Health Care Costs in Retirement

In this article...
  • Healthcare costs in retirement can be expensive. Learn about the costs of health insurance that many retirees can expect, including Medicare premiums and out-of-pocket expenses.

People in their 50s should be dreaming of the fun they'll have in retirement, but studies show financial worries dominate their thoughts. According to the Retirement Confidence Index, 53% of Americans in their 50s worry about whether they'll afford their medical expenses in retirement.

These concerns are understandable; while many bills decrease as you age, health care costs typically rise. However, when you understand your potential medical costs, you can budget better for the health care expenses that lie ahead.

How Much Does Health Care Cost in Retirement?

According to Fidelity, the average American couple retiring at age 65 will spend $295,000 on medical expenses during their retirement. This figure breaks down as follows:

  • 19% on generic, branded and specialty drugs
  • 39% on Medicare Part B and Medicare Part D premiums (coverage for doctor appointments and prescription drugs, respectively)
  • 42% on other medical expenses (copays, coinsurance and deductibles for doctor and hospital visits)

These average cost figures assume the couple qualifies for Original Medicare (Medicare Part A and Part B) and doesn't have an employer retiree health plan.

You may spend less than $295,000, but conversely, you could also pay more. The actual amount a 65-year-old couple spends depends on a variety of factors, including their:

  • Health status
    This figure would increase if the couple had severe health problems. The costs of over-the-counter medication, dental work, and long-term care, which weren't factored in, would also impact the total spend.

  • Location
    Certain areas of the U.S. and large cities usually have higher living expenses.

  • Longevity
    Your expenses increase with age and you’ll pay more health insurance costs over the course of your life-span the longer you live.

How Much Does the Average Retiree Pay for Medicare?

The average retired man pays $130,000 for their Medicare premiums and out-of-pocket expenses, according to a recent Employee Benefit Research Institute (EBRI) report.

The same report found that women pay $146,000. According to the Centers for Disease Control and Prevention (CDC), the gender gap in health care spending is prtly due to the fact that women typically live 20.7 years after qualifying for Medicare, while men are only expected to live another 18.1 years.

The EBRI report assumes the average person has Medicare Part A (hospital insurance), Part B (medical insurance) and Part D (prescription drug coverage), as well as Medigap Plan G, which covers many out-of-pocket Medicare costs.

How Does Health Insurance Work When You Retire?

You may have several health insurance options when you retire, including:

  • Employer-sponsored retiree health insurance
    Employer-subsidized insurance for retirees is similar to employee health insurance. Approximately 29% of large firms offer these plans, according to the Kaiser Family Foundation (KFF). They are much less common in small to medium firms.

  • Medicare
    This government health insurance program is available once retirees reach 65 (or before, if they have qualifying health conditions). These insurance benefits may be managed by the federal government (through Original Medicare, Parts A and B) or by private insurance firms (Medicare Advantage plans, also called Medicare Part C).

  • COBRA
    An employee plan extension through the Consolidated Omnibus Budget Reconciliation Act, which extends employee coverage for up to 18 months.

  • Marketplace insurance
    These are Affordable Care Act insurance plans for individuals. Help with payments may be available to people with qualifying incomes, often available.

Once you qualify, Medicare will be your main form of health insurance. If you receive Social Security retirement benefits, you'll typically be automatically enrolled in Medicare once you turn 65.

If you're unsure which insurance option will work best for you, you can speak to an insurance broker or with a representative from your local State Health Insurance Program.

How Much Will Health Insurance Cost Me If I Retire Early?

Most Americans are eligible for Medicare once they turn 65. However, the Federal Reserve found just 24% of Americans wait until they're 65 or older before leaving the workforce. The report found 23% of people retire between 62 and 64 years of age, and 51% are 61 years old or less.

These findings indicate an extended period where these adults may not have health insurance that’s either covered by an employer or subsidized by Medicare.

While it is increasingly rare, some companies offer retiree health insurance plans. Retired workforce subsidies vary substantially and may also depend on years of service. These plans could be your best option until you qualify for Medicare but less enticing once you turn 65. Crunch the numbers with your other alternatives to determine whether they're a good deal.

If you don't qualify for COBRA after you retire or can't afford the premiums, you may be able to get Marketplace insurance under the Affordable Care Act, sometimes referred to as Obamacare.

The Centers for Medicare and Medicaid Services (CMS) lists the average monthly premiums for benchmark plans (the second-lowest cost silver plan) in 2020 at $388 for a 27-year-old. However, AARP notes that monthly premiums for adults nearing retirement are much higher than younger Americans' plans. They cite a 2019 KFF study, which found a 60-year-old would pay $943 per month for the more affordable silver plan.

The cost of health care in retirement can be daunting but preparing for these expenses during your retirement planning will help you enjoy a happy and healthy life once you leave the workforce.

Savings strategies, including increasing your retirement account contributions or opening a health savings account (HSA), can ensure you have money for medical care when you need it.

About the Author

Zia Sherrell is a digital health journalist with over a decade of healthcare experience, a bachelor’s degree in science from the University of Leeds and a master’s degree in public health from the University of Manchester. Her work has appeared in Netdoctor, Medical News Today, Healthline, Business Insider, Cosmopolitan, Yahoo, Harper's Bazaar, Men's Health and more.

When she’s not typing madly, Zia enjoys traveling and chasing after her dogs.