Planning for Healthcare Costs in Retirement

A lot of effort often goes into having a well-thought-out retirement plan. Income streams, asset values, return expectations and expenses all play a key role in putting together a plan that works. When it comes to expenses, we believe there is one thing you cannot overlook: healthcare costs. For most retirees, it is one of the largest expenses in retirement, second only to housing.

Average annual spending by age and category 2017-2021

Average annual spending by age and category 2017-2021

Source: JPM Guide to Retirement.

Of all the expenses in retirement, healthcare may be the one with the greatest amount of unpredictability. While inflation on healthcare was lower in 2022 than the average, over the past 40 years, it has grown at a higher rate than any other major expense category.

Annual average inflation by spending category

Annual average inflation by spending category

Source: JPM Guide to Retirement.

Healthcare costs can generally be divided into two categories: medical costs, such as trips to the doctor and prescription drugs, and long-term care costs, such as receiving help with the activities of daily living, like dressing and cooking. Let’s leave long-term care costs aside for the moment and delve a bit deeper into managing medical costs.

Medical costs after the age of 65

For most retirees age 65 and older, Medicare will be the primary form of healthcare coverage. The major costs of Medicare are premiums and out-of-pocket expenses. Here’s a summary:

  • For 2023, Medicare Part A (hospital insurance) is premium-free in about 99% of cases. The inpatient hospital deductible is $1,600 per admission, and there is co-insurance for any stays longer than 60 days.1
  • Medicare Part B (physician insurance) has a standard monthly premium of $164.90 and an annual deductible of $226. There is a 20% coinsurance for all expenses after the deductible has been paid.2
  • Medicare Part D (prescription drug) costs are per plan. The national average premium for 2023 is just under $33. Each plan will have its own levels of deductibles and copays.3

It’s important to note that the higher your income, the more you will have to pay for your Medicare Part B and Part D coverage. For the highest income earners (single taxpayers earning over $500,000 and married filing jointly taxpayers over $750,000), Medicare Part B can run over $550/month per person, and an extra $77/month per person for Part D plans.4

Due to the coverage gaps in Medicare Parts A and B (such as deductibles, co-pays, 20% coinsurance for Part B and no maximum out-of-pocket limit protection), we usually recommend that retirees purchase a supplemental insurance policy (either a Medigap plan or a Medicare Advantage plan) to cover them. These supplement plans can range in cost, with the lower-premium plans having more out-of-pocket costs (deductibles and copays) compared to the higher-premium plans, which usually have fewer out-of-pocket costs.

As you can see, when it comes to anticipating your healthcare costs in retirement, it’s reasonable to expect between $2,000 and $6,000 per year for Medicare premiums. However, do not forget about out-of-pocket costs. Here are some considerations:

  • Those on Original Medicare with a Medigap plan (i.e., plan G) should see minimal out-of-pocket costs—perhaps as low as the Medicare Part B deductible of $226 in 2023.
  • Those on Medicare Advantage will have deductibles, copays and coinsurance costs based on how much they use their plan. Out-of-pocket costs are capped at $8,300 in 2023 for in-network care.5

You also need to account for the cost of Part D coverage (such as deductibles and copays) and any potential income-related premium surcharges for Part B and Part D coverage. It can get expensive if you use your plan regularly and/or are prescribed prescription drugs.

Medical costs before the age of 65

For those who retire before Medicare age, health insurance coverage options are limited and are usually more expensive compared to employer-provided coverage and Medicare. One of the primary options for health insurance coverage before age 65 is an individual policy offered on the health insurance marketplace.

Marketplace plans are categorized as bronze, silver, gold and platinum. The average premium for an individual silver plan is $560/month. With a silver plan, the insurance company pays 70% of medical costs, and you cover 30%.6 More comprehensive plans charge higher premiums but cover a higher percentage of the medical costs.

There are premium subsidies available for these plans based on household income. Under the American Care Act, those with income of 400% or less of the federal poverty level (in 2023, that’s $54,360 for a single individual and $111,000 for a family of four)7 are eligible for varying levels of subsidies in the form of a tax credit.

With the passage of the America Rescue Plan, the subsidies are expanded for those with income under 400% of the federal poverty level and also extended to those who are over that level.8 The amount you can receive is based on your household income and health plan selection.

Out-of-pocket costs for marketplace plans are capped in 2023 at $9,100/individual and $18,200/family.9 The out-of-pocket limit does not include monthly premiums, anything you spend for services not covered by your plan and out-of-network care and services.

Besides one of these marketplace plans, other options for coverage include COBRA and former employer retiree coverage. COBRA allows a person to stay on their employer-sponsored health insurance plan for up to 18 months after they retire. The cost of the coverage increases to 102% of the full costs of the plan premium.

For others, their previous employer may offer retiree health insurance coverage. Most of these plans require a premium to be paid by the former employee but are less expensive than marketplace options.

Dental and vision costs in retirement

Another item worth mentioning when it comes to medical costs in retirement is dental and vision coverage. While there are separate insurance plans that retirees can purchase to cover both, the coverage tends to be limited (usually a cap of $1,000 for dental plans and either a benefit cap or predetermined discount rate for vision plans). These plans also tend to be more focused on preventative care, meaning that any major dental work or elective eye surgery will be out-of-pocket.

While it is impossible to predict all of your future healthcare costs, we believe it is crucial to make them part of your retirement plan. Working with your Wealth Advisor, you can arrive at reasonable estimates and build enough flexibility into your plan to cover the costs that seem likely as well as those that might be unexpected.




Bryan Smalley, CFP®

Bryan Smalley, CFP®

Wealth Advisor

Bryan is a Wealth Advisor in our Morristown, NJ, office. He is responsible for managing client relationships and coordinating all aspects of client service for the team. He currently serves on the firm’s Financial Planning Committee, providing research and input into such topics as Medicare and retirement planning. Bryan is an Ohio native (Go Bucks!) who has earned the CERTIFIED FINANCIAL PLANNER™ certificate along with a BA from the University of Toledo, an MA from Bowling Green State University and a certificate in Financial Planning from Boston University. Bryan, his wife, Liz, and their four children live in Flemington, NJ, where they enjoy exploring new places and spending time with family and friends.


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