Retirement, Investments, & Insurance for Individuals Build your knowledge 4 ways to save for the cost of health care in retirement

4 ways to save for the cost of health care in retirement

You can make progress toward planning for future health care expenses in your post-work years.

Medical professional sitting with two people discussing health care
3 min read |

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

  • Lifespans have increased (a lot) since Social Security was created.
  • Heath care inflation is typically greater than general inflation.
  • Chronic illnesses and age-related health problems have increased.
  • The median retirement age is 62, but Medicare doesn’t kick in until 65.

“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, financial professional and product director for Retirement and Income Solutions at Principal®.

How much will health care cost in retirement?

Medicare doesn’t cover everything. Out-of-pocket expenses depend on your age, overall health, where you live, income, and if you have supplemental Medicare policies. 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.

Start integrating Medicare-related costs into your planning in the years before retirement, and learn the ins and outs of what’s covered. Medicare drug coverage, for example, is a separate cost, and you may need supplemental insurance to cover out-of-pocket costs. Medicare has a window of enrollment, too.

How can you save for retirement health care costs?

Four options may help.

1. Health savings account (HSA)

An HSA is a special savings account you can contribute to until you turn 65, even when you’re not working. You’re not taxed on withdrawals made for eligible medical expenses, which may include deductibles and copayments. However, there are contribution limits for how much you can keep in the account. (Check the IRS website for the most up-to-date totals.)

If your employer offers a high deductible health plan (HDHP), a health savings account (HSA) is a great way to steadily save for everything from contact lenses to dental check-ups.

HSA funds grow tax free, and unused savings will carry over to the next year. If you don’t need the money now for health care-related costs, you can use it later for everything from doctor visits to long-term care. (Also, once you hit age 55, you can make catch-up contributions to your HSA.)

2. Traditional and Roth individual retirement accounts (IRAs)

To draw on more resources to help pay for retirement health care expenses, it can help to contribute to a range of retirement accounts, such as IRAs and Roth IRAs, over time. Those accounts have the added bonus of allowing catch-up contributions if you’re over 55. (Those limits may change over time; check with the IRS or your tax professional for specifics.)

However, with employer-sponsored retirement accounts and traditional IRAs, withdrawals are taxed. And if you take the money out before age 59½ you’ll pay a penalty.

3. Emergency fund

A robust emergency fund may help cover unexpected, immediate medical costs—think, broken eyeglasses, for example—in retirement, especially if it’s in a bank account that’s liquid and accessible.

4. Long-term care (LTC) and disability income insurance

LTC isn’t covered by Medicare, but a policy that covers nursing home, assisted-living, or at-home care costs may help you rely less on your retirement savings. You select the amount of coverage and pay premiums. If you need long-term care and don’t have coverage, any costs will come out of your retirement savings.

Like life insurance, long-term care insurance is more expensive and harder to get as you age. “Not all are created equal, and your options are determined by your health history, how much you need, and other factors,” Winston says.

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?

Have you made a retirement budget—and reviewed if you’re saving enough to achieve your goals? Log in to your Principal account to review what you’re saving, and change as necessary.