Healthcare Costs in Retirement: What Most Pre-Retirees Seriously Underestimate

Fact-checked by the MyFinancial101 editorial team

Most Americans spend more time planning a week-long vacation than they do projecting their retirement healthcare costs. The numbers are jarring enough to derail an otherwise solid retirement plan, yet roughly one in five Americans have never factored healthcare into their retirement planning at all, a figure that rises to nearly one in four among Gen X. The 2025 Fidelity Retiree Health Care Cost Estimate pegs the average after-tax cost at $172,500 per 65-year-old retiring this year, and that figure has climbed more than 4% annually for several years running.

This article is not a worst-case scare tactic. It is a line-by-line breakdown of what healthcare actually costs in retirement, where the big-ticket items hide, and how much you need saved to cover each one, using real data from EBRI, Milliman, CMS, and survey evidence of what pre-retirees routinely miss. The single criterion that matters most in every projection is not your overall health status or even your insurance choices. It is your retirement age, and whether you have a fully funded bridge to Medicare at 65.

The Real Numbers Most Pre-Retirees Haven’t Run

Most people guess. When researchers ask pre-retirees what they expect to spend on healthcare over a full retirement, the typical answer lands somewhere in the range of $50,000 to $75,000, total, not annually. The actual figure is more than double that.

The Fidelity 2025 Retiree Health Care Cost Estimate puts the number at $172,500 for a single 65-year-old retiring in 2025, net of taxes and assuming Original Medicare Parts A and B, a Part D prescription drug plan, and a Medigap supplement. That figure does not include long-term care, over-the-counter medications, or dental, vision, and hearing services, all of which fall almost entirely on the retiree. And it has been climbing at a rate well above general inflation: Fidelity’s 2025 estimate rose more than 4% over the prior year, consistent with multi-year trends.

What most people also miss is that the cost is not evenly spread. A couple retiring at 65 might face combined annual premiums of roughly $12,850 in their first year, and that is before a single co-pay, deductible, or prescription. As retirees age, healthcare spending claims a steadily larger share of their budget. At 65, healthcare might consume about 15% of total spending. By 85, that share narrows toward 48%, with medical inflation far outpacing the CPI-W index used for Social Security cost-of-living adjustments. The math is unforgiving because it compounds and accelerates exactly when the retiree has the fewest options to earn more.

According to Bank of America retirement research, healthcare is the biggest retirement expense people fail to plan for, largely because many assume Medicare will cover everything when, in reality, it only covers about two-thirds of total costs.

Why Your Current Healthcare Budget Is Probably Way Too Low

The gap between assumption and reality is not small, it is structural. Survey data from Jackson National’s 2025 study shows that nearly two-thirds of pre-retired investors underestimate their prospective annual healthcare expenses by at least $1,220. Over a 25-year retirement, that single annual miss compounds to more than $30,000, and that is the minimum gap. Plenty of households are off by far more.

Part of the problem is that people anchor on what they spend now while working. Employer-sponsored health insurance averages roughly $8,400 per year for single coverage with the employer absorbing the bulk of the premium. In retirement, that subsidy vanishes. A Medicare beneficiary pays Part B premiums, a Part D drug plan, a Medigap supplement or Medicare Advantage premium, deductibles, and co-insurance, all from after-tax savings or Social Security income. The full weight shifts.

The second problem is inflation assumption. General CPI inflation has run around 3% in recent years, but healthcare-specific inflation has historically outpaced CPI by 1.5 to 2 percentage points annually. A retirement budget that escalates healthcare at 3% will underestimate the true cost by tens of thousands over two decades because the compounding differential widens dramatically in years 15 through 25.

The third problem is simpler: a lot of people never build the line item at all. One in five Americans report they have never considered healthcare costs in their retirement planning, and among Gen X that figure jumps to one in four. If there is no line item, there is no plan, and the spending still arrives.

Medicare Reality Check: What It Pays For and What It Doesn’t

The single most dangerous assumption pre-retirees make is that Medicare functions like employer health insurance. It does not. Original Medicare has no out-of-pocket maximum, a feature that shocks many new enrollees. You can hit the Part A deductible, pay 20% of a six-figure outpatient surgery with no upper limit, and face prescription costs that run through the Part D coverage gap.

