Retirement is supposed to be about stress-free days at the beach, golf course or museum. The reality? Money worries cause anxiety for most people.
So, what's the biggest financial fear of folks between 60 and 70? Market volatility? Nope. Inflation? Nah. Running out of money? Sorry.
Retirement health care costs? Correct!
The cost of health care is the No. 1 financial concern in retirement, according to a March survey by eHealth.com, an online private health insurance marketplace, and Retirable, a financial advisory firm. Two of three survey respondents (63%) cite health care costs as their top concern, followed by running out of money (58%), inflation (53%), maintaining their lifestyle (41%), and market volatility (23%).
Anxiety About Retirement Health Care Costs
Blame sticker shock. A retiree who stopped working last year can expect to spend $157,500 in health care and medical expenses in retirement ($315,000 for a couple), according to Fidelity Investments.
Paying for long-term care is another fear. The annual median cost of a private nursing home room is $108,405 (or $9,000 a month), according to Genworth's 2021 Cost of Care Survey. This potential bill is even more taxing because "Medicare does not cover (long-term care) costs," said Catherine Collinson, CEO and president of Transamerica Center for Retirement Studies.
Read More In Our IBD 2024 Retirement Special Report. Plus, Find New And Different Ways To Boost Retirement Income. And, Save On Fees With DIY Ideas.
Another retirement health care cost nightmare is dealing with a medical shock, like a major surgery or dementia diagnosis. Regularly laying out cash for prescriptions and doctor copays also causes headaches.
The cost of health care in retirement is a "point of terror" among most adults, according to a 2023 survey by insurer Nationwide.
But retirement health care costs must be put in perspective. Not everyone experiences a medical shock. And there are ways to plan for health-related expenses, insure against catastrophic costs and invest in a way to minimize your financial risk.
Here are some tips to manage through the inevitable costs.
1. How To Pay For High Health Care Costs
Retirees and pre-retirees should treat medical costs like any other monthly expense, personal finance pros say. Health care isn't a discretionary expense you can cut back on like eating out.
"Budgeting for health care is a very important aspect of your retirement budget," said Collinson.
Bottom line: You need a financial plan that bakes in retirement health care costs.
Earmark 10% of your overall retirement income for health care costs, says Katherine Irby Arnold, a senior VP at U.S. Bank Private Wealth Management. "That's a nice little rule of thumb," said Arnold. So, if your 401(k) balance is $500,000, plan on using $50,000 of that to pay medical expenses in retirement.
And don't get overly focused on a big lump sum you think you'll need and just throw up your hands. "I like to break it up into bite-sized pieces, just like any other expense in a budget," said Arnold.
You can take steps to minimize and manage your costs. Work with a Medicare specialist to select a plan that's specific to your personal needs. That means getting a policy that fits your budget and meets your coverage needs.
The mistake most people make is just focusing on their premiums. They often end up having trouble paying uncovered out-of-pocket costs. Some Medicare Advantage plans, for example, come with low or $0 premiums. But nothing is really free. You may have to pay higher deductibles and copays for covered services, which can quickly add up, as well as pay for Medicare Part B premium, which covers medically necessary and preventative services, according to health insurer Humana.
"Health and wealth are inexorably linked, so it's important to look at the holistic picture," said Bob Rees, chief sales officer at eHealth.
Ways To Prepare For Retirement Health Care Costs
Worried about medical costs busting your budget? Consider taking Social Security later to lock in a higher monthly benefit. Your check will grow 8% a year from your full retirement age through age 70. "That can positively impact a financial plan," said Collinson.
You can also potentially lower your health care costs later in life by taking better care of yourself. That means adopting healthy behaviors, such as eating right, exercising regularly and managing stress better.
Another tip: Be mindful that your health care costs won't be the same as your neighbors. So don't look at average health care costs in retirement. "That won't cut it," said Christine Simone, CEO at Caribou Wealth. "Press for more detail and personalization so you can better understand your unique needs. Things like the length of the gap between retirement and Medicare, and your unique medications."
More: Learn About The Best Time To Claim Social Security And Read What Empower CEO Ed Murphy Says About Using AI For Retirement Planning
2. How To Find Affordable Long-Term Care
Not being able to age in place is costly. In-home care or a nursing home stay isn't cheap.
Footing such a large bill is why retirees surveyed by the Transamerica Center for Retirement Studies cited "declining health that requires long-term care" as their second greatest retirement fear. Retirees' biggest fear? "Social Security will be reduced or cease to exist in the future."
