’ll have to also budget for your spouse’s or partner’s needs and care, too.

How will age affect your health and your health care retirement costs?

As we get older, our vision and hearing declines. Our bones often become more brittle, leading to mobility issues. Disease frequency tends to increase too.(7) Your health care retirement budget will have to include expenses related to those needs. “Medicine and health care haven’t figured out how to prevent us from aging,” Reddy says.

Your age and those health care needs may have a different kind of retirement budget impact, too. For example, mobility and driving issues often make it difficult for older people to get behind the wheel. How will you get to and from appointments? Medicare generally doesn’t cover long-term care facility stays, says Reddy, “so how you budget for it matters. The type of care and the state you’re in, and what they provide, matters. The expensive things are all the things you need but don’t think about.”

What’s next?

Trying to save more now—even if retirement and retirement health care costs are decades away? Log in to principal.com to check (and increase) your savings rate. Don’t have an employer-sponsored retirement account or want to save even more? We can help you set up your retirement savings with an individual retirement account (IRA). Ready to learn more ways you can build your financial foundation? Our learning library can help.