Health Care Costs in Retirement: Are You Prepared?

Health is often one of the top concerns for those nearing or in retirement—not just because it affects their independence and lifestyle, but staying healthy can also come with significant and unpredictable expenses, even for individuals who have been saving diligently for the expected high cost of health insurance for retirees.

A report from the Employee Benefit Research Institute estimates a 65-year-old couple could need as much as $366,000 in savings to have a 90% chance of covering their health care expenses—including premiums, deductibles, prescriptions, copays, and out-of-pocket costs—in retirement.

Here are four strategies to consider before and into retirement to help minimize your cost of health coverage in the future.

While you're still working, one employee benefit you may have is the ability to enroll in a high-deductible health care plan (HDHP) that offers a health savings account (HSA). During your open enrollment period, check if this health insurance option is available under your health benefits. While an HDHP with an HSA may not be the right choice for everyone, you can build unused money in the account for future medical needs.

For 2025, you can make tax-deductible contributions¹ of up to $4,300 for individual coverage and $8,550 for a family ($4,400 and $8,750 respectively in 2026)—plus an additional $1,000 for those ages 55 and older so long as you're not enrolled in Medicare. Some plans even allow you to invest your HSA funds after meeting a minimum account balance.

HSA earnings can potentially 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.

Understanding your options for retiree health coverage can become challenging as you grow older and plan to leave the workforce. Most near-retirees know Medicare becomes available at age 65, but fewer realize there's typically a permanent penalty for missing the initial enrollment period (IEP), unless a special exceptions applies. Your IEP is a seven-month span comprising the three months before, the month of, and the three months following your 65th birthday.

The penalty for not enrolling on time can be stiff. If you miss 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 (see "The ABCDs of Medicare").

If you begin collecting Social Security before your 65th birthday, you'll automatically be enrolled in Medicare Part A (which covers hospital stays and is generally premium-free) and Part B. But if you plan on waiting to collect Social Security until your full retirement age or later, be sure to apply for Medicare as soon as you're eligible.

Be aware that you may be able to delay Medicare enrollment if you (or your spouse) are still working and enrolled in an employer's health insurance plan. For example, if you work for a large company (with at least 20 employees), you may be able to delay signing up for Medicare without penalty until your workplace coverage ends. Generally, you may also want to postpone enrolling in Medicare if you intend to stay with your group health insurance plan or you want to keep contributing to an HSA after age 65. Your human resource department can explain how Medicare works with your health plan to help guide your decisions.

Once you (or your spouse) lose employer-sponsored health insurance coverage, you'll have up to eight months to sign up for Medicare during a special enrollment period (SEP) to avoid penalties. That said, best practice is to plan for Medicare coverage immediately after losing coverage to prevent any insurance gaps. Also, if you are funding an HSA, stop contributions six months before you apply for Medicare.

Medicare premiums for Parts B and D are affected by your modified adjusted gross income (MAGI), and relatively higher-earning retirees may also be subject to Medicare's Income-Related Monthly Adjustment Amount (IRMAA). MAGI for IRMAA is generally calculated as the sum of your adjusted gross income (AGI) plus tax-exempt interest from your tax return from two years prior.

The higher your income, the more you can expect to pay for Medicare in 2025.

The differences in premiums for higher-income retirees can be steep, so taking steps to reduce your MAGI can lower your medical costs. Consider these strategies:

• Diversifying accounts by tax treatment: Many retirees have the bulk of their retirement savings in tax-deferred accounts—like a 401(k), 403(b), or traditional IRAs—and distributions from these are fully taxed as ordinary income. To provide more flexibility in managing your MAGI, consider diversifying your investments across accounts with different tax treatments—for example, investing in a 401(k), a Roth IRA, or Roth 401(k) as well as a taxable brokerage account. This could also help you plan for potential changes to your tax bracket or unexpected expenses in retirement.
• Taking qualified distributions before your RMD age: Retirement savings that are in tax-deferred accounts are subject to taxable required minimum distributions (RMDs) in the year you reach age 73 or 75, depending on your birth year. RMDs will likely increase your MAGI, which could potentially lead to higher Medicare premiums. Before RMDs occur, you may want to consider strategies to accelerate qualified distributions from a 401(k) or traditional IRA to reduce the impact to Medicare IRMAA and income tax brackets, such as converting some of those funds to a Roth IRA.
• Converting tax-deferred accounts to a Roth: Roth IRAs can potentially offer tax-free withdrawals once you reach age 59½ and you've held the account for at least five years since your first contribution. You'll have to pay taxes on the converted amount in the year of the conversion, but Roth IRAs are not subject to RMDs, helping you to better manage your MAGI in retirement.
• Reducing RMDs with a qualified charitable distribution (QCD): If you're charitably-minded and at least age 70½, taking a QCD can help reduce your MAGI. With a QCD, you can donate up to $108,000 in 2025 (estimated to be $115,000 in 2026) to a qualified charity directly from your IRA, which could satisfy all or part of your RMD. Although you can't deduct a QCD as a charitable contribution, the withdrawal won't count as taxable income.

Long-term care costs include custodial help for activities of daily living and can be a significant risk to your financial situation in retirement without careful planning. Costs related to long-term care aren't typically covered by Medicare, and very few retirees have insurance for it. Long-term care insurance can seem costly—annual premiums with 3% growth for a healthy 60-year-old average $2,610 for males and $4,550 for females in 2025—but with the median annual cost of a private room in a nursing home at $127,750 in 2024, and with the majority of people needing some form of assistance into older ages, it may be more expensive not to have it. 

Generally speaking, the most cost-effective time to buy is in your 50s to early 60s, and premiums may be tax-deductible if your overall medical expenses exceed 7.5% of your income. A financial planner can help you strategize ways to structure insurance to dampen the risk of future long-term care costs as well as discuss alternatives.

With the cost of care and health insurance premiums showing no signs of declining, taking proactive steps before and during retirement is essential to managing future health expenses—and should be an important part of your financial and retirement planning strategy.