Premiums, out-of-pocket expenses and critical services not covered by Medicare can deplete your retirement savings. In fact, a healthy 65-year-old couple who retired in 2023 will likely use nearly 70% of their lifetime Social Security benefits to cover their medical costs in retirement.¹ Yet only about half of Americans surveyed by the Harris Poll² said they understood how much they need to cover healthcare costs in retirement.

“Retirees counting on Social Security to supplement their retirement income are often surprised to learn that most of it may need to be used for healthcare,” notes Storey. “Your financial advisor can help you estimate and develop a strategy to save for those costs.”

Consider these five questions as you work together to develop a plan to help you cover all your healthcare expenses.

Click on the links below to jump between questions.

How much could medical expenses cost me in retirement?

What does Medicare cover, and how much does it cost?

What if I retire before I’m eligible for Medicare at age 65?

What about my future long-term care needs?

Are there other ways to prepare for healthcare costs in retirement?

How much could medical expenses cost me in retirement?

While Medicare will pay about two thirds of your medical costs, out-of-pocket healthcare expenses like premiums, copays and deductibles can add up. And the post-pandemic economy, with inflation at a 40-year high, has significantly impacted those costs. In fact, healthcare costs have been increasing at one-and-a-half to two times the rate of inflation.³ A 55-year old couple today can expect to pay more than $1 million for healthcare costs during their retirement.³

“Such a large amount may put you at risk of outliving your retirement savings,” says Storey. It most likely means that it is time to revisit what you have earmarked for healthcare expenses in retirement. Your advisor can walk you through what Medicare does — and doesn't — cover, estimate how much you may need to put aside for future healthcare costs and develop a plan to help you get there.”

“As you estimate your potential costs, consider factors such as your current health, your family’s health history, where you'll retire (medical costs can vary across the country) and whether your employer offers retiree health coverage,” says Storey.

Your advisor may recommend adjusting your financial plan to include a one-time lump sum investment or an increase in your regular investment contributions to cover these additional costs. Other changes might include taking on more risk in your portfolio or reprioritizing your goals. The approach you take will depend on your individual circumstances but just like investing for any goal, the sooner you start, the better your chances of being successful.

What does Medicare cover, and how much does it cost?

Medicare Parts A and B, known as Original Medicare, cover a portion of hospital stays and medical services — but not vision, hearing or dental care; prescription drugs; or medical care outside the U.S. So, you may want to add a drug plan (Medicare Part D) and a Medicare Supplement Insurance Policy, commonly known as Medigap, which can help cover out-of-pocket costs as long as you have Original Medicare. Medicare Advantage, or Part C, is a private insurance alternative that bundles much of that coverage but often restricts you to a limited network of providers.

While Medicare Part A is typically premium-free, you will pay monthly premiums for Part B, some Part C Medicare Advantage plans, Part D prescription coverage and Medigap.

And while there is no premium for Medicare Part A, there is a $1,632 deductible in 2024 for each inpatient hospital benefit period, before Medicare starts to pay. And there is no limit to the number of benefit periods that can take place in a year. This means that you could pay the deductible amount many times if you have multiple hospital stays during a year.⁴

The monthly premium for Medicare Part B is $174.70 in 2024 or higher depending on your income. You’ll pay the higher premium if your modified adjusted gross income (AGI) is more than $103,000 (from your tax return from two years prior), if you file an individual tax return or are married and file separately or if your AGI is $206,000, if you are married and file a joint tax return. The higher monthly premium costs range from $244.60 to $594 based on income.⁴

In addition, Medicare Part D premiums can also be impacted by income. The monthly cost, in addition to the plan premium, can range from $12.90 to $81.⁵

Medicare plans at a glance

What if I retire before I’m eligible for Medicare at age 65?

Unless your employer offers retiree coverage, you’ll need to consider other health insurance options so that you don’t go without coverage until you are Medicare eligible.

The cost of coverage should be fully explored among various resources and can vary widely. Your options include:

• Joining your partner’s plan if they are still working or taking on a new job that provides you with healthcare benefits.
• Sticking with your employer’s insurance plan under COBRA (the Consolidated Omnibus Budget Reconciliation Act) for up to 18 months.
• Purchasing health insurance directly from a company or through an insurance broker or purchasing health insurance on the government-managed exchange.
• Purchasing a high-deductible health plan that meets federal tax standards permitting you to open a health savings account (HSA).

What about my future long-term care needs?

“Long-term care insurance can help improve the chances that your savings will last through your full retirement,” says Storey.

Even with all the medical coverage available through Medicare, there’s one element that falls through the cracks — the cost of long-term care. “Savings can get eaten up pretty quickly,” notes Storey. And many people are unprepared to meet those costs.

Purchasing insurance to cover the costs can help when you need to pay for a caregiver to keep you in your home or if you need to move to a long-term care facility. It can cost upwards of $100,000 per year for a private room in a nursing home.⁸

The annual long-term care insurance premium for a couple (both aged 65) with a benefit of $165,000 (increasing by 5% each year) was $9,675 in 2022.⁹

But if you haven’t purchased it by the time you’re in your 60s, the premiums on traditional long-term care policies may be out of reach and, after age 70, it may be harder to obtain coverage.

Other options to consider include hybrid life insurance/long-term care policies, which are designed to provide long-term care coverage as well as cash value you could tap. In addition, some life insurance policies have a long-term care rider that can provide coverage.

“The sooner you consider your needs, the more options you’ll have,” says Storey.

Are there other ways to prepare for healthcare costs in retirement?

You could self-fund by increasing the amount you save in your 401(k) or other retirement accounts. “But a health savings account (HSA), with its potential tax advantages,¹⁰ is a particularly powerful way to save for medical expenses,” says Storey.

To qualify for an HSA, you must have a high-deductible health plan, and you can’t be covered by any other medical plan or be enrolled in Medicare. Opening an HSA could help you accumulate critical additional funds to pay for eligible expenses in retirement, including long-term care services and insurance premiums.

Once you enroll in Medicare, you can no longer contribute to your HSA but you can use the funds you’ve saved to cover most out-of-pocket medical expenses and Medicare premiums (Medigap Supplement Insurance premiums are an exception).

Either way, “the more you can earmark for healthcare as you save for retirement, the better,” Storey sums up.