Consider this: A couple, both age 55, who each obtain long-term care protection valued at $800,000 total for their needs at age 85, can expect to pay around $5,000 annually, according to the American Association for Long-Term Care Association's 2024 price index. And that number rises if you get a policy at a later age.
But raising the funds to pay the premiums will get easier next year. Starting Dec. 29, 2025, the SECURE 2.0 Act will allow you to take penalty-free 401(k) and IRA distributions of up to $2,500 per year before age 59 ½ to pay long-term care premiums, says Simone.
Life Insurance With Long-Term Care Benefits
Another funding option is to buy a hybrid life insurance policy that also covers long-term care or provides a death benefit to your heirs if care isn't required. That's a huge benefit. With a stand-alone long-term care policy, you lose all the money you put toward premiums if you don't need care.
"This is not your grandmother's long-term care policy," said Arnold. "You will pay a little more, though, because you're locking in the death benefit," says Arnold.
If you're looking to buy either a hybrid policy or stand-alone long-term care coverage, the sweet spot is around age 60 to 65.
Another option is to self-fund long-term care. Create a separate account like you would a 401(k) or 529 college savings plan, says Kathleen Malone, a senior financial advisor at Wells Fargo Advisors. "Nickname it my long-term care account," said Malone.
Only 38% of people not yet retired say they are saving money specifically for retirement health care costs, the eHealth/Retirable study found.
If you go the self-fund route, Arnold recommends investing in growth assets like stocks, which tend to outpace inflation and generate bigger returns than bonds and cash. "People may not need these assets until they're 80," said Arnold. Even if you start to build a separate health savings bucket at age 55, you still have 25 years to grow your balance.
3. How To Survive A Costly Medical Shock
For many people, family financial support is the first line of defense when a medical shock exposes financial fault lines. It's vital to have candid conversations about how a family member might be able to assist before a shock hits.
"It's important to have those conversations proactively rather than wait until a crisis when emotions are high and options are low," said Collinson.
One way to save for a costly yet unexpected medical issue is to fully fund a health savings account (HSA) each year, says Brad Bartick, a wealth planner at Baird. "Maximizing an HSA early in life can have a profound tailwind-effect on one's savings for health care costs later in life," said Bartick.
How do HSAs work? HSAs are offered to savers with high deductible health plans. HSAs enjoy a triple-tax advantage. Your contributions aren't taxed, your money grows tax-deferred, and your withdrawals are tax-free if used for qualified medical expenses. In 2024, individuals can contribute up to $4,150, families $8,300, and savers 50 and over can contribute $1,000 more.
"HSAs are a really underutilized, valuable tool that people should think about," said Tyler End, CEO at Retirable.
Read About The Best HSAs: Health Savings Accounts: From Simple Savings To Investment Powerhouse
Don't Forget The Emergency Fund
Having a sizable, very liquid emergency fund earmarked for retirement health care shocks is another way to prepare for the unexpected, adds End. But rather than just covering six months of living expenses, it's prudent to save even more. Set aside enough cash to at least cover your maximum out-of-pocket expenses for a given year. "You'll be covered beyond that max exposure," said End.
Ask your financial advisor to run some "stress-tests" of your financial plan to see if your nest egg would crack under the weight of long-term care or a medical shock, adds Bartick
4. How To Pay For Catastrophic Illness Care
"A black swan health event is unknowable and catastrophic by definition," said Bartick.
It might be the passing of one spouse way earlier than expected. Or an extended stay in a memory care facility. It may be an aging parent of the retirees needing to move in so that care can be provided by family members.
It's important to be aware of the financial implications of such events on the impacted spouses or family members. Many families have limited resources for such events.
"Having 'last resort' funding sources (one's home, a life insurance policy with long-term care features, state-funded programs once assets are fully depleted, etc.) need to be explored and weighed far in advance so that planning and preparation can take place," said Bartick.
5. How To Deal With Cognitive Decline
All the planners we spoke to admitted this is a tough one to deal with.
"It's a big one, a really scary one," said Arnold.
One way to protect yourself, though, is to make sure you have all your estate planning documents in place as early as possible. Dot the Is and cross the Ts on your will. Have a health care directive that outlines your wishes if you become incapacitated. Don't forget a durable power of attorney, so someone to make financial decisions for you, to name a few.
"That needs to be done well in advance," Arnold said.
From a funding standpoint, try to pull all the levers mentioned above to avoid drowning in debt.
