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How to plan for rising health care costs

Key takeaways

  • Health care continues to be one of the largest expenses in retirement.
  • Decisions about when to stop working, when to take Social Security, and how to generate cash flow in retirement all factor into how you prepare to meet health care expenses.
  • To help fill a gap in saving for health care expenses, consider increasing contributions to your tax-advantaged accounts, especially HSAs (if you have one), which enable tax-free spending on health care in retirement.
    Health savings account (HSA) contributions, earnings, and distributions used to pay for qualified medical expenses are tax-free for federal income tax purposes.

If you are like most Americans, health care is expected to be one of your largest expenses in retirement, after housing and transportation costs. But unlike your parents' generation, you won't likely have access to employer- or union-sponsored retiree health benefits. So health care costs will likely consume a larger portion of your retirement budget—and you need to plan for that.

There are a number of drivers behind this mounting retirement health care cost challenge. In general, people are living longer, health care inflation continues to outpace the rate of general inflation, and the average retirement age is 62 for most Americans—that's 3 years before you are eligible to enroll in Medicare.

"Health care is creating a 'retirement cost gap' for many pre-retirees," says Steve Feinschreiber, senior vice president of the Financial Solutions Group at Fidelity. "Many people assume Medicare will cover all your health care cost in retirement, but it doesn't. So you should carefully weigh all options."

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How much is needed for health care costs in retirement?

According to the Fidelity Retiree Health Care Cost Estimate, a single person age 65 in 2023 may need approximately $157,500 saved (after tax) to cover health care expenses in retirement. An average retired couple age 65 in 2023 may need approximately $315,000 saved.1

Note: Fidelity’s 2023 Health Care Cost Estimate remains the same as last year (2022), due in part to limits on expected retiree out-of-pocket costs for prescription drug coverage starting in 2025.

Of course, the amount you’ll need will depend on when and where you retire, how healthy you are, and how long you live. The amount you need will also depend on which accounts you use to pay for health care—e.g., 401(k), HSA, IRA, or taxable accounts; your tax rates in retirement (see chart); and potentially even your gross income.2

Tip: If you're still working and your employer offers an HSA-eligible health plan, consider enrolling and contributing to a health savings account (HSA). An HSA can help you save tax-efficiently for health care costs in retirement. You can save pretax dollars (and possibly collect employer contributions), which have the potential to grow and be withdrawn tax-free for federal and state tax purposes if used for qualified medical expenses.3

Read Viewpoints on 5 ways HSAs can fortify your retirement

Pre- and early retirees: Make the most of your time to prepare

As retirement nears, you will have several big decisions to make, including when to stop working, when to take Social Security, how to pay for health care, and how to generate cash flow from your retirement assets. These decisions are interconnected and could make a difference in your living costs and lifestyle in retirement—and when you can retire.

Approximately one-third of "early retirees" who claim Social Security at age 624 do so to help pay for health care expenses until they are eligible for Medicare coverage at age 65. But if you can postpone retirement or save enough to cover health care costs until 65, then you may be able to defer your Social Security benefits. Generally speaking, the longer you can wait until age 70 to take Social Security benefits, the more you can collect, assuming you live a long life.

Read Viewpoints on Should you take Social Security at 62?

If you're like most people, you probably don't have access to employer-sponsored pre-65 retiree medical coverage. So if you retire prior to age 65, you'll need to find coverage until you are eligible for Medicare. Consider these options that may be available to you (see table).

Retiring before 65? Explore health insurance options and estimate potential costs before you’re Medicare-eligible.

  COBRA continuation Spouse's health plan Public marketplace Private insurance
Target audience Former employees Eligible spouses/partners of covered employees Anyone Anyone
Estimated cost $$–$$$ $–$$ $$–$$$ $$–$$$
Considerations Few employers subsidize COBRA; you may pay the full cost of the coverage. Not all employers offer this benefit; special rules or surcharges may apply. You may qualify for federal assistance based on your income. Your former employer might provide a reimbursement account that can help you afford the cost of these plans.

Good to know: While you can’t use an HSA to cover health care premiums, you can use an HSA to cover COBRA premiums while you’re unemployed.

Turning 65 and retiring: Consider Medicare and other options

When you get close to age 65, spend some time reviewing and considering all your Medicare options. When you do become eligible at age 65, you'll want to remember to sign up during your 7-month initial enrollment period that begins 3 months before the month you turn 65.

