How much is needed for health care costs in retirement?

This amount is up nearly 5% from 2023.

Of course, the amount you’ll need will depend on when and where you retire, how healthy you are, and how long you live. The amount you need will also depend on which accounts you use to pay for health care—e.g., 401(k), HSA, IRA, or taxable accounts; your tax rates in retirement (see chart); and potentially even your gross income.²

Tip: If you’re still working and your employer offers an HSA-eligible health plan, consider enrolling and contributing to a health savings account (HSA). An HSA can help you save tax-efficiently for health care costs in retirement. You can save pretax dollars (and possibly collect employer contributions), which have the potential to grow and be withdrawn tax-free for federal and state tax purposes if used for qualified medical expenses.³

Pre- and early retirees: Make the most of your time to prepare

As retirement nears, you will have several big decisions to make, including when to stop working, when to take Social Security, how to pay for health care, and how to generate cash flow from your retirement assets. These decisions are interconnected and could make a difference in your living costs and lifestyle in retirement—and when you can retire.

Approximately one-third of “early retirees” who claim Social Security at age 62⁴ do so to help pay for health care expenses until they are eligible for Medicare coverage at age 65. But if you can postpone retirement or save enough to cover health care costs until 65, then you may be able to defer your Social Security benefits. Generally speaking, the longer you can wait (until age 70) to take Social Security benefits, the more you can collect, assuming you live a long life.

If you’re like most people, you probably don’t have access to employer-sponsored pre-65 retiree medical coverage. So if you retire prior to age 65, you’ll need to find coverage until you are eligible for Medicare. Consider these options that may be available to you (see table).

Turning 65 and retiring: Consider Medicare and other options

When you get close to age 65, spend some time reviewing and considering all your Medicare options. When you do become eligible at age 65, you’ll want to remember to sign up during your 7-month initial enrollment period that begins 3 months before the month you turn 65.

There’s a lot to learn about the world of Medicare. You’ll need to know about Medicare Parts A, B, and D, as well as Medicare Advantage and “Medigap” supplemental insurance plans.

In brief:

• Part A covers hospital costs after you meet a deductible.
• Part B is optional coverage for medical expenses and requires an annual premium. If you didn’t get Part B when you were first eligible, your monthly premium may go up 10% for each 12-month period you could’ve had Part B but didn’t sign up. In most cases, you’ll have to pay a penalty each time you pay your premiums, for as long as you have Part B. Moreover, the penalty increases the longer you go without Part B coverage. 
• Part D is for prescription drug coverage.
• Medicare Advantage plans are all-in-one managed care plans that provide the services covered under Part A and Part B of Medicare and may also cover other services that are not covered under Parts A and B, including Part D prescription drug coverage.
• Supplemental policies, referred to as Medigap policies, are offered by private insurance companies to supplement expenses that Medicare Parts A and B do not typically cover.

Tip: You may be better off paying a higher premium but not having to pay out-of-pocket at your office visits. Look at the cost of annual premiums and co-pays at different levels of supplemental insurance. Compare these costs. Then factor in the number of visits and co-pay/co-insurance per visit that you anticipate for the next year.

Once you select a Medicare plan, it’s not forever. You can switch Medicare plans as you age and as your situation changes. (This does not apply to Medigap policies, however.) Generally, it makes sense to enroll in Medicare Parts A, B, and D when you are first eligible because the late enrollment penalties for doing so later are steep (see next section if you are continuing to work after age 65). For example, you may owe a late enrollment penalty if you go without Part D or other creditable prescription drug coverage for any period of 63 consecutive days after your initial enrollment period.