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Keys to covering health care in retirement

Key takeaways

  • Health care costs can be significant in your older years, and are often very unpredictable.
  • Understanding Medicare options and benefits can help you plan for what costs you may need to cover out of pocket.
  • A financial professional can help you assess options for long-term care coverage, and how a health savings account may help you cover post-retirement health care expenses.

Along with housing and food, having enough savings to cover your medical needs throughout your working life and retirement is a "must have" in everyone's budget.

But unlike many other costs, health care needs are unpredictable—and even more so as you age. "I find that there is often a huge misunderstanding about the potential cost of health care in retirement," says Jennifer Sellwood, vice president, financial consultant with Fidelity. "That's why my planning discussions with clients always include in-depth conversation around the reality of health care costs and the most efficient way to save for them."

According to the latest Fidelity Retiree Health Care Cost Estimate,1 an average couple can expect to pay approximately $315,000 (after tax) to cover health care costs in retirement—and that number does not include the cost of long-term care, if needed. A single person can expect to pay $157,500 (after tax). Moreover, the costs of health care year over year have typically risen faster than the average rate of inflation. Compounding the challenge is that health care costs can vary person to person based on medical conditions and where they live.

"When it comes to long-term financial planning around health care, it's about each individual and their personal health situation," says Sellwood. The following strategies can help.

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Get educated on Medicare

Signing up for Medicare, the federal health insurance program for individuals age 65 and older, as well as certain younger people with medical conditions or disabilities can be complicated. You'll need to make choices about different types of coverage, known in Medicare lingo as "parts." There's Part A, which is hospital insurance; Part B, which is medical insurance; and Part D, which covers prescription drugs. There are also optional supplementary coverage options: Medigap (aka Medicare Supplement), which helps cover out-of-pocket costs; and Medicare Advantage (aka Part C), which is an all-in-one option which combines Original Medicare (A and B) services with benefits such as vision, dental, hearing, or prescription drug coverage.

To determine which plans may be right for your situation, you'll need to consider many factors, including benefits, coverage, premiums, and any special situations such as living part of the year in a different location. While Medicare is an individual, not family, plan, in situations where one spouse is retired and eligible for Medicare, and the other spouse is still working, it's a good idea to compare the costs and coverage benefits of the Medicare coverage for the retired spouse with the costs and coverage benefits of adding them to the employer benefits maintained by the working spouse, if eligible. Fidelity Medicare Services® has a team of licensed Medicare advisors who can help you evaluate your options.

No matter which options you choose, it's important to understand that you'll likely have out-of-pocket costs, which may be significant. Medicare Part B has monthly premiums that are set by the government and can also change each year; those premiums can also be subject to a surcharge, the Income-Related Monthly Adjustment Amounts (IRMAA) that is scaled based on your income, so an event that affects your household income could also affect how much you pay for Part B. They're also based on a 2-year look back on income, so if you work until just before Medicare eligibility, your premiums may be higher. Part D premiums are also subject to IRMAA, and unlike Part B, which has a standard base premium, part D plan options and their corresponding premiums vary based on where you live.

Explore long-term care options

One expense that generally isn't covered by Medicare is long-term care. While the costs vary a great deal depending on the location and type of care needed, you could potentially need to pay 5- or even 6-figures annually for various types of help, including a home health aide, assisted living, or full-time nursing home care. An individual who reaches age 65 has about a 70% chance of needing long-term care services throughout the rest of their lifetime. "A financial professional can model the impact those costs could have on your overall retirement plan, and talk through the options for covering them," says Kerry Beeber, an advanced planner with Fidelity.

There are 4 basic options to cover long-term care: personal savings, government benefits (such as Medicaid), traditional long-term care insurance, or a hybrid product, which combines long-term care coverage with life insurance or annuities, and potentially allows for a life insurance death benefit to beneficiaries if long-term care is ultimately not needed. Each of these options has advantages and considerations, with the right choice depending on your age, financial circumstances, and family situation.

If you're considering insurance, you may want to begin discussing your options with a professional in your 50s. "At this stage of life, long-term care insurance policies tend to be more affordable and you are less likely to have medical issues that might potentially disqualify you from purchasing a policy," says Jason Webb, a regional vice president with Fidelity Investments Life Insurance Company.

Fund a health savings account (HSA)

It's tough to top the power of an HSA: Annual contributions reduce your income tax, all money within the account potentially grows tax-deferred, and withdrawals are tax-free when used for qualified medical expenses.2 Unlike other tax-advantaged accounts like a Roth IRA, HSAs have no income limits; anyone enrolled in an HSA-eligible health care plan can typically contribute.

Come retirement, HSA funds can be used to pay for qualified medical expenses and even some eligible Medicare premiums, including parts B and D. However, HSAs cannot typically be used to pay for Medicare Supplement premiums. 

Upon reaching age 65, HSAs can also be used for nonmedical expenses without penalty, though they will be subject to federal income taxes. Because HSAs are such a tax-efficient option for savings, it may also make sense to pay for medical expenses out of pocket and view the HSA as another retirement savings vehicle.

Keep in mind, however, that an HSA can have significant tax consequences for your heirs. "An HSA can't be passed to anyone in the form of an HSA, other than your spouse," says Beeber. A non-spouse beneficiary will receive the entire distribution in the form of taxable income. "Using the HSA for its intended purpose is where you'll get the most benefits from it," Beeber explains.

Bridge the gap

While you might assume you'll work until Medicare age, you also may find that you can or need to retire sooner. Retirees who find themselves needing to bridge that health care coverage gap have several options, including transitioning to a spouse's employer plan if they're still working, enrolling in COBRA coverage, purchasing private insurance or a plan through the public marketplace, or even considering part-time work that offers insurance coverage. "There's no single right answer—you'll need to explore all the options available to see which choice meets your health care needs and budget," says Webb.

Looking ahead

Unpredictable health care costs can be one of the biggest risks to retirement security. That's why it's crucial to understand the expenses you may face and build flexibility into your plans. "While one can never truly be prepared for health care events, we can have conversations around planning for the unexpected," says Sellwood. "And the earlier we start the conversation, the more prepared we can be."

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1. Estimate based on individuals retiring in 2023, 65-years-old, with life expectancies that align with Society of Actuaries’ RP-2014 Healthy Annuitant rates projected with Mortality Improvements Scale MP-2020 as of 2022. Actual assets needed may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Cost Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, original Medicare. The calculation takes into account Medicare Part B base premiums and cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care. 2. With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. Please consult with your tax advisor regarding your specific situation.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Investing involves risk, including risk of loss.

The information provided herein is general in nature. It is not intended, nor should it be construed, as legal or tax advice. Because the administration of an HSA is a taxpayer responsibility, you are strongly encouraged to consult your tax advisor before opening an HSA. You are also encouraged to review information available from the Internal Revenue Service (IRS) for taxpayers, which can be found on the IRS website at You can find IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, and IRS Publication 502, Medical and Dental Expenses, online, or you can call the IRS to request a copy of each at 800-829-3676.

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