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After decades of dedication and hard work, retirement comes as a well-deserved reward, a time to finally prioritize the joys you had to take a raincheck on during your medical career. Your dream retirement might entail hiking the Appalachian Trail, restoring a vintage car, or spending winters in a sunlit coastal town.
These visions are exhilarating (as they should be) but beneath the surface of these dreams lies a less glamorous, yet undeniably crucial, responsibility: Preparing for the staggering cost of healthcare in retirement
For us, this task presents a unique challenge. We spend our careers diagnosing risks, advocating for preventative care, and guiding patients through complex health decisions. Yet when it comes to our own retirement, the financial realities of aging like rising medical inflation, gaps in Medicare, and the specter of long-term care, are some considerations that can fall through the cracks.
Not so fun fact: A 65-year-old retired last year (2024) can expect to spend, on average, $165,000 on healthcare, depending on longevity and medical needs. Medicare, often misunderstood as a blanket solution, covers only two-thirds of these costs.
The rest, along with expenses like dental care, hearing aids, and long-term care, falls squarely in out-of-pocket territory. These expenses can add up quickly, especially for a retired couple, and savings can take a big hit.
This isn’t meant to dampen your retirement dreams but to shine a light on something no retiree can risk overlooking. Just as you wouldn’t neglect a patient’s risk factors, you can’t afford to overlook the financial realities of healthcare in retirement.
The Hidden Costs of Retirement Healthcare
Rising prices, longer lifespans, and systemic gaps in coverage have exacerbated retirement healthcare costs. Medical inflation outpaces any equalizing efforts. Healthcare costs tend to rise at a higher rate than general inflation.
In 2024, Medicare Part A and Part B premiums surged 6%, while Social Security’s cost-of-living adjustment (COLA) lagged at 3.2%. This gap is fueled by, among other factors, expensive new treatments and an aging population. Over a 20-30 year retirement, this compounding effect can throw a wrench into even the most well-laid plans.
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Physicians, due to their higher income and as a byproduct of being part of the medical community, often live longer than the general population. While this is a testament to their healthy lifestyles, it also means their savings must stretch further.
A 65-year-old individual today has a 70% chance of needing long-term care (LTC) in their lifetime, such as a nursing home, where stays may cost around $110,360/year or in-home aides at $27/hour. Medicare doesn’t cover these services, and without a plan, they can decimate your nest egg.
Many retirees assume Medicare will cover their needs, but it’s riddled with gaps. Original Medicare (Parts A and B) excludes prescriptions, dental, vision, hearing aids, and most long-term care. Out-of-pocket costs add up quickly. Medicare Part A is free for most, but there is a $1,676 cost per hospital stay.
Part B starts at $185/month but scales with income ($628.90/month for individuals earning over $500,000). Medicare Part D premiums average $36.78/month plus income-based surcharges upto $85.80/month. Even with all these plans, there are still gaps in coverage which require you to add Medigap or Medicare Advantage Plans to the mix.
For high-earning physicians, Medicare’s income-adjusted premiums are a particular concern. If you withdraw large sums from retirement accounts or have significant investment income, you could face IRMAA surcharges (Income-Related Monthly Adjustment Amounts), which inflate Part B and D premiums.
Bridging the Gap
Suppose you retire before 65, whether by choice or circumstance, you’ll face a coverage gap until Medicare begins. This period is critical, as even a brief lapse in insurance can lead to catastrophic costs. Fortunately, there are ways to mitigate this gap.
COBRA
The Consolidated Omnibus Budget Reconciliation Act (COBRA) lets you keep your employer’s health plan for 18 months post-retirement. However, you’ll pay the full premium plus a 2% administrative fee. While costly, it’s a viable bridge if you need continuity of care.
Spousal Coverage
If your spouse is still working and has employer-sponsored insurance, joining their plan is often the most cost-effective option. Premiums are typically lower than COBRA or private plans, and coverage is seamless.
ACA Marketplace Plans
The Affordable Care Act (ACA) marketplace offers subsidized plans based on income. There are three options to choose from: Bronze, Silver, and Gold, with Gold plans being the most expensive, yet they all cost less than COBRA. You can use Healthcare.gov’s calculator to compare options.
