Health care in retirement: How to plan for your costs

As you plan for health care costs in retirement, knowing what to expect from Medicare — a public health insurance program for Americans ages 65 and older — is key.

Here are your options:

Traditional Medicare is offered through the federal government and includes Part A, which provides hospital coverage, and Part B, which covers doctor’s appointments. Part B charges a monthly premium, which is $170.10 for most people in 2022. Part A is generally premium-free since you (or a spouse) probably paid Medicare taxes while working.

There are some notable gaps in Medicare coverage, so you can select additional “parts” offered through Medicare-approved insurance companies. These include:

• Part D covers prescription drugs for a modest premium or none at all, as well as out-of-pocket costs for the prescriptions, which can vary depending on your plan.
• Medicare supplement insurance (Medigap) has several plan options and may cover items such as copays, deductibles and coinsurance (the percentage of health services you pay after you’ve reached your deductible). Medigap premiums vary by provider.

^{Source: Medicare, Kaiser Family Foundation, Centers for Medicare & Medicaid Services, Edward Jones estimates. Amounts are rounded to the nearest hundred. Medigap and Medicare Part D are offered by insurance companies and are not standard parts of Medicare. With the elimination of Plan F for new enrollees in 2020, Plan G has the most similar coverage, with the exception of the Part B deductible. Actual Part G premium will vary based on age, sex, tobacco use and geographic location and may be higher or lower than the estimated range.}

The above table shows 2022 estimated annual Medicare premiums for Medicare Parts A, B, D and G.

* Must have paid 40 quarters of Medicare tax while employed. If paid fewer than 30 quarters, the premium is $499/month. If paid Medicare taxes for 30-39 quarters, the premium is $274/month.

Medicare Advantage (Medicare Part C): A Medicare Advantage plan includes Parts A, B and possibly D. You might pay a low monthly premium for Medicare Advantage or no premium, but you will have deductibles, copays and coinsurance.

Notably, you cannot have Part C and Medigap — you have either traditional Medicare, Part D and Medigap, or Medicare Advantage. So, consider the plan offering the best combination of costs and coverage to meet your needs.

Note: If you do not enroll in Medicare during your Initial Enrollment Period when eligible at age 65, delays in coverage can occur and penalties can apply to Parts B and D premiums (and potentially Part A). These penalties are permanent. That’s why you’ll want to understand your enrollment deadlines to avoid potential penalties. There are exceptions, however. For example, you may be able to delay enrollment and not be penalized if you are still working and covered by an eligible group plan.

Medicare Parts B and D premiums are tiered by your income, or more specifically by your modified adjusted gross income (MAGI).

Your MAGI includes your adjusted gross income and tax-exempt interest. Any MAGI above $91,000 (single) or $182,000 (joint) is subject to higher premiums for Parts B and D (referred to as an income-related monthly adjustment amount, or IRMAA). Your premiums for Parts B and D are based on the following income brackets:

^{Source: Medicare}

The above table shows 2022 estimated annual premiums for Medicare Parts B and D for various individual and joint income brackets.

In general, there are two categories of medical expenses in retirement: traditional and long-term medical care.

Initially budgeting $4,500 to $6,500 per person annually for traditional medical expenses may be a good starting point. Depending on your health, prescription drug use and the supplemental insurance coverage you select, your costs could be higher or lower.

For long-term medical care, the amount budgeted depends on how you plan to cover these costs.

Thirty years ago, retirees spent almost twice as much on food as on health care. Now the amounts are nearly the same. Health care continues to become a larger share of retirees' expenses.

Retiree household expenditures

^{Source: Bureau of Labor Statistics, Edward Jones estimates.}

A pie chart that shows retiree household expenditures for ages 65 and older, scaled for a household of two, including the percentage of income spent on items such as food, health care and housing and utilities.

One of the largest potential health care costs not covered by Medicare is long-term health care.

Neither Medicare nor Medicare Advantage will cover the highest-cost aspects of long-term care, such as an extended stay in a nursing home, which averaged over $90,000 in 2020 for a yearlong stay.* Medicare covers only short-term skilled nursing care (up to 100 days) stemming from a recent hospitalization.

To cover the cost of a longer stay, the need for care not related to a recent hospitalization, or care that isn’t skilled nursing (e.g., a home health aide), you may want to explore private long-term care insurance options.

You may decide to self-insure against a long-term stay or consider long-term care insurance, as well as newer insurance options combining life insurance with long-term care coverage.

Regardless of your decision, a healthy retirement strategy includes some preparation for a potential long-term care stay. Your financial advisor can work with you to include an estimate for long-term care costs in your retirement strategy.

Active planning and discussion about how you want care to be administered and how to cover these costs can better position you, your family members and your retirement strategy if the need arises.

^{*Source: Genworth 2020 Cost of Care Survey.}

An HSA can be a valuable tool for planning your retirement expenses.

HSAs have triple tax benefits — contributions are tax-deductible, they grow tax-free, and distributions are tax-free if used for qualified medical expenses.

Distributions from an HSA do not count against your modified adjusted gross income (MAGI) if used for qualified heath care expenses, which could help reduce your MAGI if you are subject to an income-related monthly adjustment amount (IRMAA).

In retirement, qualified health care expenses might include Parts A, B, C, and D premiums (although not Medigap premiums), as well as qualified long-term care insurance premiums up to the federal tax-deductible limits. These expenses also include those that go toward your deductibles and copays, as well as dental, vision, and qualified long-term care expenses.

While there is a 20% penalty for distributions not used for health care expenses, after reaching age 65, distributions not used for health care are penalty-free and would be taxed as ordinary income. This is similar to a traditional IRA, in that these distributions would count toward your MAGI.

Also, there are no required minimum distributions, or RMDs, on HSAs.

Given these benefits, if you can afford to, it may make sense to avoid using your HSA on health care expenses before you retire, and instead save your HSA for retirement. Once you enroll in Medicare, you can withdraw from your HSA, but can no longer contribute to it.

Outline your retirement goals. This includes when you want to retire, which will determine whether there are gaps in coverage before you become eligible for Medicare at age 65.

Know the key dates to avoid penalties. Medicare has a seven-month window for enrolling that begins three months before your 65th birthday. If you’ve delayed enrollment past age 65 because you remained on an employer’s plan, there is an eight-month special enrollment period after you separate from your employer.

Evaluate insurance options. For Medicare Part D and Medigap or Part C, ensure you select a plan aligned with your needs.

Develop a strategy for long-term care. Whether it’s through budgeting or purchasing insurance coverage, determine how you may pay for a potential long-term care need.

Estimate your costs. Calculate based on your individual situation, supplemental insurance (if selected) and potential out-of-pocket costs.

Invest for growth and rising income. To help hedge against rising costs, and to provide for future income needs, allocate a portion of your assets to investments with the potential for growth and rising income.

Consider a health care power of attorney and advanced directives. Consult an attorney about who has responsibility for your health care decisions and how you want care to be administered if you become unable to make these decisions yourself.

Health care expenses during retirement can be a challenge. But by planning for them now, you can avoid unpleasant surprises and stay in control of your financial future.

If you need help, reach out to an Edward Jones financial advisor for advice on planning for the cost of health care in retirement.