As CNBC has reported, out-of-pocket costs can be significant once a retiree gets sick, which typically happens later in retirement when financial flexibility is lowest.

Medicare Part A covers inpatient hospital stays, skilled nursing facility care for rehabilitation, and some home health services. It does not cover custodial care, the assistance with bathing, dressing, and eating that comprises most long-term care. Part B covers medically necessary doctor services, preventive care, durable medical equipment, and outpatient procedures. It explicitly excludes routine dental care, eye exams for glasses, hearing aids and exams, cosmetic surgery, and most foot care. Those exclusions alone can add $2,000 to $5,000 per year for a retiree who needs hearing aids, regular dental work, and updated eyeglasses.

Prescription drug coverage comes through Part D, a separate plan with its own premium, deductible, and a coverage structure that includes a gap where the enrollee pays 25% of drug costs until hitting the catastrophic threshold. The Inflation Reduction Act capped annual Part D out-of-pocket spending at $2,000 starting in 2025, a meaningful improvement, but the premium and deductible still apply.

The choice between Original Medicare with a Medigap supplement and a Medicare Advantage plan changes the lifetime math materially. Medigap plans offer more predictable costs but higher upfront premiums. Medicare Advantage plans typically carry lower monthly premiums but expose the enrollee to higher out-of-pocket costs when care is needed, with annual in-network maximums that can reach $8,850 or more. Over a 25-year retirement, the difference between these paths can shift lifetime costs by tens of thousands of dollars, and the Milliman Retiree Health Cost Index quantifies exactly how much.

The Pre-65 Insurance Gap That Can Double Your Lifetime Costs

Retirement age is the lever with the most destructive power over retirement healthcare costs, and it is the one most pre-retirees treat as a preference rather than a financial variable. Retire at 65 with Medicare coverage beginning immediately, and the cost path follows the Fidelity and EBRI projections. Retire at 60 without employer-sponsored retiree health benefits, and you must bridge five full years of private insurance before Medicare eligibility kicks in.

The Milliman 2025 Retiree Health Cost Index quantifies this precisely. A 65-year-old couple retiring in 2025 on the Original Medicare plus Medigap plus Part D path faces projected lifetime costs in an expected range. That same couple retiring at 60, buying five years of individual-market coverage and then transitioning to the same Medicare path, sees lifetime costs rise by 56%. If they instead choose a Medicare Advantage path at 65, the penalty for retiring at 60 jumps to 90%.

Why the difference? Because individual market premiums for ages 60 to 64 are not cheap. For 2025, the average benchmark silver plan premium for a 60-year-old runs roughly $900 to $1,200 per month before any premium tax credit. Two 60-year-olds buying separate policies face a combined annual premium that can exceed $20,000 to $25,000, and that is before deductibles that commonly range from $3,000 to $7,000 per person. Over five years, a couple can easily spend $100,000 to $150,000 just on premiums, all out of savings, before Medicare begins.

There is a nuance that matters. Premium tax credits through the Affordable Care Act marketplace are available if household income falls between 100% and 400% of the federal poverty level, roughly $19,720 to $78,880 for a couple in 2025. Early retirees who can manage their taxable income, by drawing from Roth accounts, using cash reserves, or taking capital gains that stay under the threshold, can reduce their net premium dramatically. But doing so requires deliberate income planning before retirement, and it can conflict with other goals like Roth conversions or delaying Social Security.

Many early retirees end up claiming Social Security at 62 not because they want to but because they need cash flow to cover the insurance bridge, a trade-off that permanently reduces their monthly benefit. That trade-off cascades: lower Social Security income means less to cover medical costs later, exactly when out-of-pocket spending escalates most sharply.

“Health care costs remain a major financial challenge in retirement, even for people covered by Medicare,” said Paul Fronstin, director of health benefits research at EBRI.

Long-Term Care: The Wildcard 70% Will Need

Only 27% of pre-retirees expect to need long-term care. The actual probability for someone turning 65 is roughly 70%, according to data from the Administration for Community Living and the U.S. Department of Health and Human Services. That gap, 27% expectation versus 70% reality, is the largest blind spot in retirement planning.

