Health Care Costs in Retirement

A difficult task in retirement planning and budgeting is estimating health care costs. We know those costs will be significant compared to our earlier years. That is one of the downsides of growing old. But it is important to have some idea what you can expect to pay for health care as a retiree. Only by having that knowledge can you understand and project what your retirement income needs will be.

Retirement Health Care Cost Categories

So what health care expenses can we expect when we retire? Let’s first list them by category.

1. Medicare premiums. Yes, Medicare is a benefit provided to retirees at age 65 but it’s not free. There are Part A (hospital coverage) premiums (if you do not have enough work credits) and Part B (other medical expense) premiums for everyone. For 2009, the Part B premium is $96.40 per month, if your income is less than $85,000 per year.

2. Medicare supplement insurance. As with most health insurance policies, Medicare doesn’t cover everything. Traditional Medicare coverage is estimated to cover only 60% of the average retiree’s health care costs.  Some of the coverage gaps are significant and justify purchasing a “Medigap” (Medicare Supplement) insurance policy. This is the explanation from the official Medicare site.

A Medigap policy is health insurance sold by private insurance companies to fill the “gaps” in Original Medicare Plan coverage. Medigap policies help pay some of the health care costs that the Original Medicare Plan doesn’t cover. If you are in the Original Medicare Plan and have a Medigap policy, then Medicare and your Medigap policy will pay both their shares of covered health care costs.

Insurance companies can only sell you a “standardized” Medigap policy. These Medigap policies must all have specific benefits so you can compare them easily.

You may be able to choose up to 12 different standardized Medigap policies (Medigap Plans A through L). Medigap policies must follow Federal and State laws. These laws protect you. A Medigap policy must be clearly identified on the cover as “Medicare Supplement Insurance.” Each plan, A through L, has a different set of basic and extra benefits.

It’s important to compare Medigap policies because costs can vary. The benefits in any Medigap Plan A through L are the same for any insurance company. Each insurance company decides which Medigap policies it wants to sell.

Generally, when you buy a Medigap policy you must have Medicare Part A and Part B. You will have to pay the monthly Medicare Part B premium. In addition, you will have to pay a premium to the Medigap insurance company.

You and your spouse must each buy separate Medigap policies. Your Medigap policy won’t cover any health care costs for your spouse.

The cost of Medigap coverage can vary depending on what level coverage (A through L) you purchase. Yearly premiums range from a few hundred dollars to $5000 or more.

Some Medigap policies are “attained age” policies in which the premiums increase as you age. Others are “issue age” policies in which the premiums are not increased as you get older.

3. Medicare deductibles and co-pays. These are not insignificant. For 2009, these costs look like this:

For Part A: (inpatient hospital, skilled nursing facility, and home health care), Medicare pays all covered costs except the Medicare Part A deductible (2009 = $1,068) during the first 60 days and coinsurance amounts for hospital stays that last beyond 60 days and no more than 150 days. For each benefit period you will pay $1,068 for a hospital stay of 1-60 days, $267 per day for days 61-90 of a hospital stay, and $534 per day for days 91-150 of a hospital stay (Lifetime Reserve Days), and all costs for each day beyond 150 days.

For Skilled Nursing Facility Coinsurance: You pay 133.50 per day for days 21 through 100 each benefit period.

For Part B: (physician services, outpatient hospital services, certain home health services, and durable medical equipment): You pay $135.00 per year deductible and 20% of the Medicare-approved amount for services after you meet the $135.00 deductible.

4. Dental, vision, and hearing care. These categories are generally not even covered by Medicare and may be 100% out of your pocket.

Estimates of Lifetime Costs for Retirement Health Care

The Employee Benefit Research Institute in June 2009 projected that a male retiree will need $68,000-$173,000 in savings to have a 50% probability of being able to cover retirement health care premiums and out-of-pocket expenses. For women, the projected need is for $98,000-$242,000 in dedicated savings. For a 90% probability, those projections increase to $134,000-$378,000 for men and $164,000-$450,000 for women. That’s no chump change.

Fidelity has estimated retirement healthcare costs by category for the typical retiree. At age 65, these estimated costs are $6,631 annually or $551 per month. These costs do not include long term care.

For estimates of health care costs if you retire before age 65 (and therefore are not eligible for Medicare), has an interesting summary of healthcare cost data and estimates for retirement.  This article projects that in 2018, a relatively healthy 65 year old couple will need to have saved $518,000 to cover healthcare expenses through retirement!

Final Thoughts on Healthcare Costs in Retirement

Although changes are in the works for healthcare in the U.S., it is unlikely that these “reforms” will lessen the cost burdens for retirees. Therefore, your retirement income planning needs to factor these costs in to the budget. Allocating a significant portion of your retirement nest egg to healthcare is a must.


  1. PW says

    There is also Medicare Supplement Part D for drugs that should be discussed. Not everyone takes it if they don’t take drugs but for the most part seniors do take the Medicare Supplement Part D because most are on drugs, which again has several different plans with different drug coverages and different pricing. Just thought I would throw that out there to add to the confusion. Don’t ask about the doughnut hole, ok?

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