Medical Costs in Retirement

Future savings needs checklist:

  • Retirement - Saving for your retirement in your employer’s  retirement program
  • College - Saving for your children’s college through a 529 plan
  • Healthcare - Covered by Medicare

Oops. You may have the first two goals under control, but relying only on government-provided healthcare  may be shortsighted. Medicare and related programs will probably take care of some of your post-retirement healthcare needs, but not all of them. So, don’t wait any longer to plan for your post-retirement healthcare. The time to take action is NOW.

Healthcare costs have risen two to three times faster than inflation over the last few decades, with no signs of letting up. Without proper planning, some retirees may find themselves facing unpleasant choices:

  • Spending a disproportionate amount of their retirement income on healthcare needs
  • Doing without certain healthcare services
  • Postponing retirement
  • Returning to employment in order to get employer-sponsored health insurance

Soaring healthcare costs may hit extra hard if you retire early, since Medicare coverage doesn’t begin before age 65. How do you plan to fill that gap between early retirement age and 65? Some employers extend group coverage to former employees who retire before age 65, but typically those are only very large employers. And even those numbers are dwindling. Those who do have employer-subsidized coverage may face enormous out-of-pocket expenses for premiums, deductibles, and co-payments. Private health insurance is often extremely expensive or simply not available. That’s why it’s more important than ever for employees to familiarize themselves with how to evaluate how healthcare costs will impact their retirement.

What You Can Do 

Rather than simply hoping for a lifetime of good health, you can take control of your future retirement healthcare costs by following some simple steps:

  • Stay healthy. It might sound obvious, but the best way to save on medical costs is to not need medical help. Healthy habits, including proper nutrition and exercise, started early and continued through your life are a good way to help take care of yourself. Remember “An apple a day . . .”?
  • Explore your employer’s retirement benefits. You might be one of the lucky ones who works for an employer that provides retiree healthcare. Find out how it works, how much of the premium you’ll have to pay, what’s covered and what’s not. And keep in mind, your employer’s benefits policy could change before you retire—what’s true today could be completely different tomorrow.
  • Evaluate your options. Even if your employer doesn’t offer retiree healthcare coverage, does it offer you the ability to purchase insurance at group rates? Shop around for private insurance if you’re retiring before age 65, or look into Medigap policies if you’re 65 or older. Do your homework.
  • What about COBRA coverage?  Congress passed the landmark Consolidated Omnibus Budget Reconciliation Act (COBRA) health benefit provisions in 1986 to provide continuation of group health coverage that otherwise would be terminated.  This coverage, however, is only available in specific instances. Group health coverage for COBRA participants is usually more expensive than health coverage for active employees, since usually the employer formerly paid a part of the premium. It is ordinarily less expensive, though, than individual health coverage.
  • Check out your professional and/or alumni associations. Being a member of some groups could qualify you for less expensive group coverage. If you start a part-time business (even a one-person operation), your local chamber of commerce may be able to help.
  • Try to estimate your future medical costs. Take a good look at your current general health and your family’s medical history. Any history of cancer? Heart disease? High blood pressure? Diabetes? Be as honest as you can about what your future health concerns might include, and try to put a dollar figure on them.
  • Consider long term care insurance. Medicare won’t pay for long term care if you ever need it, and the American Health Care Association estimates that 40 percent of Americans will need nursing home care at some point in their lives. Long term care insurance is designed to prevent a medical disaster from becoming a financial disaster. If you think you might need it, you may want to explore the insurance options (but do so while you’re relatively young and healthy—you can’t get it unless you’re in good health, and premiums are based on the age at which you take out the insurance).
  • Review your current retirement savings. Take a look at your current retirement savings rate. In light of the information above, is your current savings level adequate? How much more should you be saving? A 65-year-old couple with median prescription drug expenses will need $199,000 to have a 75% chance of covering their Medicare premiums and other out-of-pocket medical costs throughout retirement.* The sooner you increase your contribution rate, the closer you’ll be to improving your future retirement picture.
  • Consider a separate savings account for healthcare. Some financial planners suggest that having a separate savings account dedicated to funding your future healthcare needs is a good way to put a focus on that aspect of retirement. Psychologically, it may also help to keep your summer beach house savings separate from your hip replacement savings.
  • Become an assertive and informed consumer of medical services. Ask questions, get a second opinion, do some research about treatment options, review your bills carefully—take charge of your situation to make sure you get the most out of your healthcare dollars.
  • Find out more about Medicare. For more detailed information, go to, the website for the Centers for Medicare and Medicaid Services, the Federal agency within the U.S. Department of Health and Human Services that administers the Medicare program.

The reality is, healthcare costs will continue to rise, most people will require more healthcare as they get older, and healthcare is going to be a bigger expense than most people might have anticipated. Planning today for tomorrow’s needs could help make the future more secure.


This article has been presented for informational purposes only. It should not be considered financial advice for which you should contact your qualified professional.



*Source: Employee Benefit Research Institute. October, 2014.

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