Healthcare costs will likely be your largest expense in retirement, and planning for them now makes a real difference

Most people underestimate how much they will spend on healthcare after they stop working. Medicare covers hospital and doctor visits, but it does not cover everything — you will still pay premiums, deductibles, and costs for prescriptions, dental care, vision care, and long-term care. The amount varies widely depending on your age when you retire, your health, and where you live. Starting to set money aside now, understanding what Medicare does and does not cover, and knowing your options for filling the gaps can reduce financial stress later.

Key Takeaways

  • Medicare begins at 65 and covers hospital and doctor visits, but you pay premiums for Part B and Part D, plus deductibles and copays for each service.
  • Gaps in Medicare coverage — dental, vision, hearing, and long-term care — are not small expenses and should be factored into your retirement budget now.
  • Medigap and Medicare Advantage are two different ways to cover costs Medicare does not pay, and the choice depends on your health and how much you use doctors.
  • If you retire before 65, you will need to find health insurance through the Affordable Care Act marketplace or your former employer until Medicare starts.
  • Setting aside money specifically for healthcare — through a Health Savings Account if you have one, or in a separate savings account — makes it easier to pay these costs without disrupting other retirement income.

What Medicare covers and what you will pay out of pocket

Medicare Part A covers hospital stays, skilled nursing care, and hospice. You do not pay a premium for Part A if you or your spouse paid Medicare taxes for at least 10 years while working. Part B covers doctor visits, outpatient care, and some preventive services. Most people pay a monthly premium for Part B — the amount depends on your income and changes each year. In 2024, the standard Part B premium is higher for people with higher incomes.

When you use a service covered by Medicare, you pay a deductible first, then a percentage of the cost (called coinsurance) or a fixed amount per visit (called a copay). For example, Medicare Part A has a deductible for hospital stays, and you pay coinsurance for stays longer than 60 days. Part B has an annual deductible, and then you typically pay 20 percent of the cost for doctor visits and outpatient services. Part D covers prescription drugs, but you choose a plan each year, and your costs depend on which drugs you take and which plan you pick.

Costs Medicare does not cover

Dental work, eyeglasses, hearing aids, and routine eye exams are not covered by Medicare. If you need a crown, root canal, or dentures, you pay the full cost yourself. Hearing aids can cost hundreds to thousands of dollars per ear. Long-term care — whether in a nursing home, assisted living facility, or at home — is not covered by Medicare. Medicaid may cover some long-term care costs, but only if your income and assets fall below your state's limits, and you must have already spent down your savings.

Some preventive services are covered at no cost, such as annual wellness visits and certain cancer screenings. But if you need ongoing treatment for a chronic condition, you will pay your deductible and coinsurance. Travel outside the United States is not covered by Medicare, so if you spend winters abroad or travel frequently, you may want supplemental coverage that includes international care.

Medigap and Medicare Advantage: the two ways to cover gaps

Medigap (also called Supplement Insurance) is a private insurance plan that pays some or all of the costs Medicare does not cover — deductibles, coinsurance, and copays. You buy a Medigap plan from a private insurance company, and you keep your original Medicare coverage. You can see any doctor who accepts Medicare. Medigap plans are labeled A through N, and each plan covers a different set of costs. Plan G, for example, covers your Part B deductible and coinsurance. Plan N covers coinsurance but not your deductible. Medigap premiums vary by plan, by insurance company, and by your age and location.

Medicare Advantage (Part C) is an alternative to original Medicare. A private insurance company runs the plan, and it must cover everything Medicare Part A and B cover, but it does so through its own network of doctors and hospitals. Most Medicare Advantage plans include prescription drug coverage (Part D) and may cover dental, vision, or hearing — benefits original Medicare does not. However, you typically pay a copay for each doctor visit, and you must use doctors in the plan's network or pay more. If you travel or move frequently, or if you have a doctor you want to keep, check whether they are in the plan's network before you enroll.

The choice between Medigap and Medicare Advantage depends on your health and how much you use healthcare. If you see many doctors or specialists, Medigap may cost less overall because you can see any doctor. If you are generally healthy and do not mind using a network, Medicare Advantage may have lower premiums and include dental or vision coverage. You can switch between them during the annual enrollment period (October 15 to December 7), but if you wait to buy Medigap after your initial enrollment window, insurance companies can charge you more based on your health.

Early retirement: healthcare before age 65

If you retire before 65, you cannot enroll in Medicare yet, and you need to find health insurance. One option is the Affordable Care Act (ACA) marketplace, where you can compare plans and see what you will pay based on your expected income for that year. If your income is low enough, you may receive a tax credit that lowers your monthly premium. You can enroll in an ACA plan during the open enrollment period (November 1 to January 15 each year) or if you have a may have access to life event, such as losing employer coverage.

