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Healthcare Costs in Retirement – Don’t Make this Big Mistake

safety first!

Today, we’re going to talk about the healthcare costs all will face in retirement, at least under the system we currently have for traditional-age retirees, which is Medicare.

If you were hoping to read about healthcare costs in early retirement, I had a guest post on that last year, and I plan to share more as I learn what’s going to work best for my family and me. I should have an answer later this summer, but I’ve got a pretty good idea of which direction we’ll be taking.

When Dr. Jim Dahle spoke at WCICon a year ago, he gave an overview of the current state of Medicare and the costs involved. I was honestly surprised to learn today’s retirees need to budget somewhere between $5,000 and $10,000 for healthcare even when insured by Medicare. It’s complex, and still quite expensive!

Our guest post today is from Danielle Kunkle Roberts; she knows far more about Medicare than I do. We have no financial relationship and her brief bio is below:

Danielle K Roberts is the co-founder of Boomer Benefits where she and her team help baby boomers navigate their Medicare insurance options. She is a member of the Forbes Finance Council and writes frequently about Medicare, retirement and personal finance. 


Healthcare Costs in Retirement – Don’t Make this Big Mistake


Over the years in my career as the co-owner of a Medicare insurance agency, I have noticed a pattern. People reach Medicare age and are starry-eyed over quitting their jobs and planning some world travel or time with family and friends. Then they sit down to set up their Medicare benefits are blown away by the expense of it all.

It can put a real damper on your retirement if you haven’t saved money for future healthcare costs.

Data from a recent study backs my observation, nearly 80% of middle-income baby boomers stated that they had not set aside a single dime for healthcare in retirement.

When considering the financial categories that need to be built up for retirement, we simply don’t consider the cost of healthcare after 65 as a major category.

Why? Because we will have Medicare, of course!

That is where one of the biggest retirement mistakes begins.

Though many of you are outliers on your journey to early retirement, there are important healthcare costs to calculate in your financial plan for life after 65.


safety first!
safety first!



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Don’t Fall for This Medicare Myth


Myth: I’ve been paying for Medicare my whole life; it will be free when I retire.

It is easy to see the FICA deductions on your paycheck and assume you are paying-in-full for healthcare in the future.

While partially true, you are only paying for one part of your healthcare in retirement through your FICA deductions. Those taxes are funding your Medicare Part A hospital benefits.

After enrolling into Medicare Parts B and D, you will pay monthly premiums along with deductibles, copays and coinsurance much like you would with traditional insurance.

So, now that you know Medicare will not be free, let’s take a closer look at the different parts of Medicare and the costs associated.


Medicare Part A


I like to tell my clients to think of Part A as coverage for your room and board in the hospital. This part of Medicare provides you a place to stay and meals while you’re there receiving medical services.

The majority of Medicare beneficiaries qualify for premium-free Part A (this is from those FICA taxes we talked about). To qualify, you need to have worked 10+ years (40 quarters) in the United States (or be married to someone who did have those quarters and is at least age 62 and eligible for Social Security).

If you have not worked the minimum requirement, the monthly premium for Medicare Part A would be well over $400. Though, if you worked less 40 quarters but more than 30 quarters, your Part A premium would be about half that because it would be pro-rated.


Medicare Part B


Part B of Medicare covers outpatient services that are medically necessary. Part B coverage includes services like doctor visits, lab testing, diagnostic imaging, preventive care, surgeries, ambulance rides, chemotherapy, and dialysis care for people with renal failure.

So, how much does this kind of coverage cost? Medicare Part B premiums are based upon your modified, adjusted, household gross income also known as MAGI.

The Social Security office will go back two years and look at your tax returns from that year to determine your premium.

Your MAGI consists of any money earned through wages, interest, investments, or capital gains. Additionally, Social Security benefits and tax-deferred pensions will also be included in this number.

If you filed jointly with a spouse, Social Security will base your premiums on your combined MAGI and base both of your premiums accordingly. Social Security will use your household income to determine which column you would be in on the Part B premiums chart.


Medicare Part D


Part D is implemented and regulated by the Federal Government to lower the cost of your retail prescription drugs.


Your income will determine your Part D premium in the same way it did with Part B. These premiums will vary by plan as each state may have 20 or more plans to choose from.

