Healthcare is one of the largest and least predictable expenses you will face after you stop working. Fidelity Investments' widely cited estimate puts the average cost of healthcare in retirement for a 65-year-old couple at roughly $300,000, and that figure covers premiums, deductibles, and out-of-pocket costs but not long-term care. Because medical inflation has historically outpaced general inflation, treating healthcare as a minor line item in your retirement budget can quietly erode your savings. This guide explains what Medicare does and does not cover, how to estimate your own costs, and which accounts and timing decisions can reduce the burden.
Why Healthcare Deserves Its Own Line in Your Budget
Most retirement budgets are built around housing, food, and travel. Healthcare is different because the spending curve is not flat: costs tend to rise with age and can spike sharply after a serious diagnosis or a fall. According to the Centers for Medicare & Medicaid Services, national health spending grows faster than the overall economy in most years, and the Medicare Trustees Report has repeatedly warned that the program's Hospital Insurance trust fund faces long-term financing pressure. For households, the practical takeaway is simple: assume healthcare inflation of roughly 4% to 5% a year when projecting future costs, rather than the 2% to 3% you might use for general expenses.
It also helps to separate three buckets:
- Routine premiums for Medicare Part B, Part D, and any Medigap or Medicare Advantage plan.
- Out-of-pocket care such as copays, coinsurance, dental, vision, and hearing aids, which original Medicare largely excludes.
- Long-term care, including home care and nursing home stays, which Medicare covers only in limited, short-term situations.
What Medicare Covers and What It Leaves to You
Original Medicare has two parts. Part A covers hospital stays, skilled nursing facility care after a qualifying hospital stay, hospice, and some home health services, and most people pay no premium because they or a spouse paid Medicare taxes for at least 40 quarters. Part B covers doctor visits, outpatient care, preventive services, and durable medical equipment, and it carries a monthly premium that is higher for people with incomes above certain thresholds (the income-related monthly adjustment amount, or IRMAA).
What original Medicare does not cover is where budgets break. There is no routine dental, vision, or hearing coverage, and there is no cap on out-of-pocket Part B spending unless you add a Medigap policy or enroll in Medicare Advantage. Prescription drugs require a stand-alone Part D plan or a Medicare Advantage plan with drug coverage. Long-term custodial care is generally not covered at all.
Two comparison points matter when you choose supplemental coverage:
- Medigap policies have higher monthly premiums but predictable cost-sharing and let you see any provider who accepts Medicare.
- Medicare Advantage plans often have low or zero premiums but use networks and prior authorization, and out-of-pocket maximums can be several thousand dollars a year.
Neither option is universally cheaper. The right choice depends on your health, your providers, and how much premium you can absorb versus how much risk you can tolerate.
The Pre-65 Gap: Retiring Before Medicare Eligibility
The single biggest healthcare cost many retirees face is the bridge between leaving an employer and turning 65. If you retire at 62, you may need to buy coverage on the Health Insurance Marketplace, and premium tax credits are available based on household income, not assets. A household that keeps taxable income modest by drawing from Roth accounts or cash reserves can sometimes qualify for substantial subsidies. Others use COBRA for up to 18 months, though the full premium plus a 2% administrative fee is often expensive. A spouse's employer plan is another common bridge. Modeling this gap year by year before you retire is essential, because a single year of unsubsidized family coverage can exceed $20,000.
How to Save and Pay for Medical Costs Tax-Efficiently
The account you use to pay medical bills matters as much as the amount you save. A health savings account (HSA), available only when you are enrolled in a qualifying high-deductible health plan, offers a rare triple tax advantage: contributions are deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free at any age. If you can afford to pay current medical bills from cash, investing HSA dollars and letting them grow for retirement is one of the most efficient strategies available.
Other tools to consider:
- Roth IRAs and Roth 401(k)s, because qualified withdrawals do not raise the income that determines your Medicare premiums.
- Traditional 401(k) and IRA withdrawals, which do count toward IRMAA thresholds, so plan large distributions carefully.
- Taxable brokerage accounts, which offer flexibility and favorable capital gains treatment.
Also budget for long-term care separately. The Department of Health and Human Services estimates that roughly 70% of people turning 65 will need some form of long-term care, and Medicare will not pay for extended custodial care. Options include self-funding, a traditional long-term care insurance policy, or a hybrid life insurance policy with a long-term care rider.
What to Remember
Healthcare costs in retirement are large, rising, and uneven. Build a dedicated healthcare line into your budget, assume medical inflation above general inflation, and plan explicitly for the years before Medicare eligibility. Understand the gaps in original Medicare and price out Medigap versus Medicare Advantage based on your own health and providers. Use an HSA if you can, favor Roth withdrawals when Medicare premium thresholds matter, and treat long-term care as a separate funding problem. Reviewing these numbers annually with your plan, rather than once at retirement, keeps the estimate honest.
