Paying for health care in retirement: How to save and budget (and worry less while you’re at it)

Health care expenses are top of mind for many, and especially for those nearing or in retirement. Take this stat: Nearly six out of ten adults older than age 65 report worries of affording services like a nursing home or other health assistance.

That’s not surprising. Health care is one of the largest expenses you can expect in retirement, after housing and food. And those costs are likely to increase. Why? For starters, people are living longer, even as they have more illnesses and health issues related to aging. And, health care inflation is typically greater than rates of general inflation.

But it’s possible to save and budget for health care in retirement. It takes planning and thoughtful consideration of how much you can set aside and what choices you may have to help cover costs. Here’s how to get started.

It’s true that the more you save, the better your chances of being able to afford the health care you need in retirement. But the average amounts experts say to save for retirement health care costs can feel difficult to plan for: Men may need $191,000, while women (with longer average lifespans) may need $226,000 to have near certainty in meeting health care costs.

Here’s the other twist about saving and budgeting for health care in retirement. Just as retirees may see other expenses, such as transportation, going down, health expenses are going up. And even in retirement, health care is an ongoing expense, a combination of set monthly premiums and other costs that may vary.

“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®. “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.”

When you turn 65, you’re eligible (and generally required to sign up) for Medicare. But Medicare functions just like other health care insurance plans: It doesn’t cover everything, and it doesn’t cover the same things at the same level. Out-of-pocket expenses depend on your age, overall health, where you live, income, and if you have supplemental Medicare policies.

If you’re trying to save for retirement health care costs, you can use some Medicare baselines as a starting point. For example, the out-of-pocket spending cap in 2025 for a person with Medicare Advantage Part A and B was $9,350, and $2,000 for Part D, or prescription drug, coverage. (Here’s a Medicare explainer to help.)

Then you'll have to add potential additional costs that are specific to your current health status. For example, in most states Medicare Part A covers inpatient care in a hospital but it doesn’t cover preventive treatment. You’ll need Part B for that, which is not free. And look closely at the Medicare coverage fine print. In Part D, drugs are tiered into categories of more or less expensive. 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, and your savings goal. To see your budgeting exercise in action, as you near retirement, integrate Medicare-related costs into your spending to see the effects.

Of note: Planning to travel internationally 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.

As your modified adjusted gross income (MAGI) changes from year to year, your Medicare costs will too. Also, if your income is above a certain level, you’ll be subject to an income-related monthly adjustment amount, or surcharge.

Inflation is simply how expensive goods and services are over time. And because health care costs typically outpace the rate of inflation, 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 average rate of health care inflation has been 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.

As we get older, our vision and hearing declines, mobility changes, and disease frequency often increases. “Medicine and health care haven’t figured out how to prevent us from aging,” Reddy says.

Your changing health care needs may have a retirement budget impact. 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 (more on that below).

An HSA is a special savings account you can contribute to until you turn 65, even when you’re not working. HSA funds grow tax free, and unused savings carry over year to year. When you retire, you’re not taxed on withdrawals made for eligible medical expenses, which may include deductibles and copayments. (There are contribution limits, including catch-up options, for how much you can keep in the account. Search “IRS HSA contribution limits” and the year for the most up-to-date totals.)

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, as well as emergency savings over time. IRAs 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.) An emergency fund may help cover unexpected, immediate medical costs—think broken eyeglasses, for example—especially if it’s in a bank account that’s liquid and accessible.

Unless you meet very low income levels, Medicare will not cover any long-term care (LTC). For that, there are traditional long-term care insurance policies, guaranteed income options, or savings. With LTC insurance, you select the amount of coverage and pay premiums. 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,” Reddy 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.

Not everyone ages the same way, or has the same health challenges. Just over 24% of those age 65 or older describe their health as “fair” or “poor.” There are steps you can take for better outcomes, from socializing to physical activity, eating well to regular check ups. All of those habits, to-dos, and routines can help ensure you enjoy the retirement you’ve long been planning for.