Long-term care costs vary dramatically by setting and geography, but the national averages provide a baseline. A home health aide averages roughly $51,000 to $61,000 per year for 44 hours of weekly care. A private room in a nursing home runs approximately $108,000 to $112,000 per year. Assisted living facilities average about $54,000 per year. The typical care episode lasts around 33 months, which means a single LTC event can cost $150,000 to $300,000, and it can strike one spouse while the other remains healthy, doubling the household’s exposure.

Medicare does not cover custodial long-term care. It covers skilled nursing facility care for up to 100 days following a qualifying hospital stay, but only if the patient is receiving skilled therapy and improving. Once improvement plateaus, Medicare stops paying. Medicaid covers long-term care, but only after the individual has spent down assets to state-specific thresholds, generally around $2,000 in countable assets for an individual. Most middle-class retirees who need LTC will pay out of pocket until their savings are exhausted.

Traditional long-term care insurance has become less available and more expensive over the past decade, with annual premiums that can run $3,000 to $6,000 for a couple in their 60s and a history of rate increases that make budgeting difficult. Hybrid life insurance policies with LTC riders and self-funding strategies, setting aside a dedicated pool of assets specifically for care, have become the dominant approaches for households that do not qualify for or do not want traditional LTC coverage. For many, prioritizing retirement savings over other goals creates the margin needed to handle this specific risk.

How Costs Scale With Age, Health, and Where You Live

Healthcare inflation is not uniform, it accelerates with age and varies by health status and geography. A 65-year-old in good health with access to a well-priced Medigap plan in a competitive insurance market will face a different cost trajectory than an 85-year-old managing multiple chronic conditions in a high-cost state.

The spending curve bends upward sharply after age 75. At 65, healthcare might consume 15% of a retiree’s total annual spending. By 85, that share can approach 48%, and the absolute dollar amount is far larger because of accumulated medical inflation. EBRI data illustrates why the savings requirement differs so much by gender: a man needs about $120,000 saved to have a 50% chance of covering Medigap premiums and median drug costs, while a woman needs $146,000. Women live longer on average, which means more years of Medicare premiums, more years of out-of-pocket spending, and a higher probability of a long-term care event.

Health status at retirement age is the second major driver. EBRI’s highest-cost scenario, a couple with particularly high prescription drug expenditures who want a 90% chance of covering everything, requires $469,000 in dedicated savings. That figure is for health care alone, separate from housing, food, and the rest of the retirement budget.

Geography matters more than most people realize. Medigap Plan G premiums can vary by $200 per month or more between states, and Medicare Advantage plan networks and out-of-pocket maximums differ significantly by county. Retirees who relocate in retirement should evaluate the local Medicare options before choosing a destination, a lower cost of living can be partially offset by higher healthcare premiums if the insurance market is thin.

The Center for Retirement Research at Boston College found that median out-of-pocket medical spending consumes about 29% of the typical retiree’s Social Security benefit. That leaves 71% for everything else, and for many lower-income retirees, that simple math makes clear why healthcare is the budget line item that can break the plan.

The Single Biggest Miss Most Calculators Get Wrong

Retirement calculators are everywhere, and nearly all of them do healthcare poorly. The typical calculator asks for an estimated annual healthcare cost and escalates it at general inflation. Both inputs are usually wrong, and the output compounds the error over 25 or 30 years.

Medical inflation has historically exceeded CPI by 1.5 to 2 percentage points per year. If your calculator escalates a $10,000 annual healthcare budget at 3% general inflation, it produces about $24,000 in year 30. Escalated instead at 5%, a realistic healthcare inflation assumption, that same $10,000 becomes roughly $43,000. A calculator that does not let you set a separate healthcare inflation rate will understate year-30 healthcare costs by nearly half. That is the difference between a plan that works on paper and one that runs out of money.

The second miss is that most calculators treat healthcare as a flat annual expense, when in reality it is lumpy and rises with age. A retiree spends less on healthcare at 67 than at 82, and far less than during a year with a hip replacement, a new hearing aid, or a long-term care event. Planning tools that smooth this spending into a constant withdrawal rate can mislead investors with no experience modeling irregular expenses.

