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Introduction: Why Healthcare Costs Can Make or Break Your Retirement
You have worked hard, saved diligently, and you are getting close to the finish line—retirement. But here is the reality many people overlook: healthcare costs do not retire when you do. In fact, for most retirees, health expenses are among the largest line items in the budget. According to recent estimates, the average 65-year-old couple may spend over $300,000 on healthcare throughout retirement [1].
That number surprises a lot of people. Why? Because many assume Medicare covers everything. It does not. From premiums to prescription drugs to long-term care (LTC), the out-of-pocket costs add up fast. If you do not plan ahead, these expenses can derail even the most carefully built retirement plan.
In this article, we will break down:
• What Medicare does (and does not) cover
• Common out-of-pocket costs every retiree should expect
• Long-term care planning options, including insurance and self-funding
• Practical steps to estimate and protect your savings
By the end, you will have a clearer understanding of how to create a realistic healthcare budget for retirement.
The Basics: What Medicare Covers and What It Doesn’t
Medicare is a federal health insurance program for people age 65 and older, but it is not free and it does not pay for everything. Understanding its parts is the first step in accurate budgeting.
Medicare Part A (Hospital Insurance)
• Covers inpatient hospital stays, skilled nursing facility care (short-term), hospice, and some home health care.
• Premium: Most people do not pay a premium if they have at least 10 years of qualifying work history.
• Deductible in 2025: $1,676 per benefit period [2].
Medicare Part B (Medical Insurance)
• Covers doctor visits, outpatient care, preventive services, and durable medical equipment.
• Premium: Standard Part B premium is $185.00/month in 2025, though higher-income earners pay more [3].
• Deductible: $257 per year in 2025 [3].
Medicare Part D (Prescription Drug Coverage)
• Helps cover the cost of prescription drugs.
• Premium: Varies by plan, averages about $34/month nationally [4].
• Deductible and copays apply, and there is still potential for out-of-pocket costs in the coverage gap.
Medicare Advantage (Part C)
• Combines Parts A and B (and often D) into one plan offered by private insurers.
• Often includes additional benefits like vision and dental, but costs and coverage vary widely.
Key takeaway: Medicare does not cover everything and you are still responsible for premiums, deductibles, copayments, and services outside Medicare coverage.
What Medicare Doesn’t Cover
Some major healthcare costs are not covered by Medicare, including:
• Long-term care beyond short-term skilled nursing
• Most dental, vision, and hearing care
• Routine foot care
• Cosmetic procedures
• Care received outside the U.S.
This gap is where many retirees are caught off guard. The largest of these is long-term care.
The Big Wildcard: Long-Term Care Costs
Long-term care refers to help with daily activities such as bathing, dressing, and eating, either in a nursing home, assisted living facility, or at home. Medicare does not cover custodial care, and these costs can be staggering.
Average Costs of Long-Term Care in 2025
• Nursing home (private room): $120,000/year
• Assisted living facility: $60,000/year
• Home health aide: $30/hour [5]
These services are needed by 70% of people age 65 and older at some point in their lives [6]. The average length of care can range from two to five years, which means hundreds of thousands of dollars in potential costs.
Options for Long-Term Care Planning
You have two primary strategies to cover these expenses: insurance or self-funding.
1. Long-Term Care Insurance
• Policies help pay for nursing home, assisted living, and in-home care.
• Premiums vary based on age, health, and coverage amount, but buying earlier (late 50s to early 60s) usually locks in a better rate.
• Many insurers now offer hybrid policies that combine life insurance with LTC benefits, providing value if care is never needed.
2. Self-Funding (Paying Out-of-Pocket)
• Some retirees prefer to earmark a portion of savings for LTC rather than pay insurance premiums.
• This may be an option for those with high net worth and strong liquidity.
• The risk: If care is needed for several years, it can significantly reduce legacy goals or impact a surviving spouse.
Pro tip: Even if you self-fund, consider tax-advantaged accounts like Health Savings Accounts (HSAs) to build a dedicated healthcare reserve during your working years.
Estimating Retirement Healthcare Costs
How do you know what to budget? Here’s a practical approach:
Step 1: Estimate Medicare Premiums
• Add up Part B and Part D premiums (or Advantage plan premiums) plus Medigap if you choose that coverage.
Step 2: Add Out-of-Pocket Expenses
• Include deductibles, copays, dental, vision, and hearing care.
Step 3: Plan for Long-Term Care
• Decide whether to insure, self-fund, or a combination.
Step 4: Add Inflation
• Healthcare costs typically rise faster than general inflation. Plan for 5% annual increases.
Sample Healthcare Cost Estimator
Expense Category Annual Cost (Estimated)
Medicare Part B Premium $2,096
Part D Premium $408
Medigap Plan G Premium $1,800
Dental/Vision/Hearing $1,000
Out-of-Pocket Medical $1,200
Total (Annual) $6,504
This does not include long-term care, which could add $60,000+ annually if needed.
This is for an adult male, age 60 for the 2025 plan year.
How to Protect Your Retirement Savings
1. Use a Dedicated Healthcare Bucket
Set aside a specific amount for healthcare costs within your retirement plan.
2. Consider Insurance Strategies
Medigap plans can reduce out-of-pocket exposure. Evaluate LTC insurance or hybrid life policies if suitable.
3. Try to Optimize HSAs Before Retirement
If you are eligible, a Health Savings Account (HSA) offers triple tax advantages and can serve as a healthcare fund in retirement.
4. Stress-Test Your Plan
Run scenarios: What happens if you need three years of nursing home care? Does your plan hold up?
Final Thoughts and Next Steps
Healthcare is one of the most predictable and unpredictable expenses in retirement. You know you will have costs, but you do not know exactly how much or when they will hit. That is why proactive planning is so important.
Start by estimating your basic Medicare and out-of-pocket costs, then decide how you will handle long-term care. Whether you use insurance, self-funding, or a hybrid approach, the goal is the same: protect your savings and keep your retirement secure.
Sources
1. Fidelity Investments, “How to Plan for Rising Healthcare Costs in Retirement,” 2025.
2. Centers for Medicare & Medicaid Services (CMS), “Medicare 2025 Premiums and Deductibles,” 2025.
3. Medicare.gov, “Part B Costs,” 2025.
4. Kaiser Family Foundation, “Medicare Part D: A Primer,” 2025.
5. Genworth Cost of Care Survey, 2025.
6. U.S. Department of Health and Human Services, “Long-Term Services and Supports: Facts and Figures,” 2025.
Disclosures:
Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. Investing involves risk which includes potential loss of principal.
Neither the companies of OneAmerica Financial, Fuller Financial, nor their representatives provide tax or legal advice. For answers to specific questions and before making any decisions, please consult a qualified attorney or tax advisor.
All numeric examples and any individuals shown are hypothetical and were used for explanatory purposes only. Actual results may vary.
Not affiliated with or endorsed by the Social Security Administration, the Centers for Medicare & Medicaid Services, or any governmental agency.