In most states, you can find plans that start around $15 a month. If you are in a higher income bracket, Social Security will tack on an income adjustment to that premium as well.


Medicare Supplement Plans


Medicare Supplement plans are a type of add-on plan for your Original Medicare. This type of plan is also known as Medigap. Medigap plans help to cut the amount of out-of-pocket costs Medicare leaves behind for you to pay.

There are 10 available standardized Medigap plans as of 2019, though two of these plans – Plan C and Plan F – will be phased out for new enrollees as of 2020. Medigap plans are required to offer the same coverage regardless of what carrier they are purchased through. So for example, your benefits for Plan G are the same with one company as they would be with another.

With that said, what you will want to look at when finalizing your Medigap plan decision is the monthly premium. Once you have decided which plan offers the best coverage for you, shop around to find a carrier with the lowest premium and best average rate increases.

Out of all the Medigap policies, Plans F, G, and N are the most popular.

The average price for a Medigap plan for someone aging into Medicare is about $100 to $150 per month her in the state of Texas and in many other states. However, the cost of healthcare by region can greatly affect the price, so beneficiaries in states like Washington and Florida pay considerably more. Keep in mind that Medigap premiums are also based on many things such as age, gender, location, choice of plan, and tobacco usage.

Medicare Advantage Plans


Are you wondering why Part C was missing in the sequence of events above? Most people know “Part C” of Medicare as Medicare Advantage. Medicare Advantage plans are just another name for private Medicare insurance.

Medicare Advantage plans are private health plans in which you can get health coverage from instead of Original Medicare. You would get your Part A, Part B, and sometimes also Part D all from one insurance carrier.

The cost of these plans varies but is generally lower than what you pay for a Medicare Supplement plan. Many people are attracted by the plans that offer a zero-dollar premium. The national average premium for Medicare Advantage plans currently hovers around $30 a month.


Build a Medicare Nest-Egg


Now that you have digested the different parts of Medicare, let’s look at designing a plan to pay for them. Whether you plan to retire in 5 years or 25 years, the most important step to take is setting aside a fund specifically for healthcare in retirement.

Where is the best place to stash this money? A health savings account, if you are eligible to open one.


The Benefits of a Health Savings Account


If you are enrolled in a qualified high deductible insurance plan, setting up an HSA is a no-brainer. An HSA is a savings account meant to help pay for qualified medical expenses. Money contributed to this account is on a pre-tax basis.

An individual in 2019 can contribute a max of $3,500. The maximum allowed amount for families is $7,000 in 2019. If you are 55 or older, you can contribute up to $1,000 on top of that every year.

When you add money to your HSA, you are also getting a tax break. You don’t have to pay FICA taxes or ordinary income taxes on your HSA contributions. This is just one of the reasons why everyone should consider an HSA as a way to save for health care costs in retirement.

How HSA Funds Can Be Used


Money contributed to your HSA can be used to pay for a variety of medical expenses. A great example of services that won’t be covered by Medicare but can be paid for with an HSA, is routine dental care and vision services.

Another way you can use your HSA funds is by investing them in things such as stocks and mutual funds. Doing this can help grow your total HSA funds over time through accrued interest.

If you find yourself needing the money for non-medical expenses and are at least 65 years old, you can withdraw money from your account with no penalty. Though non-medical withdrawals will leave you paying income tax that you would otherwise bypass if the funds were used for medical expenses.


How Health Savings Accounts Work with Medicare


After enrolling in any part of Medicare, you are no longer allowed to contribute to your HSA. This means you would need to delay Medicare if you wanted to continue to contribute into your HSA past age 65. However, you will also face a penalty for delaying Medicare unless you have creditable coverage, such as that through a large employer group health plan.

The good news is that if you have a spouse who isn’t of Medicare age yet and has an HSA under their name, they can still contribute the maximum allowed amount for families.


Tackle Your Savings


Saving for retirement can seem like an intimidating project, especially if you are trying to prepare for it in an untraditional amount of time. However, if you are taking healthcare costs into account now, you will be able to set yourself on a trajectory to have plenty set aside for health care no matter when you choose to retire.



Have you planned for healthcare spending after age 65? How much do you budget for these expenses? Do you plan to keep an HSA past age 65?


