Strategies To Plan For Healthcare Costs During Retirement

Most people underestimate what healthcare will cost in retirement. According to Fidelity’s 2024 Retiree Health Care Cost Estimate, the average 65-year-old couple retiring this year will need around $315,000 just for medical expenses throughout retirement. That doesn’t include long-term care, dental, or vision costs.

If you’re a physician or a high-income professional, chances are you’re focused on building wealth or maintaining your current lifestyle. But if you don’t account for future healthcare costs, they can quietly erode your savings and limit your financial freedom later in life.

Here’s how to prepare effectively, so medical costs don’t catch you off guard.

Why Healthcare Costs Keep Rising

There are a few key reasons why healthcare is one of the fastest-growing expenses for retirees:

• Increased longevity and aging population - Thanks to medicine, people are living longer than ever. While that’s great news, it also means retirees will likely need care for more years than previous generations.

• Chronic conditions and their long-term impact - According to the Centers for Disease Control and Prevention (CDC), 6 in 10 adults in the U.S. have at least one chronic condition, including diabetes, hypertension, or COPD. These conditions often require ongoing medication, treatments, and specialist care, increasing out-of-pocket costs significantly over time.

• Medical inflation and advancements in treatment - Healthcare inflation continues to outpace regular inflation. Advances in medications development and surgery come at a high price, leading to higher insurance premiums and out-of-pocket costs for retirees.

Knowing what’s driving these expenses sets the stage for understanding what your current insurance, such as Medicare, will and won’t protect you from.

What Medicare Covers and What It Doesn’t

Many people assume Medicare will handle most of their medical needs. That’s only partially true. Here’s a breakdown of what Medicare actually offers:

• Part A (Hospital Insurance): Covers inpatient hospital stays, skilled nursing facility care, hospice, and some home health care. Usually no premium.
  

• Part B (Medical Insurance): Covers outpatient care, doctor services, preventive services, and durable medical equipment. Requires a monthly premium, which increases with income.
  

• Part D (Prescription Drug Coverage): Helps cover the cost of medications. Also requires a separate premium.

Common Healthcare Costs Medicare Won’t Cover

• Long-term custodial care (nursing homes or daily personal assistance)

• Routine dental, vision, and hearing services

• International healthcare

• Alternative or experimental treatments

• Overseas medical care

These gaps can leave retirees exposed to thousands of dollars in out-of-pocket costs, unless they plan accordingly.

Must-Have Tools for Healthcare Planning

Preparing now while you’re still working can make a big difference. Here are three important tools to consider.

Using a Health Savings Account (HSA) Strategically

If you’re enrolled in a high-deductible health plan (HDHP), you’re eligible for an HSA. This triple-tax-advantaged account is one of the smartest ways to prepare for healthcare costs:

• Contributions are tax-deductible

• Earnings grow tax-free

• Withdrawals for qualified medical expenses are tax-free

Plus, after age 65, HSA funds can be used for non-medical expenses without penalties (though subject to income tax).

Choosing the Right Supplemental Insurance

To limit out-of-pocket expenses, consider::

• Medigap: Helps cover copayments, deductibles, and coinsurance not paid by Medicare Parts A and B.

• Medicare Advantage Plans: These are all-in-one plans that bundle Medicare coverage with additional services, often including dental, vision, and prescription drugs.

The right supplemental plan can significantly reduce the financial impact of a medical event.

The Importance of Long-Term Care Insurance

This is one of the most overlooked areas of retirement planning. Medicare does not cover custodial care, which includes help with bathing, dressing, or eating.

• Assisted living

• Home health aides

• Full-time nursing care

The ideal time to purchase a policy is in your 50s or early 60s. Waiting too long may increase premiums or risk denial due to health conditions.

How to Handle Unexpected Medical Expenses

Even with good planning, surprise costs still happen. Here are some practical ways to stay protected.

1. Build a medical emergency fund - Set aside a dedicated reserve for out-of-pocket healthcare expenses. Even $10,000 to $20,000 can make a big difference in reducing financial stress when a bill arrives.

2. Diversify your income sources - Relying solely on retirement accounts can make you vulnerable. Consider investments that provide steady passive income, such as real estate or dividend-paying stocks. That way, you’re not forced to withdraw from principal to pay for care.

3. Review your coverage annually - Medicare plans and premiums change each year. Review your options every open enrollment period to make sure your current plan still fits your needs.

4. Consider a Roth conversion strategy - Converting part of a traditional IRA to a Roth IRA during lower-income years can help you reduce taxable income in retirement. This is especially useful if you anticipate large healthcare expenses in future years.

As physicians, we know how easy it is to delay planning when you’re focused on your career and your family. But this is one area where a little preparation today can save you a lot down the road. Retirement should be about freedom, not worrying about surprise medical bills. Plan for it early, and you’ll give yourself the peace of mind to enjoy the next chapter. If you're ready to build a retirement plan that gives you freedom, not just coverage, the time to get started is now.