Paying for Health Care in Retirement

By Mitchell J. Smilowitz, CPA

Health care will be one of your largest expenses in retirement. According to the Fidelity Retiree Health Care Cost Estimate, the average retired couple age 65 can expect to pay about $315,000 on health care in retirement. That’s $315,000 in after tax dollars.

Many factors affect that estimate. First, health care costs continue to outpace the general rate of inflation. Other factors affecting health care costs include when you plan to retire, where you will live in retirement, your health status when you retire, how long you live and the care your family may be able to provide.

The World of Medicare

For most of us, Medicare will form the backbone of our health care insurance package. There’s lots to learn about Medicare, but here are some basic facts about the program. You can find out more, and sign up for Medicare, at

  • Medicare charges monthly premiums for some services. These premiums can vary by income. If you receive Social Security, premiums are deducted from your monthly Social Security benefit. If you don’t receive Social Security, Medicare will invoice you directly.
  • Medicare Part A covers hospital costs. Most people do not pay a premium for Part A, but you will pay deductibles and co-pays for hospital stays.
  • Medicare Part B pays for medical expenses including doctors’ visits. Part B carries a monthly premium which varies by income. You will also be responsible for deductibles and co-pays.
  • Medicare Advantage plans, also known as Medicare Part C, are all-in-one managed care type plans that include Medicare Parts A and B. Like other managed care plans, Medicare Advantage plans generally limit you to a network of providers. Some also include services, such as gym memberships and over-the-counter pharmacy products, that traditional Medicare does not cover. Medicare Advantage plans charge a monthly premium.
  • Medicare Part D pays for prescription drugs. Many insurance companies and Medicare Advantage plans offer Medicare Part D. Each Medicare Part D plan has its own list of prescription drugs for which it will pay so make sure the plan you choose covers the drugs you use. Most Medicare Part D plans charge deductibles and co-pays, especially for name brand (vs. generic) drugs. Medicare Part D plans charge a monthly premium unless your Medicare Advantage plan includes prescription drug coverage.
  • Supplemental health insurance policies, generally known as Medigap policies, pay for medical expenses that Medicare does not cover. There are several Medigap policy options; your premiums will depend on the option you choose. Private insurance companies bill you directly for Medigap coverage.

You must apply for Medicare when you turn 65 unless you continue to receive health insurance through your employer or your spouse’s employer. There’s a 7-month enrollment period. The enrollment period begins 3 months before you turn 65. There are penalties for late enrollment.

During the enrollment period you’ll have a chance to review the different plans available. Indeed, if you’re like most people, you’ll be inundated by information. Rest assured that any choice you make is not permanent. Each year you’ll get a chance to update your coverage as your medical and prescription drug needs change.

Managing Health Care Costs in Retirement

Increasing the contribution to your retirement plan is an effective way to prepare for health care expenses while reducing your current taxes.

Most of us tend to spend more on health care as we age. This reality has two implications for retirement planning. First, according to the Kaiser Family Foundation, retirees generally spend nearly 3 times as much for health care than those who are working (14% of household budget vs. 5%). Second, health care costs are likely to increase the longer we live in retirement. This means that we will probably pay more out-of-pocket on health care the older we get.

If you have questions about retirement planning, including budgeting for health care in retirement, please contact the JRB at 888-JRB-FREE (572-3733) or by email.