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29 thoughts on “Healthcare Costs in Retirement – Don’t Make this Big Mistake”

  1. Pingback: The Epochs of Early Retirement - Passive Income
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  3. Pingback: Health Savings Account (HSA): Everything You Need to Know - The Physician Philosopher
  4. Mutual of Omaha Medicare Supplement Plans offers a variety of good and best options for the coverage of medical expenses. The Mutual of Omaha Medicare Supplement is a favorite health insurance plan for the people who are 65 and above. This plan is available in several states as Mutual of Omaha Medicare Supplement Plan F and Mutual of Omaha Medicare Supplement Plan G which can be bought from The Health Exchange Agency company.

  5. I think this is a great summary of information related to the cost of healthcare insurance.

    However, I rarely see discussed the cost of caregiving that is frequently seen as we age and at the end of life. For the majority of people, we do not live at our current level of function until we die, but slowly have increased debility, decline, and need for assistance for years as we age.

    Depending on how long you live, many people may need years to pay for a nursing care facility or for private caregivers at home. None of these costs are currently covered by medicare at all, and they number in the thousands of dollars every month. In my area, you could pay at a minimum $2500/mo for a group home for assistance and $15,000/mo for a nice care facility or for private caregivers at home.

    It’s rare nowadays to have family that is dedicated to taking care of you in your older age, and something to consider in planning.

  6. Are there HSA options available for those without high-deductible health plans? My employer provides commercial insurance but it doesn’t qualify as a high-deductible plan.

  7. Is the cost for Medicare B a rolling price based on income from 2 yrs prior or is it set for a long period of time base on modified adjusted gross income at age 63

  8. I don’t understand the healthcare in retirement title and all we hear about is how to navigate medicare.
    Medicare is for 63-65 y/o.
    FIRE is supposed to be before that, way before that.

    And honestly it is extremely difficult to get coverage in the 50s.
    It’s quite hard to find insurance at a reasonable cost, but insurance and real life coverage are completely different concepts. Most insurance do not provide adequate coverage.

    And that’s without a condition.
    With a bad preexisting condition it’s almost impossible to be covered at a reasonable cost in the US.
    Unless I am provided with examples in which case I would gladly change my mind.

  9. Oooh neat summary. I’ve tried to deal with post retirement health spending using two methods:
    1-Working 1 day a week at my last company thus getting health insurance
    2-Living in Canada. All the big stuff is covered 🙂

    I don’t know if I want to keep up part time work forever so I’m excited to see how the dollars work out.

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  11. This is a great write up. I have been in the business a number of years and I didn’t realize Medigap plans were standardized, or that there were 8-10 options? I will definitely be reading up on that next week!One thing to add, Part B doesn’t cover ‘self-administered’ drugs given in the outpatient hospital setting like the ER or Observation status. It’s Medicare, so of course the definition of self-administered drugs can get a little gray, but think pills you can take yourself. We get a number if complaints from patients confused by this this and unfortunately the Medigap plans don’t usually cover it either since they only cover cost share left by the Medicare program. I have heard of some patients turning around and submitting these drugs to Part D. Hopefully Medicare fixes this someday. Have a good weekend.

  12. Please comment on your statement that “To qualify, you need to have worked 10+ years (40 quarters) in the US (or be married to someone who did have those quarters and is at least age 62 and eligible for Social Security)”. I am in the USA on a Green Card for 1.5 years, my wife is a Citizen already on Medicare, but SS says I do not qualify. Thanks.

  13. I applied for Medicare in October 2018 and found out that the premium you pay is adjusted for income.Since the IRA goes back two years, during full time salary , you have to pay well above the $135 monthly premium for Part B in addition to Part D, the so called IRMAA. In my case almost $700, no counting what I pay for meds. This of course triggers multiple calls and few visits to SS office: the whole experience is enervating to say the least: Dealing with the government at its best is really frustrating. Still struggling with the situation. Also have to pay for a Medigap.

    • You will not get anywhere if your income is high and are part of part B Medicare letters from my accountant etc made no difference still paying four times the basic charge for part B- we are paying for others

  14. $8-10K isn’t free but it is pretty close to nothing considering I’m paying over $16K now for my wife and my coverage in early retirement. Obviously I’ve budgeted the whole $16k for medical now and so anything less than that will be gravy. Plus around that same time Social Security will kick in with around $71k in annual benefits for us. But you’ve got some great points, a lot of early retirees probably are assuming Medicare is free, I’m glad I wasn’t one of them!

