“YOU COULD CALL HEALTHCARE the biggest retirement expense people fail to plan for," says Ben Storey, director, Retirement Research & Insights, Bank of America. "Many folks just assume Medicare is going to pay for everything but, in reality, it only covers about two-thirds of your costs," he adds.

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 retire 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 retirement expenses.

Premiums, copays and deductibles can add up. Healthcare costs have been increasing at one-and-a-half to two times the rate of inflation³ — a 55-year-old couple today could expect to pay more than $930,000 for healthcare costs during their retirement.⁴

“Such a large amount may put you at risk of outliving your retirement savings,” notes Storey. 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.

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. “Weighing these options is an important decision as you approach retirement,” notes Storey.

Unless your employer offers retiree coverage, you'll need to consider alternate options. You could stick with your employer's insurance plan under COBRA (the Consolidated Omnibus Budget Reconciliation Act) for up to 18 months, but your premiums will be considerably higher than they were. Other possibilities could include coverage under a spouse's plan or buying coverage through the health insurance marketplace or a private insurer.

Even with all the medical coverage available through Medicare, there's one element that falls through the cracks — the cost of long-term care. Someone turning 65 today has a nearly 70% chance of requiring some type of long-term care during their lifetime.⁵ Considering that a private room in a nursing home can cost upward of $100,000 per year,⁶ “savings can get eaten up pretty quickly," notes Storey. “Long-term care insurance can help improve the chances that your savings will last through your full retirement.”

But here’s the rub: 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. 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.