The third miss is taxes. Healthcare costs in retirement are funded from a mix of Social Security income, taxable IRA withdrawals, Roth distributions, and HSA reimbursements. Each source carries different tax implications. An IRA withdrawal that pushes income into a higher bracket can also trigger Medicare IRMAA surcharges, the income-related monthly adjustment amount that raises Part B and Part D premiums for higher-income beneficiaries. The IRMAA thresholds for 2025 start at $103,000 of modified adjusted gross income for an individual and $206,000 for a couple filing jointly. Crossing a threshold can add $69 to $419 per month to Part B premiums alone, per person. Planning withdrawals to stay just under a threshold can save thousands per year.

Turning Healthcare From a Shock Into a Budget Line Item

Once the numbers are on the table, they are manageable, but they require a plan built specifically around healthcare, not a general retirement withdrawal strategy with a vague allowance for medical costs.

The most tax-efficient tool available to most workers is a Health Savings Account, and it is underused. HSA contributions are pre-tax, grow tax-free, and come out tax-free when used for qualified medical expenses. In retirement, those qualified expenses include Medicare premiums, long-term care premiums up to IRS limits, and essentially any out-of-pocket medical cost. No other account offers the triple tax advantage. The maximum 2025 HSA contribution is $4,300 for self-only coverage and $8,550 for family coverage, with an additional $1,000 catch-up for those 55 and older. A couple who maxes out an HSA from age 55 to 65 can accumulate a six-figure pool specifically designated for retirement healthcare costs before they have spent a dollar of their 401(k).

Timing matters. Because HSAs require enrollment in a high-deductible health plan, they are generally only available while still employed and not yet on Medicare. Once you enroll in any part of Medicare, you can no longer contribute to an HSA, but you can still use the accumulated funds. The strategy is clear: fund the HSA aggressively during the last working years, invest the balance for growth, and treat it as a dedicated healthcare reserve that covers the pre-65 bridge, Medicare premiums, and long-term care costs.

For those already retired, the annual Medicare open enrollment period from October 15 to December 7 is not a formality, it is the single most impactful recurring financial decision a retiree makes. Part D drug plans change their formularies every year. Medicare Advantage plans change their networks, premiums, and out-of-pocket maximums. Staying on top of preventive care through free screenings can catch conditions early and reduce long-term costs. A retiree who does not re-shop their drug plan annually can easily pay $500 to $1,500 more than necessary for the same prescriptions because a different plan added their specific medication to its preferred tier.

Lifestyle factors are the variable most people overlook. Regular exercise, smoking cessation, and weight management reduce the probability of the chronic conditions that drive the bulk of later-life spending. The same behaviors that lower healthcare costs also extend the years of independent living and delay the onset of long-term care need. They are not a guarantee, but they shift the odds in a way that financial planning alone cannot match.

How to Build a Healthcare Budget That Survives Contact With Reality

A healthcare budget only works if it is specific. The broad rules of thumb, save $300,000 for healthcare, budget 15% of income, dissolve the moment they meet a real retirement date, a real health history, and real insurance choices. These questions produce a number concrete enough to act on.

First, at what age do you actually plan to stop working, and is employer-sponsored retiree health coverage available? If the answer is “before 65 and no employer coverage,” the pre-Medicare bridge is your single largest near-term expense, and the Milliman data on the 56% to 90% lifetime cost penalty should inform whether that retirement date is financially feasible. If employer coverage is available, the bridge cost largely disappears, and the planning focuses on Medicare transition.

Second, which Medicare path fits your health needs and risk tolerance? Original Medicare with Medigap plus Part D offers predictable costs, higher monthly premiums but lower exposure to catastrophic bills, with nationwide provider access and no network restrictions. Medicare Advantage offers lower premiums but higher out-of-pocket maximums, narrower networks, and prior authorization requirements that some enrollees find frustrating when care is needed. The decision is not permanent, but switching from Advantage to Original Medicare plus Medigap later can require medical underwriting in most states, and the Medigap premium at that point may be unaffordable.

