How to Plan for the Cost of Healthcare in Retirement

How to Plan for the Cost of Healthcare in Retirement

If you’re like a lot of pre-retirees, healthcare costs in retirement are a major concern. 

It’s estimated that an average retired couple age 65 in 2021, will need to have saved at least $300,000 after tax to cover healthcare expenses in retirement. And that doesn’t include long-term care! 

Not knowing how you’ll deal with these expenses in retirement can add unnecessary stress to your life. To ease your concerns, talk to a financial advisor about ways to plan for health-related costs. As a financial advisor in Annapolis, the Scarborough Capital Management team offers the following tips.


Have questions about retirement? Contact the team at Scarborough Capital Management and get the conversation started.


Health Savings Accounts (HSAs)

Opening a Health Savings Account (HSA) can be a great way to save for out-of-pocket healthcare costs in retirement. To qualify, you must have a high-deductible healthcare plan (HDHP) and no other health insurance. HDHPs typically have lower monthly premium but have a higher deductible (meaning you pay for more of your health care items and services before the insurance plan pays).

The biggest benefit of HSAs is that they’re 100 percent tax-free if used properly. You fund them with pre-tax dollars (just as you do your 401(k)), the accounts grow tax-deferred, and you can take tax-free withdrawals for any qualified medical expenses.

There are many ways to use HSA funds in retirement: 

  • Pay for out-of-pocket healthcare expenses
  • Bridge the gap between when retirement starts and Medicare kicks in
  • Plan for long-term-care costs
  • Cover non-medical expenses once you turn 65 (subject to ordinary income tax)
  • Leave a gift for your spouse

For 2021, you can contribute up to $3,600 in an HSA if you have a self-only insurance plan, or $7,200 if you have a family plan. For 2022, the limits are slightly higher. You can contribute up to $3,650 for self-only plans and $7,300 for family plans. 

A lot of employers offer contribution matches for HSAs just like they do for 401(k)s, so check with your HR department to see if that’s an option. If your employer doesn’t offer HSAs, you can open one on your own if you have a high-deductible healthcare plan. If you don’t get your health insurance through your employer, check with your provider as some health insurance companies offer HSAs for their HDHPs. You can also open an HSA through some banks and other financial institutions. Remember, while you can use the funds in an HSA at any time to pay for qualified medical expenses, you may contribute to an HSA only if you have an HDHP.

For more on how these plans work, visit our HSA page.




Even though you can start taking your Social Security benefits as early as age 62, you’re not eligible for Medicare until you turn age 65. Once you become eligible, despite popular belief, Medicare won’t cover everything. 

It’s estimated that Medicare covers around two-thirds of healthcare costs for retirees. Medicare Part A is free for most working Americans (and it’s what most people think of when they hear the term “Medicare”). But it only covers basic levels of inpatient hospital care. 

This means that you’ll still be on the hook for dental work, routine vision and hearing care, and prescription drug coverage, unless you also pay for other types of Medicare coverage, such as:

  • Medicare Part B: Premiums start at $148.50 a month and cover most doctor’s services, preventive care, Durable Medical Equipment (DME), laboratory tests, x-rays, mental health services and some limited ambulance services. You automatically qualify for Medicare Part B if you’re at least age 65 and a U.S. citizen or permanent resident.
  • Medicare Part C: Also known as a Medicare Advantage Plan, Part C is offered through private insurers and can be used in place of Original Medicare (Parts A and B). It typically covers general hospital and medical care, as well as dental, vision, eye care and prescription drugs. 
  • Medicare Part D: If you don’t go with an Advantage Plan, you can still get prescription drug coverage with Parts A and B through Medicare Part D. Part D is offered through private companies contracted by the government, so premiums and coverage vary. 

Deciding what insurance coverage to sign up for can be confusing. Discuss your situation with a financial advisor to determine what makes the most sense for you and your family.

Employer-Sponsored Plans

If you retire before age 65, you’ll need to have a plan in place for how you’ll stay insured. You have several options when it comes to employer-sponsored plans. 

Depending on your current employer, you may have the option to stay insured through the company’s retiree health coverage plan. (A retiree health coverage plan is basically a continuation of your current plan but it may have different costs and coverage limits.)

Another option is COBRA coverage through your previous employer, but COBRA can be expensive, as very few employers continue to subsidize premiums once you leave the company. COBRA is also only available for 18 months after you leave an employer, so you’ll need to find another option if you’re more than 18 months away from qualifying for Medicare when you retire.

As a last resort, some pre-retirees work part-time in retirement to get employer-sponsored health insurance. Working part-time can give you a “best of both worlds” situation if you want to ease into early retirement without footing the bill for health insurance. Your options for work will be more limited as the majority of companies do not offer healthcare for part-time employees.

Spousal Plans

Will your spouse continue working after you retire? If so, hopping on their employer-sponsored healthcare plan can be a great way to lock in affordable coverage. As a financial advisor in Annapolis, this option tends to be easier for many retirees, if available. 

The Bottom Line

Healthcare costs in retirement can be expensive, but that doesn’t mean it has to derail your plans. There are several ways to strategize your healthcare options now, to help you plan for your retirement, whether it’s at age 65 or before. The above are common strategies you can use when preparing for health-related costs in retirement, but there are many other plans to consider. If you’d like help reviewing your options and creating a game plan for healthcare costs in retirement, schedule a no-obligation conversation with the team at Scarborough Capital Management. We’re here to help. 


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