Budgeting for healthcare in retirement

Man who is happy because he budgeted for health care expenses in retirement.

As you consider your retirement savings, it’s important to think about healthcare costs because it will likely take up a significant portion of your retirement budget.

The good news is that with planning, covering healthcare costs—as daunting as they may seem—is doable. We can help you work those costs into your retirement budget so you’re ready to enjoy life.

A healthy 65-year-old couple can expect to spend $363,946 (in today’s dollars) on healthcare premiums throughout retirement.1

Breaking down Medicare

Medicare is a medical insurance program offered by the federal government for those 65 years and older or those who are disabled. It’s made up of four different plans (called Parts), plus an extra coverage option called Medigap. Check out the chart below to see what each Part covers, the cost, and how they work together to help you manage expenses.2 (You can enroll in different Medicare Parts at the same time, depending on your needs.)

Medicare Part AMedicare Part BMedicare Advantage (Medicare Part C)Medicare Part DMedigap3
What is it?Helps cover the cost of inpatient hospital careCovers services like doctor visits and outpatient hospital careHelps cover hospital and medical services; you can choose it in place of Parts A and BCovers prescription drugsHelps cover copayments and deductibles for Parts A and B. You can't use it with Medicare Advantage
What does it cover?
  • Hospital stays
  • Skilled nursing
  • Home healthcare
  • Hospice care
  • Doctors' visits
  • Outpatient services
  • Diagnostic tests
  • Everything included in Parts A and B
  • Might cover prescription drugs
  • Generic and brand-name prescription drugs
  • Deductibles and copays for Medicare Parts A and B
Who provides it?U.S. governmentU.S. governmentPrivate health insurance companiesPrivate health insurance companiesPrivate health insurance companies
How much does it cost?Nothing for most peopleStarting at $135.50 per month depending on your incomeVaries by planVaries by plan and income levelVaries by plan and location
What's the deductible?$1,364 per benefit period$185 per benefit periodVariesVariesVaries
Any additional costs?You'll pay for some or all hospital in-patient costs if you stay longer than 60 daysThere's a 20% copayment for some servicesThere's a copay for most servicesIf you sign up before 2020, you may pay some drug costs due to a coverage gapVaries

The bottom line: Medicare Parts A and B generally provide the lowest upfront costs. But they can also create the most coverage gaps. Medicare Parts A, B, D and Medigap together have the highest upfront costs. But they provide the fullest coverage with the least number of gaps.

So … what’s Medicare going to cost out of pocket?

Okay, now you have an idea of what Medicare pays for. Let’s talk about what it won’t cover: copays and insurance deductibles, and vision, dental and long-term care. To make sure both your Medicare premiums and noncovered costs are covered, estimate how much you’ll need to pay in retirement for premiums, medicals services, deductibles and copays, prescription drugs, medical supplies and miscellaneous health expenses.

For more details on Medigap coverage, visit medicare.gov. To calculate your estimated premiums, visit the Medicare Plan Finder.

Beyond Medicare: Paying for health care

If you’re still working:

  • A health savings account may be an option. Check with your employer.
  • Check into possible coverage through your employer or individually.

If you’re about to retire and you aren’t 65 yet: 4

  • See if your employer offers an early retiree insurance program.
  • Consider extending your employer’s health plan coverage using COBRA coverage. (It may cost extra and there’s usually a time limit.)
  • Consider buying individual insurance.

If you’re already retired:

  • If your spouse is still employed, see if you can join his or her employer-provided healthcare plan.
  • If you’re a veteran, you may qualify for coverage through the Veterans Benefits Administration.
  • If you aren’t 65 yet, consider purchasing individual insurance.

At any time:

  • Think about long-term care insurance. You can buy this insurance on your own, from your employer or through another group you might belong to, such as an alumni association or trade organization.

Don't forget to plan for healthcare costs

Planning for healthcare costs, including creating a plan to enroll in Medicare, is 1 step you can take toward your best life in retirement. It’s also important to keep in mind that one of the best ways to keep your healthcare costs in check is to remain healthy.

Talk with your financial professional to develop a retirement income strategy that factors in medical coverage and the rising costs of healthcare and review your strategy on an ongoing basis to adjust for health situations or coverage changes.

Ready to get started?

  • Looking for estimates? Start visualizing retirement with your own info by visiting our planning tools and calculators.
  • Have a Principal retirement account from your employer? Log in to principal.com to access personalized planning, sign up for our quarterly newsletter and more. First time logging in? Get started here.
  • Interested in starting an individual retirement account (IRA) or consolidating other accounts into your existing one? Call 800-247-8000, ext. 2503 between 7 a.m. and 9 p.m. CT. Not familiar with IRAs? Here’s a refresher.
  • Got a financial professional? They can help you figure out your next steps. If you’d like to meet with one face-to-face, we’ll help you find one.

1 HealthView Services 2018 Retirement Health Care Costs Data Report. http://www.hvsfinancial.com/wp-content/uploads/2018/09/2018-Retirement-Health-Care-Costs-Data-Report.pdf

2 Estimated costs are as of 2019 via medicare.gov.

3 For more details on Medigap coverage, go to medicare.gov’s plan cost page.

4 When you turn 65 you’ll be eligible for Medicare.

Principal does not make available products related to health savings accounts.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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