Another option is COBRA, which lets you stay on your former employer's health plan for up to 18 months after you leave your job. You pay the full premium (what your employer was paying plus an administrative fee), which is usually more expensive than an ACA plan, but you keep your current doctors and coverage. Some employers offer retiree health plans for people who retire before 65, though these are becoming less common. If your spouse still works, you may be able to enroll in their employer plan.

Using a Health Savings Account to set aside money for healthcare

If you have a Health Savings Account (HSA) through a high-deductible health plan, you can contribute money before taxes are taken out, and the money grows tax-free. You can withdraw it tax-free to pay for healthcare costs now or in retirement. Unlike a Flexible Spending Account (FSA), which you must use by the end of the year, an HSA rolls over year to year and can grow into a significant fund. After age 65, you can withdraw money from an HSA for any reason without penalty, though non-healthcare withdrawals are taxed as income.

If you do not have an HSA, setting aside money in a separate savings account specifically for healthcare costs in retirement is still useful. Many financial advisors suggest setting aside 10 to 15 percent of your retirement savings for healthcare, though the amount depends on your health, your family history, and whether you plan to buy supplemental coverage. Keeping this money separate from your general retirement fund makes it less likely you will spend it on something else.

Estimating your healthcare costs and building them into your budget

Your healthcare costs in retirement depend on several factors: your age when you retire, your health, whether you buy Medigap or Medicare Advantage, and whether you need long-term care. Medicare Part B premiums, Part D premiums, and Medigap premiums all increase each year. Dental, vision, and hearing costs are unpredictable — you might need nothing for years, then suddenly need a crown or hearing aid.

A practical approach is to list the healthcare costs you expect to pay each month: Medicare Part B premium, Part D premium, and either a Medigap or Medicare Advantage premium. Add an estimate for copays and coinsurance based on how often you see doctors. Then add a separate line for unpredictable costs like dental work, and set aside money for that separately. If you have a chronic condition that requires ongoing medication or specialist visits, factor those costs in. Review your budget each year when Medicare enrollment opens (October 15 to December 7) and adjust your coverage if your health or costs change.

Long-term care: planning for costs that Medicare does not cover

Long-term care — whether in a nursing home, assisted living facility, or at home with paid caregivers — is one of the largest healthcare expenses in retirement, and Medicare does not cover it. The cost varies by location and type of care. Nursing home care costs more than assisted living, and costs in urban areas are usually higher than in rural areas. Some people pay for long-term care out of pocket, some rely on Medicaid (which covers long-term care for people with low income and assets), and some buy long-term care insurance to cover part of the cost.

Long-term care insurance is expensive and becomes more expensive the older you are when you buy it. It also has strict rules about when you can use it — you typically must need help with activities like bathing, dressing, or eating before the insurance pays. Some people buy a hybrid policy that combines life insurance or annuities with long-term care coverage, which may be less expensive. Others decide to self-insure by setting aside money in savings. If you think you might need long-term care, talk to a financial advisor about whether insurance makes sense for your situation.

Frequently Asked Questions

Can I change my Medicare plan if my health changes?

Yes. During the annual enrollment period (October 15 to December 7), you can switch from original Medicare to Medicare Advantage, from Medicare Advantage to original Medicare, or change which Medigap or Medicare Advantage plan you have. If you have a may have access to life event — such as losing employer coverage, moving to a new state, or getting married — you can enroll outside the annual period.

What happens if I delay Medicare enrollment?

If you do not enroll in Medicare Part B when you first become may be able to access at 65, you will pay a higher premium for as long as you have Medicare. The penalty is 10 percent of the standard Part B premium for each year you delayed. If you delay Part D (prescription drug coverage), you pay a penalty on your premiums if you enroll later. The only exception is if you have employer coverage when you turn 65 — then you can delay without penalty.

Does Medicare cover prescription drugs?

Yes, through Part D. You choose a Part D plan each year during enrollment, and different plans cover different drugs at different costs. If you take expensive medications, compare plans to find one that covers your drugs at the lowest cost. Some plans have a coverage gap (called the "donut hole") where you pay more for drugs after you reach a certain spending amount, though the gap has been shrinking in recent years.

What if I cannot afford my Medicare premiums?

If your income is low, you may be able to get help paying your Part B and Part D premiums through programs like the Medicare Savings Program or the Low-Income Subsidy Program. These programs are run by your state, and you can find information through Medicare.gov or by calling 1-800-MEDICARE. You must meet income and asset limits, which vary by state.

Should I buy long-term care insurance now or wait?

Long-term care insurance is cheaper when you buy it younger and healthier. If you wait until you are older or have a health condition, the premiums will be much higher or you may not be able to buy it at all. However, not everyone needs it — if you have significant savings or family who can provide care, you may decide to self-insure instead. A financial advisor can help you weigh the costs and benefits for your situation.