There's a lot to learn about the world of Medicare. You'll need to know about Medicare Parts A, B, and D, as well as Medicare Advantage and "Medigap" supplemental insurance plans.

In brief:

  • Part A covers hospital costs after you meet a deductible.
  • Part B is optional coverage for medical expenses and requires an annual premium. If you didn't get Part B when you were first eligible, your monthly premium may go up 10% for each 12-month period you could've had Part B but didn't sign up. In most cases, you'll have to pay a penalty each time you pay your premiums, for as long as you have Part B. Moreover, the penalty increases the longer you go without Part B coverage. Part D is for prescription drug coverage.
  • Medicare Advantage plans are all-in-one managed care plans that provide the services covered under Part A and Part B of Medicare and may also cover other services that are not covered under Parts A and B, including Part D prescription drug coverage.
  • Supplemental policies, referred to as Medigap policies, are offered by private insurance companies to supplement expenses that Medicare Parts A and B do not typically cover.

Tip: You may be better off paying a higher premium but not having to pay out-of-pocket at your office visits. Look at the cost of annual premiums and co-pays at different levels of supplemental insurance. Compare these costs. Then factor in the number of visits and co-pay/co-insurance per visit that you anticipate for the next year.

Once you select a Medicare plan, it's not forever. You can switch Medicare plans as you age and as your situation changes. Generally, it makes sense to enroll in Medicare Parts A, B, and D when you are first eligible because the late enrollment penalties for doing so later are steep (see next section if you are continuing to work after age 65). For example, you may owe a late enrollment penalty if you go without Part D or other creditable prescription drug coverage for any period of 63 days or more in a row after your initial enrollment period.

Find out about health coverage, both before you’re Medicare-eligible and after.
Where does the retirees health care money go? Drugs, Medicare and other medical expenses.
Source: Fidelity Benefits Consulting, 2022

Turning 65 and still gainfully employed (or your spouse/partner is)

If you're still working when you're 65 and get health insurance through your employer or your spouse's employer, you'll have the opportunity to enroll in Medicare when you leave your employer plan through a Special Enrollment Period.

In addition to Medicare options to consider, if your spouse or partner continues to work, they may be able to cover you through their health plan. Talk to your HR department to help you evaluate all your options, costs, and any restrictions. The rules of Medicare are complicated, so to get started, consider the following questions:

  • Which plan offers you the best coverage for your health needs?
  • Your employer is required to offer you coverage, but is that your best option?
  • Is it more expensive to stay in your employer plan or join Medicare?
  • Can your spouse or partner remain in your employer's plan if you decide to leave?

Tip: Remember, one of the key goals at this stage is to avoid any gap in coverage.

Read Viewpoints on 6 key Medicare questions and Medigap 101: What you need to know

Health care in retirement: Costs can come later

As you plan for health care expenses throughout your retirement—however long it may be—understand how paying for future health care expenses fits into your overall retirement income planning efforts, because health care utilization tends to increase as we age.

"Although health care costs continue to rise, there are financial planning steps that you can take today to help prevent health care costs from eating into your retirement lifestyle," Feinschreiber advises. "For example, if you're age 50 or older, you may be able to make up for a savings shortfall with additional catch-up contributions to your 401(k) or IRA. In addition, if you are age 55 or older, you can make an additional $1,000 catch-up contribution annually to your health savings account."

Read Viewpoints on What will my savings cover in retirement?

Consider a health savings account (HSA)

With an HSA, you can pay for qualified medical expenses in a tax-advantaged way.

More to explore

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

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.

1. Estimates based on a hypothetical single person or opposite-sex couple 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 2023. 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 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. For investors with MAGI above $174,000 in the calendar year 2 years before the current year, and filing taxes as married filing jointly, Medicare premiums for parts B and D are increased.

3. With respect to federal taxation only. Contributions, earnings, and distributions are tax-free for federal tax purposes when used to pay for qualified medical expenses. Each state may decide to follow the federal tax guidelines for HSAs or establish its own. As of 8/5/2020, 2 states tax eligible contributions to HSAs (CA and NJ), and 2 tax earnings but not contributions (NH and TN).

4. Social Security Administration;

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