Third, what is your plan for long-term care? If you have substantial assets, a hybrid life insurance policy with an LTC rider may provide the best balance of cost and coverage. If your assets are more modest, and you may eventually qualify for Medicaid, understanding your state’s spend-down rules and asset-protection strategies is essential. If you are part of a couple, the plan must cover the scenario where one spouse needs care and the other does not, because that is the most common LTC outcome, and it is the one that conventional advice often overlooks.

Fourth, how will you fund healthcare expenses in a tax-efficient way? HSA dollars should be spent first on qualified medical expenses because they are entirely tax-free. Roth IRA withdrawals can cover large medical bills without increasing taxable income or triggering IRMAA surcharges. Taxable IRA withdrawals for medical expenses may be deductible if they exceed 7.5% of adjusted gross income, but they also increase MAGI and can push you into a higher IRMAA bracket, a trade-off worth reviewing with a tax professional before year-end.

A couple retiring at 65 can use these questions to build a concrete line item. EBRI data suggests a woman with Medigap needs roughly $146,000 saved for a 50% probability of covering premiums and median drug costs. A couple who want 90% confidence against high drug costs may need the full $469,000. Those numbers frame the saving target, and the month-by-month decisions, which Part D plan, which Medigap letter, whether to work one more year, fill in the rest. The data is clear enough to act on, and that is the point.

Frequently Asked Questions

How much does the average retired couple spend on healthcare per year?

In their first year of retirement at 65, a couple on Original Medicare with Medigap and Part D can expect baseline costs around $12,850 in premiums before any out-of-pocket spending. By their 80s, annual spending can easily reach $15,000 to $20,000 or more depending on health status and prescription needs.

What is the best age to retire to minimize healthcare costs?

Age 65, when Medicare eligibility begins, minimizes the insurance bridge cost. Retiring earlier without employer-sponsored retiree health coverage adds 56% to 90% more to lifetime healthcare costs, per Milliman’s 2025 data.

Does Medicare cover dental, vision, or hearing?

No. Original Medicare covers none of those services. Retirees pay out of pocket for routine dental care, eyeglasses, eye exams, and hearing aids, which can add $2,000 to $5,000 or more per year.

How much should I have saved just for healthcare in retirement?

Fidelity estimates a 65-year-old retiring in 2025 needs $172,500 after taxes per person, excluding long-term care. EBRI estimates range from $120,000 for a man with Medigap and median drug costs to $469,000 for a couple wanting 90% confidence against high drug costs.

Is long-term care insurance worth it?

For many middle-class households, traditional LTC insurance has become too expensive and prone to rate increases. Hybrid life insurance policies with LTC riders or dedicated self-funding are often better alternatives, though the choice depends on assets, health, and whether you can afford to self-insure.

What happens if I retire at 60 and need health insurance?

You must buy coverage through the ACA marketplace, COBRA, or a spouse’s employer plan until Medicare eligibility at 65. ACA marketplace premiums for a 60-year-old average roughly $900 to $1,200 per month before subsidies, and deductibles can reach $7,000 or more per year. The total bridge cost over five years can exceed $100,000 for a couple.

Can I use an HSA to pay for Medicare premiums?

Yes. HSA funds can pay for Medicare Part B, Part D, and Medicare Advantage premiums tax-free. They cannot pay for Medigap premiums. HSA funds can also cover long-term care insurance premiums up to IRS age-based limits.

How does healthcare inflation affect my retirement plan?

Healthcare inflation historically exceeds general CPI by 1.5 to 2 percentage points per year. A retirement plan that escalates healthcare costs at 3% general inflation may understate year-30 costs by nearly half. Use a separate, higher inflation rate for healthcare specifically.

What are IRMAA surcharges and how do they affect my Medicare costs?

IRMAA is the income-related monthly adjustment amount that increases Part B and Part D premiums for beneficiaries with higher incomes. For 2025, IRMAA begins at $103,000 modified adjusted gross income for an individual and $206,000 for a couple, adding $69 to $419 per month to Part B premiums. Planning withdrawals to stay under thresholds can save thousands annually.

Do women need more saved for healthcare than men?

Yes. EBRI estimates a woman needs $146,000 versus $120,000 for a man to have a 50% chance of covering Medigap premiums and median drug costs, because women live longer on average and incur more total years of healthcare spending.