  15. Healthcare costs are a huge problem for me when trying to estimate my FI number. It’s easy to see how different types of insurance, mortgage payment, and other costs will go down significantly or to zero in retirement, but the healthcare costs are a big unknown. I’m sure I can’t be the only person that feels this way.

  16. Excellent, timely post. For those of us entering the Roth conversion years, it’s good to be aware of the effect of the additional income on the Part B premium, particularly at age 63 and beyond. The more you plan to convert, the more you have to plan if you want to lessen the effective cost.

    • GasFIRE, I had the exact same thought! I plan on doing Roth conversions sooner rather than later, now that I know that it affects Medicare premiums. That was the biggest surprise from this article.

      I do not, however, know what the thresholds are for income so I’ll be researching that soon.

    • Absolutely. It’s a good idea to get really lean in terms of taxable income from age 63 to 65. Delay SS, no Roth conversions, don’t take capital gains unnecessarily, etc…

      That’s a great tip.


  17. You mention the HSA as a potential way to pay for Medicare after retirement. But, pre retirement, it is disallowed to pay health care premiums with HSA dollars. Does this change when you enroll in Medicare? Can those HSA dollars be used then to pay for medicare premiums?

    • I recall reading that you can use HSA $ to pay Medicare premiums, but I’d verify that at IRS.gov if I were you. Who knows if the rules have changed since I opened my HSA.

      • You can use your HSA to pay premiums for Medicare Parts B, C, and D. However, you can’t use your HSA to pay the premiums on any supplemental program

  18. Even though I’m far from retirement, the looming cost of healthcare has been one of my primary concerns going forward.

  19. I will leave a real world figures of what my wife and I are paying for medical costs in retirement.
    We are both 68, and in OK health. Monthly costs per person below:
    Medicare Part A:
    Medicare Part B: 135.50
    Medigap Plan G: 164.00
    Part D: 16.00
    Drugs: 80-100
    Dental 100 (no dental insurance)
    Bottom line: we need to budget at a minimum $1,000 per month.
    We’re lucky if it stays at that number.

    • Thanks for sharing the numbers. This makes it more real. $1,000/month isn’t cheap, but most families can afford it. It’s a big part of the budget, for sure.

  20. Thank you so much for going into the details of Medicare, etc. It is something that I have a very limited overview of and that is only because I helped my mother get coverage a couple of years back and had to wade through the weeds to see what worked for her the best.

    I have been fully funding my HSA from the very first time it was offered and have been cash flowing all medical expenses leaving the balance untouched. I am pretty much using it as a Stealth IRA which has been discussed in the past. The HSA company I go through allows me to invest the money (anything over $1k balance which has to remain in cash) and gives me unlimited trade options for a $3/mo fee.

    My HSA balance is already approaching very high 5 figures and by the time I retire I am hoping to have a low 6 figure balance that I will use for medical expenses in retirement.

  21. It would be great if you could give a couple of examples of illnesses or accidents and how the various part of Medicare would kick in. I am having a little trouble following it at this abstract level.


    • Let’s say you break an ankle and need surgery.

      Your hospital room and board would be paid for by Medicare Part A (free to you). Your surgery cost and doctor fees and any subsequently required xray imaging and follow up appointments would be covered by Part B. Any medications you’d need as a result of your injury would be covered at your local pharmacy by Medicare Part D, but any medications administered while IN the hospital would be covered by Part B.

      Another example: you get terrible news and have cancer, but it’s treatable with outpatient infusions! Part A would cover any room and board at a hospital if you’re admitted. Part B would cover your infusion medications (in the hospital or in an outpatient facility) and your doctor appointments, blood draws, labs, and any imaging. Any medications you take home to give to yourself (think oral chemotherapy, anti-nausea meds, or prophylaxis medications like antibiotics) would be covered by Part D at your local pharmacy.

      (There are some exceptions to Part D covering medications you take at home. For example, some transplant anti-rejection medications are covered by Part B, as they are considered supplemental to a surgery/transplant covered by Part D.)

  22. This is something that is constantly in the back of my mind, but given that I am a good number of years away from retirement isn’t something I think about daily.

    Thanks for breaking it down and providing an overview of the costs and coverage for health care costs in retirement. I’ll have to tuck this one away for down the road!



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