Retirement | March 4, 2022

Health Care Costs in Retirement: Are You Prepared?

Dear Reader,

Even if you’ve been saving diligently, health care costs can throw a wrench in your retirement plans. A 2020 report from the Employee Benefit Research Institute estimates a 65-year-old couple could need as much as $325,000 in savings to cover their health care expenses in retirement. Fortunately, you’ve still got some time to plan ahead for health care expenses. Here are four strategies to consider now.

1. Make the most of an HSA

If you’re enrolled in a high-deductible health care plan that offers a health savings account (HSA), consider using it to sock away extra money for future medical needs. You can make tax-deductible contributions1 of up to $3,650 ($7,300 for a family) in 2022—plus an additional $1,000 for those ages 55 and older—which can be invested for potential growth. Plus, earnings grow tax-free, and withdrawals of contributions and earnings are tax- and penalty-free when used for qualified health care expenses, including Medicare and long-term care (LTC) insurance premiums. And once you reach age 65, withdrawals from an HSA can be used for any purpose without penalty, although ordinary income taxes will apply to funds used for nonmedical expenses.

2. Enroll in Medicare at the right time

Most near-retirees know Medicare becomes available at age 65, but fewer realize there’s a permanent penalty for missing the initial enrollment period (IEP). Your IEP is a seven-month span, including the three months before, the month of, and the three months following your 65th birthday. If you fail to apply during your IEP for Medicare Part B—which covers most everyday (outpatient) medical expenses—your monthly Part B premiums could go up 10% for every 12-month period you go without coverage. There’s also a 1% penalty per month for each month you delay enrolling in Part D prescription drug coverage.

If you begin collecting Social Security before your 65th birthday, you’ll automatically be enrolled in Part A (which covers hospital stays and is generally premium-free) and Part B. But if you plan on waiting to collect Social Security, be sure to apply for Medicare as soon as you’re eligible. If you or your spouse is still working and enrolled in an employer’s health care plan, you may be able to delay Part B coverage without penalty until you retire (though you should still enroll in Part A).

Once you enroll in Medicare, however, you can no longer contribute to an HSA, so keep that in mind as you develop your plan.

3. Reduce your taxable income

Medicare premiums are also affected by income level. Relatively higher-earning retirees may be subject to Medicare’s Income-Related Monthly Adjustment Amount (IRMAA), which is a surcharge on the monthly premiums for Parts B and D if your income exceeds $91,000 ($182,000 for married couples filing jointly). The differences in premiums for Part B, in particular, can be steep (see “A premium on premiums,” below), so taking steps to reduce your taxable income could lower your medical costs, as well.

A premium on premiums

A single filer making just $23,000 more than the income limit for the standard Part B premium could see their monthly payments increase by 100%.

2020 income, single

2020 income, married filing jointly

Part B premium

Part D premium

$91,000 or less

$182,000 or less

$170.10 (standard amount)

Plan premium (varies by provider)

$91,001 to $114,000

$182,001 to $228,000

Standard amount + $68.00

Plan premium + $12.40

$114,001 to $142,000

$228,001 to $284,000

Standard amount + $170.10

Plan premium + $32.10

$142,001 to $170,000

$284,001 to $340,000

Standard amount + $272.20

Plan premium + $51.70

$170,001 to $499,999

$340,001 to $749,999

Standard amount + $374.20

Plan premium + $71.30

$500,000 or more

$750,000 or more

Standard amount + $408.20

Plan premium + $77.90

Source: Medicare.gov. 2022 premiums are determined by the recipient’s 2020 modified adjusted gross income.


If most of your retirement savings are in tax-deferred accounts, one solution is to convert some of those funds to a Roth IRA, which offers tax-free withdrawals once you reach age 59½ and have held the account for five years. You’ll have to pay taxes on the converted amount in the year of the conversion, but Roth IRAs are not subject to taxable required minimum distributions (RMDs) like tax-deferred accounts are, helping you to better manage your taxable income in retirement. Be aware, however, that Medicare uses your modified adjusted gross income from the “prior-prior” year to calculate premiums. For example, the income on your 2020 tax return determines the IRMAA you pay in 2022.

Another option is to contribute to a Roth 401(k), if offered by your employer. These accounts are also funded with after-tax dollars, though they are subject to RMDs (albeit tax-free) starting at age 72.

4. Plan for long-term care

Long-term care insurance can seem expensive—premiums average $1,700 annually for a healthy 55-year-old man and $2,675 for a woman of the same age—but with the average annual cost of a private room in a nursing home at nearly $106,000, it may be more expensive not to have it. The most cost-effective time to buy is between ages 50 and 65, and premiums may be tax-deductible if your overall medical expenses exceed 7.5% of your income. A financial planner can help you strategize whether long-term care insurance makes sense for you, as well as discuss alternatives.

1HSA contributions are exempt from federal income tax, as well as state income tax in all states except California or New Jersey. Distributions used for nonqualified medical expenses are subject to ordinary income tax and, for those under age 65, are subject to a 20% penalty.