How to budget for health care expenses during retirement


Some healthcare expenses are unpredictable, making them difficult to plan for as you get closer to retirement age. Your retirement calculator can help you project what you’ll need for a retirement income, but it can’t predict changing insurance coverages, higher out-of-pocket expenses, or long-term care needs. Budgeting for these requires more research. In this article, we’ll discuss how to budget for healthcare expenses so you can create a sure fire 401k retirement plan.

Choosing the right Medicare coverage

Choosing which Medicare coverage is right for you is a big part of the budgeting process for post-retirement healthcare costs. Medicare is not “free health care.” Working at least ten years in the US and paying FICA taxes makes you eligible for premium-free Part A at age 65, but there will be copays and deductibles. Here’s a breakdown of those costs:

  • Part A (Hospital Insurance): There’s no premium for Part A if you meet the work requirement. If not, the monthly premium ranges from $278 to $506. Part A covers room and board in the hospital. There are copays if you stay over 60 days ($400 to $800 per day), a deductible of $1,600 each time you’re admitted, and coverage ends after 150 days hospitalized. You’re responsible for 100% of the costs after that.
  • Part B (Medical Insurance): This is the portion of Medicare that covers outpatient services like doctor visits, lab tests, imaging services, and surgeries. The base premium for Part B is $164.90 per month, which may be higher if your income exceeds a certain level. The deductible is $226. Copays are 20% of covered services, and there’s a penalty if you fail to sign up for Part B when you first become eligible.
  • Part C (Medicare Advantage): Part C is a hybrid plan that combines Medicare coverage with private insurance coverage, incorporating services from Parts A, B, and D. Premiums vary, so speak to an insurance agent about your options on Part C.
  • Part D (Prescription Drug Coverage): Medicare Part D was added to help keep down the cost of prescription drugs while you’re in retirement. Monthly payments are based on which plan you choose (Parts A+B or Part C). Deductibles vary by prescription.

Separate premiums from out-of-pocket costs

Understand the costs you’re responsible for are separate premiums (a fixed expense) from out-of-pocket costs (a variable expense). For example, the standard Medicare Part B premium is $164.90. That’s a fixed cost. Copays are 20% of covered services. The amount you pay out-of-pocket for that will vary based on your medical needs.

When calculating your retirement budget, include all the fixed health care costs. You can accurately plan for those. Variable costs could be covered by opening a health savings account (HSA) or creating an emergency fund that’s separate from your regular checking and savings accounts. Put a little aside each month to help cover the unexpected.

Look into long-term care (LTC) insurance

Your budget can become unmanageable quickly if you need long-term hospitalization or institutional care. Medicare Part A stops paying the bill after 150 days. Long-term care insurance is designed to pick up where they left off. Speak to an insurance agent about LTC insurance options. The premiums will be fixed so you can add them to your budget.

Another concern to keep up front in this scenario is the financial security of your spouse and family. Look for insurance professionals who are also financial advisors. There are steps you can take to protect your assets and rules that govern when you can make asset transfers. If you’re shopping for LTC insurance, ask your rep to explain those to you.  

The Bottom Line

Medicare can offset some of your healthcare costs in retirement, but not all of them. Choose your Medicare plan carefully to make sure all your needs are met. Find out what your premiums will be, add those to your retirement budget, and put extra money aside in a health savings account or emergency fund to cover variable costs like copays and deductibles.