It’s no secret retirees spend a lot of money on healthcare. Between rising premiums, deductibles, co-pays, and other out-of-pocket expenses, it’s easy to see how healthcare could eat up a significant part of a retirement budget.
Proper healthcare planning is an important pillar of any strong retirement plan. So how can you prepare for these costs?
Rising Healthcare Costs in America
Before you can plan for healthcare expenses, it’s good to understand this upward trend and why spending has increased in our society.
Healthcare costs have risen since the 1970s due to changes in government programs as well as the shifting needs of the population. According to data from the National Health Expenditure (NHE), total healthcare spending in 1970 was $74.1 billion, and by 2000, health expenditures reached nearly $1.4 trillion. Over the next 23 years, the amount spent on healthcare more than tripled to $4.9 trillion. This averages out to $14,570 per person, with some spending significantly more than others.
The Centers for Medicare and Medicaid Services (CMS) project that these spending patterns will increase. Their data suggests that by 2032, total healthcare spending will increase to $7.7 trillion and comprise about 20% of the gross national product.
Why is Healthcare Spending Growing So Fast?
Several factors contribute to this growth:
- Increased population growth
- An aging population
- Innovations in medical technology and pharmaceuticals
- A rise in medical costs
Healthcare becomes more expensive the more people use it. As the population grows and people live longer, in-patient care costs and hospital expenses have also grown. Since the turn of the century, the price of medical care (including services provided as well as insurance, drugs, and medical equipment) has increased by 121.3% as of August 2024. In contrast, prices for all consumer goods and services rose by 86.1% during that same period.
The spending uptick also tracks with rising out-of-pocket spending for basic expenses: this includes premiums and deductibles. The Kaiser Family’s Foundation 2024 Employee Benefits Survey found the average family premium in 2024 is 52% higher than the average family premium in 2014.
But the costs don’t stop there. Deductibles have steadily increased for years now, especially with the popularity of high deductible health plans. Data from the same study show that single person deductibles rose 47% over 10 years.
Where is the Money Going?
The American Medical Association (AMA) broke down the areas of healthcare spending, finding hospital care and physician services made up the largest portion of costs.
- Hospital: 31%
- Physician Services: 15%
- Prescription drugs: 9%
- Health insurance: 6%
- Nursing care: 4%
- Home healthcare: 3%
This explains some of the general healthcare spending in the U.S, but how can this data help you prepare for your own costs in retirement?
Healthcare Spending in Retirement
According to the Fidelity Investments® 24th annual Retiree Health Care Cost Estimate, a 65-year-old retiring in 2025 can anticipate spending an average of $172,500 in health care and medical expenses throughout retirement.
While this number includes deductibles, co-pays, premiums, prescriptions, and other Medicare costs, it doesn’t account for healthcare costs like dental, vision, over-the-counter medications, and long-term care.
Long-term care expenses should be an important part of your planning strategy. Why? An individual turning 65 has almost a 70% chance of needing some type of long-term care services and support in their remaining years. Genworth found the average cost of nursing care in 2024 was $127,750 for a private room and $111,325 for a semi-private room. If you needed nursing care for just one year, you could accrue significant medical bills, and the average need for long term care lasts around 3 years. This makes saving and planning for healthcare costs in retirement even more important. The trick is to start saving early and continue to evaluate both current and projected health needs to make a solid plan that will support your future.
Create a Strong Retirement Income Plan
A large part of retirement planning is allocating expenses that will help you live the life you want. When planning for medical costs, it’s important to account for all income streams you will have available, such as:
- Your portfolio
- Specific retirement accounts (401k, IRA, etc.)
- Social Security
- Pension
- Part-time work
- Other personal savings (real estate or other assets)
This will help you understand what you have and how to divide that income in the best way possible.
Your income is also a great predictor of what you can expect to pay for Medicare Part B and Part D premiums. Most people will pay $185.00 (the average Part B premium for 2025), but you can expect that number to increase if your income surpasses certain limits.
If your modified adjusted gross income from two years ago is above a certain threshold, your monthly payments can increase due to the Income-Related Monthly Adjustment Amount (IRMAA). The highest your monthly premium can be for 2025 is $628.90, but that is only if your income is above $500,000 (filing single) or $750,000 (married filing jointly). IRMAA costs also apply to your Medicare Part D premium. Part D premiums can vary depending on your plan, and in 2025, the highest IRMAA surcharge can add up to $85.80 to your monthly costs.
As you build your retirement budget, be sure to include an ample amount for all medical-related expenses, co-pays, deductibles, and premiums. When you properly plan for healthcare costs and keep them front and center, you won’t be as surprised when you need to use them.
Evaluate Your Current Health Needs
A lot of retirement health spending comes from ongoing medical care. It’s important to evaluate your current health, as well as your family health history, to see if any long-term issue might present itself as you age.
Conditions like high blood pressure, heart disease, arthritis, dementia, diabetes, and osteoporosis are common in adults over 50. Knowing your individual and family conditions can give you a better sense of how much you could be spending on ongoing health needs.
Start Saving Early
As with most long-term financial goals, a savings strategy can help in reaching and surpassing your goals. While you can allocate some of your assets to healthcare spending, there is one account to specifically help you save for health care expenses: a health savings account (HSA).
The HSA was designed to help people save for healthcare costs and its benefit to retirees can be impactful. This account has three distinct tax benefits:
- Contributions are pre-tax
- Gains inside the account grow tax-free
- Qualified distributions are tax-free
Since all contributions are made with pre-tax dollars, this strategy can lower your taxable income for the year. There isn’t another type of savings vehicle quite like this. With tax benefits from start to finish, it’s a strategic tool to add to your retirement savings plan.
With HSAs, it‘s important to know the type of expenses that are considered qualified. While Medicare Part A, C and D can be covered by your HSA, Medigap insurance premiums are not qualified. Should you use HSA funds for a non-qualified expense, the IRS will issue a 20% penalty and you will be responsible for income taxes on the total distribution amount.
To contribute to an HSA, you must first be enrolled in a high deductible health plan. This type of health plan increases the deductible and out-of-pocket expenses before insurance benefits kick in. While out-of-pocket expenses could be higher, for healthy people the benefits often outweigh the costs.
Another potential benefit of this account is your funds can roll over year-to-year, making it a great long-term savings vehicle. Most HSA plan providers offer options to invest HSA savings in mutual funds and other investment vehicles, but you may have to look for that option. By using your HSA for long-term savings, you can prioritize health expenses while building your nest egg.
For 2025 contribution limits are $4,300 for self-only coverage and $8,550 for family coverage. If you do qualify for an HSA, start making regular contributions. This will help amplify and prioritize your healthcare saving venture.
Why Planning for Healthcare Costs in Retirement Matters
Healthcare costs can have a big impact on your wallet. It‘s important to be prepared for those costs when they come. By creating a strong savings plan alongside an income plan for retirement, you’ll be better able to allocate expenses for future medical care.
Healthcare costs in America have trended up for decades and don’t appear to be changing anytime soon. To live out your dreams and retirement goals, you must be prepared to prioritize your health and proper healthcare planning can do just that.
Abacus loves exploring financial plans from a comprehensive perspective. A big part of your retirement budget will be medical costs and we want you to be ready. Schedule a time to talk with an advisor today, to learn how we can help.