Health Savings Account (HSA)
If you enroll in a High-Deductible Health Plan (HDHP), you can contribute to an HSA – a tax-free account that can make all the difference. But keep in mind that once you begin Medicare coverage, you won’t be eligible to contribute to an HSA, so start early.
These accounts offer triple tax advantages, with contributions reducing taxable income, growth being tax-free, and withdrawals for qualified medical expenses also being untaxed.
These withdrawals can include Medicare premiums and long-term care expenses. After age 65, you can use HSA funds for non-medical expenses, though they’ll be taxed as income.
Mastering Medicare
At 65, Medicare becomes your primary coverage, but optimizing it requires careful planning.
Original Medicare vs. Medicare Advantage
Original Medicare (Parts A + B + D + Medigap) offers broad provider access but requires piecing together coverage and building a comprehensive plan that won’t leave you out in the rain. Medigap policies (Plan G) cover copays, deductibles, and foreign travel emergencies.
The premiums may be higher than Medicare Part C, but you’ll have the freedom to choose your doctors, get coverage anywhere in the U.S. and avoid any referral hoops.
Medicare Advantage (Part C) bundles Parts A, B, and usually D into one plan, often with extras like dental or gym memberships.
The premiums are lower than original Medicare, but copays are required. Networks are limited, and prior authorization is common. This plan will also only offer emergency services if you’re outside the service area.
If you travel frequently or value provider choice, Original Medicare with Medigap is preferable. If you prioritize simplicity and extra benefits, Advantage may suffice, but be sure to review plans annually during Open Enrollment.
Avoiding IRMAA Surcharges
Medicare premiums are tied to your income from two years prior. Which means 2025 premiums are based on 2023 tax returns. To minimize surcharges, you can use Roth accounts for tax-free withdrawals, time large withdrawals to avoid pushing yourself into higher IRMAA tiers, and consider charitable contributions or Qualified Longevity Annuity Contracts (QLACs) to reduce taxable income.
Dental, Vision, and Hearing
Original Medicare does not include routine dental cleanings, glasses, and hearing aids. That’s where bringing in stand-alone dental/vision plans, Medicare Advantage plans with built-in benefits, or plans like AARP Dental Insurance, can make sure you have comprehensive coverage.
Long-term Care
Long-term care is the single largest threat to retirement savings, yet only 11% of retirees have insurance for it. Long-Term Care Insurance (LTCI) premiums for a 65-year-old average $3,135/year but would only cost $2,220/year for the same policy if purchased by a 55-year-old.
Applying in your 50s or early 60s locks in lower rates as these tend to rise with age and health status.
Additionally, Hybrid Life Insurance and LTC Policies combine life insurance with LTC benefits. The premiums are higher than term life insurance, but these policies also avoid the “use it or lose it” risk of traditional LTCI.
If these don’t align with your goals, you always have the option of self-funding. You need $200,000-$500,000 (depending on your specific needs) in liquid assets dedicated to healthcare costs in retirement.
This could mean devoting a portion of your 401(k) or brokerage account, using an HSA for tax-free withdrawals, or downsizing your home to free up equity.
Building Your Personalized Plan
Use tools like Vanguard’s Healthcare Cost Calculator or the myriad of tools provided by Fidelity to project expenses. Optimize your savings vehicles by maxing out HSA contributions and Roth IRA, and make sure you have a nest egg that can save the day in case of large, unexpected expenses.
No amount of research can beat the insights you can get firsthand from a fiduciary financial advisor. Partner with one you trust and who understands your vision to construct a plan that works for you. Stress-test your plan by imagining the implications of, say, a 5-year nursing home stay, a chronic illness that requires you to get home modifications, or inflation spikes that will erode your purchasing power.
Final Thoughts
Retirement should be a time of fulfillment, not financial anxiety. As a physician, you have the expertise to diagnose risks and implement solutions – now it’s time to apply that rigor to your own future. The political landscape of our nation is at a crossroads and saying that times are uncertain would be…an understatement.
The right plan for covering expected or unexpected healthcare costs in retirement can save you a lot of uncertainty and undue stress in your golden years. The goal isn’t to just retire – retirement will come sooner or later – it’s to retire with the confidence that healthcare costs won’t hijack your dreams. You’ve spent a lifetime caring for others; now it’s your turn to care for your future self.
