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How Much Should You Budget for Healthcare in Retirement?


Preparing for One of Retirement’s Largest Expenses

The average American underestimates healthcare expenses in retirement by a staggering margin. According to Fidelity Investments’ 2022 Retiree Healthcare Cost Estimate, the average American couple estimates the total cost of healthcare in retirement to be $41,000; however, in actuality, the average 65-year-old couple retiring this year can expect to spend an average of $315,000 on healthcare expenses throughout retirement.1

To properly estimate your healthcare expenses in retirement, you’ll first need to consider the different types of healthcare needs you may have, then back into how much you should set aside for the various expenses. These expenses can be put into three groups: those incurred after retirement but before age 65, those incurred during your Medicare years and those set aside for long-term care.

Healthcare Costs After Retiring but Before Age 65

If you retire before reaching age 65 (the age at which you qualify for Medicare), you have a few options. One option is to pay for Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage. Under COBRA, you can continue your previous employer’s health insurance for 18 months, but this option can be rather pricey. Another option is to purchase a plan on the health insurance marketplace, healthcare.gov. Here, you’re guaranteed coverage even with preexisting conditions and there are subsidies available to those who qualify. This can be a great option if COBRA is too expensive or you need coverage for longer than 18 months. A third option is getting insurance coverage through your spouse’s plan (if he or she is still in the workforce).

Now that you know what the health insurance options are prior to age 65, you’ll need to quantify these expenses so that you can set aside the funds to pay for them. These expenses are finite; they won’t last forever and will most likely go down once you qualify for Medicare. The key is determining how much more you’ll pay in health insurance after retiring but prior to Medicare and then comparing that to the health insurance expenses you’ll have while on Medicare.

For example, let’s say you’ll have private health insurance costs of $1,000 per month, but when you transition to Medicare, your premiums will drop to $400 per month. This means you’ll need to plan for the additional $600 per month until you qualify for Medicare. You’ll need to structure your investments to provide this income, and you can’t take much risk with this money, because you’ll need it in the short run.

Oftentimes this number isn’t a game changer, but many people will delay retirement just because of the health insurance boogeyman they’ve created in their head. Don’t put off retirement because you imagine health expenses will put you in the poor house. When I put my five-year-old daughter to bed at night and she’s afraid of the wolf in her closet (for some reason, her boogeyman is a wolf), I’ll open the closet and we’ll turn on the light so that we can see the reality: there isn’t anything to be afraid of. The same goes for your finances — it’s better to see things as they are than hold onto a fear of the unknown.

Healthcare Costs During Your Medicare Years

Your first Medicare-related cost will be premium itself, which is $164.90 per month in 2023. At higher income levels Medicare premiums will go up, with the maximum premium amount being $560.50 per month.2 Medicare premiums are based on your total income, which is technically called your modified adjusted gross income (MAGI). There are two things to note here:

  • First, take into account increased Medicare premiums when you’re making the decision to realize a bunch of income in one year. I have clients that may decide to diversify their portfolio and realize a larger capital gain one year. While they often factor in the federal capital gains taxes, net investment income tax (this is extra tax at certain income levels) and state income tax, they often don’t factor in increased Medicare premiums.
  • Second, be aware that increased Medicare premiums have a lag. If you have a large income this year, your Medicare premiums won’t see an increase for two years. The IRS shares your tax info with Medicare to make sure you’re paying the correct premium, and apparently it takes two years for them to coordinate. So it’s much like the ice cream habit you picked up during COVID — you didn’t see the added pounds around your midsection with each spoonful, but it showed up on the first beach vacation you finally got to take.

The other expense you’ll have while on Medicare is the insurance premium for a Medicare supplement or Medicare Advantage plan. These plans vary in cost and coverage, but they can be just as expensive as Medicare itself.

Long-Term Care Costs

The last healthcare expense I want to cover is one you’re not guaranteed to have but need to plan for just in case: long-term care.

This boogeyman has grown even larger in people’s minds (to my daughter, I guess this would the equivalent of Cujo, Stephen King’s rabid dog). The biggest fear my clients have is that long-term care is going to bankrupt them.

The average stay in a long-term care facility is one year or less.3 In 2021, the average annual cost for a private nursing room was $108,405.4 If you’re the average person, long-term care is just not that expensive compared to your other healthcare expenses and, for most, it shouldn’t be the horror that so many people make it out to be.

However, we’re discussing averages, and that means that there are some that won’t pay any long-term care expense and there are others that will pay a boat load. You’ll need to think of this probabilistically given your health history, family history and lifestyle. You’ll also want to consider if you have family members who are willing and able to provide care. If you have a health issue or a bad family health history, the expense of buying a long-term care policy will probably be prohibitive — the insurers know the stats and have run the numbers themselves. They only want to collect premiums from people who, on average, aren’t going to use the coverage!

Steps You Can Take Now to Prepare

Now that I’ve given an overview of the expenses you’ll need to account for, I’d like to give you the following action items to consider.

  • Try to get an idea of the health insurance premiums you might have. Ask your employer about COBRA or go to healthcare.gov to get estimates for health insurance coverage prior to qualifying for Medicare coverage.
  • Talk with an experienced Medicare advisor about the cost of Medicare supplement plans. Creative Planning has a group of dedicated Medicare specialists to assist our clients.
  • Quantify your projected expenses so that you’ll know how much you’ll need to set aside in a portfolio in order to cover them. Determine whether you’ll have enough assets to cover these expenses and reach the other income goals you have. If you don’t have an advisor willing to answer this question, give us a call. We’ll run a plan for you and help you structure your investment portfolio accordingly.
  • Make sure you consider your tax plan. There are healthcare subsidies and savings on Medicare premiums at lower income levels. Factor this in when deciding how to take income from your investments once you retire. Your advisor should have a CPA on their team who can help inform your strategy so that everything is working together as it should be.
  • Ensure sure you have the best investments for the job. If you need income for expenses today, you’ll need safer investments that aren’t going to fluctuate wildly from year to year. Bonds usually fit the bill but have had back-to-back losing years for the first time ever, so you might want to consider an alternative like private credit or laddered individual bonds now that interest rates are favorable. Bond funds can be tricky, because they might use longer-term bonds that may not be right for your situation.

Everyone’s situation is different, and you shouldn’t follow a rule of thumb when planning for healthcare expenses during retirement. You need to consider many factors, and working with a team of experienced advisors will go a long way toward giving you the peace of mind. If you’d like help planning for healthcare expenses in retirement, or to discuss any other financial matters, please schedule a call.


  1. https://www.plansponsor.com/health-care-retirement-will-cost-average-315000/
  2. https://www.medicare.gov/Pubs/pdf/11579-medicare-costs.pdf
  3. https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
  4. https://www.singlecare.com/blog/news/long-term-care-statistics

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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