Don't let unexpected health care costs spoil your retirement

By Jason R. Friday, CFP®, MPAS®, RICP®, CMFC Head of Financial Planning

As Head of Financial Planning, Jason is a strategic partner who is responsible for developing the strategy, managing the planner teams, and coordinating personal financial planning activities across Citizens Wealth Management to help clients navigate and grow in changing circumstances.

When you think of retirement planning, you might have an eye on traveling the world or building a legacy for future generations. But health care costs in retirement — especially unexpected ones — can hinder your plans. Recent research shows that over about 20 years of retirement, a healthy 65-year-old retiree could expect $157,500 on average health care costs¹.

But medical expenses in retirement don't have to catch you off guard. By planning for those costs now, you'll know what steps to take when your employer-sponsored or other medical coverage ends. With a little help from a financial advisor, you can build a comprehensive retirement plan that protects your savings and your health for years to come.

Medical expenses in retirement

Your health care costs in retirement will depend on many factors, including your health and lifestyle, when you retire and how long you live. But no matter your age or health, it's easy to be surprised by the true costs of health care.

During your working years, you may have access to your employer's medical insurance. Regardless of the plan or its costs, it at least keeps you from footing the entire bill. In fact, U.S. employers covered roughly 73% to 85% of medical insurance premiums² for their employees in 2022. When you factor in copays and negotiated costs, your share of a health care bill amounts to a fraction of the true cost.

In retirement, however, that changes. Generally, you won't have your employer's medical coverage anymore. So, unless you're covered by your spouse's workplace plan, you may become responsible for 100% of your health insurance premiums until Medicare kicks in. Even once you have Medicare, it doesn't cover everything, and the premiums could be high if your retirement income is in the six-figure range.

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Understanding your health insurance options

Retirement brings its fair share of changes — from where you live and how you spend your time to where you get your health insurance. However, the timing of the start of your retirement can also play a significant role in how you'll cover your medical expenses.

Early retirement insurance options

If you retire before age 65, you'll need to bridge the gap between the end of your employer's medical coverage and the start of Medicare. Some of your medical insurance options include:

• COBRA coverage. While it can be pricey — continuing an employer plan through COBRA averages $645 per month³ — you can continue your employer's medical plan when you retire.
• Marketplace health insurance plans. These plans can help you adjust premiums and coverage to fit your budget. The costs average $928 per month⁴ for the bronze level, $1,217 per month for silver and $1,336 per month for gold.
• Private insurance. Choosing a plan from a private insurer may help you tailor medical coverage to fit your unique health and budget needs.
• Coverage from your spouse's insurance. If your spouse hasn't yet retired, you may be able to be insured by their plan.
• Part-time work for medical coverage. Some major employers offer health insurance to part-time employees⁵.

  	COBRA coverage	Marketplace plan	Private insurance	Spouse's health plan	Part-time employer plan
  Who it's best for	Those who prefer to continue coverage with their former employer's plan	Early retirees	Early retirees	If your spouse still works	If neither spouse still works full time and you want to bridge the gap until Medicare eligibility
  Coverage	Identical to your former employer's plan	Coverage varies by plan	Coverage varies by plan	Coverage varies by plan	Limited to the employer's offerings
  Cost	$$	$$$	$-$$$	$$	$-$$

If your interim insurance plan has higher out-of-pocket costs than you had with your employer's plan, a health savings account (HSA) could help. You can tap HSA funds to cover everything from prescriptions to X-rays, which can help if you've opted for a lower-cost, high-deductible insurance plan.

Having HSA funds set aside can help keep you and your finances healthy in two ways. First, you can use those funds to avoid tapping your individual retirement account or 401(k) early and encountering penalties for accessing them before age 59½. An HSA can also provide a financial cushion that can keep you from having to take Social Security early at a lower benefit amount. It’s also important to note that health care expenses you are pulling the money for does not have to occur in the same year of the reimbursement. With that said, it’s prudent to save unreimbursed medical bills pre and post-retirement.

The power of the HSA comes from letting the account grow tax-free. Most people don’t know they can pay health care expenses out-of-pocket, let the account grow tax-free, and then pull the money tax-free in retirement. 

Retiring at or after age 65 insurance options

If you opt to retire at or after 65, you can immediately transition from your employer's health care plan to Medicare, which has two main plans: Original Medicare and Medicare Advantage. Both have several moving parts that include hospital, medical and prescription drug coverage. It's important to understand your options so you can plan for them.

Original Medicare

If you opt for Original Medicare, your insurance will likely have three components — Parts A, B and D — with an additional option to get Medigap.

• Part A⁶ is your hospitalization insurance and covers expenses like hospital stays, lab work, home health care, nursing home care and hospice. Medicare taxes you paid during your working years cover these premiums. It covers 80% of your care costs once you meet the deductible⁷, which is $1,632 for 2024.
• Part B⁸ covers your medical care from providers, including preventive care like annual physicals. This insurance is optional and has a separate, income-based premium that can be costly if you have a high income. The annual deductible for all Part B enrollees is $240 for 2024.
• Part D⁹ covers prescription drugs and has a separate income-based monthly premium that ranges from $0 to $81 for 2024. Starting in 2025, retirees with Part D plans will have annual out-of-pocket medication costs capped at $2,000¹ thanks to provisions in the 2022 Inflation Reduction Act.
• Medigap is extra insurance you can purchase with Original Medicare to cover expenses that the plans don't cover. Medigap can pay for costs like your deductible, your 20% co-insurance after you've met your Part A deductible each year and copays for care. Premiums will vary depending on your plan, where you live and the insurer you choose.

Medicare Advantage

Medicare Advantage¹¹, also known as a Part C plan, is a private Medicare plan that usually includes Parts A, B and D. These plans work more like the health insurance you're used to having during your working years. They include dedicated physician networks, annual out-of-pocket maximums, and comprehensive coverage for most of your health care needs.

Your costs will vary depending on where you live, the insurer and the plan you choose. Unlike Original Medicare plans, Advantage plans often cap your premium costs at your Medicare Part B premium. Some plans may kick in to help cover those costs as well. Once you hit your annual out-of-pocket limit, these plans pay 100% of your covered care costs for the rest of the year. While these plans can benefit a wide range of retirees, you may need to do some research and compare costs to identify the insurer, premium and plan that best suits your needs.

Paying for unexpected expenses

Building an enduring financial plan doesn't just include a budget for health insurance later in life. It should also include strategies to meet unexpected medical expenses in retirement head-on. By considering your and your family's health history, a financial advisor can help you plan for potential expenses like:

Long-term care and memory care

An assisted living facility costs $4,700¹² per month on average while a semiprivate room at a nursing home costs about $8,300¹³ per month. A specialized facility like memory care averages $6,000¹⁴ per month.

Critical illness

Long-term illnesses like cancer and cardiac and lung disorders can require significant lifestyle and financial adjustments to accommodate treatment.

Disability

Should you or your spouse become disabled, monthly care costs — including in-home care, home modifications and medical bills — could skyrocket.

Financial planning is financial security

A well-rounded financial plan is one that travels with you through every life stage. Retirement is so much more than just decades of saving to fund your hopes and dreams. It's also about protecting yourself and your loved ones with financial security no matter what comes your way.

If your financial plan doesn't include strategies for protecting both your wealth and health, consider meeting with a Citizens financial advisor who can help you do both. Together, you can craft a plan to reduce any anxiety about health care costs in retirement and chart a path to the low-stress retirement of your dreams.

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