How Healthcare Impacts Retirement Savings

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How Can You Adapt Your Retirement Plans for Rising Costs in Healthcare?

Healthcare is one of the largest expenses during one’s retirement and costs continue to rise. These costs are rising primarily due to an aging population and longer life expectancy. According to Fidelity Investments, an average retired couple age 65 may need approximately $300,000 to cover healthcare costs in their retirement years1.

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This estimate also excludes long-term care. Medical costs may significantly impact individuals’ retirement savings and reduce their retirement income if they are not prepared for this expense. 

In 2018, U.S. healthcare spending was nearly $3.6 trillion, ($11,000 per person). By 2028, these costs are expected to reach to $6.2 trillion (approx. $18,000 per person).

Peter G. Peterson Foundation

A common misconception about Medicare is that it is free and will cover all of a retiree’s medical costs in retirement. Medicare pays for some healthcare costs but won’t cover everything. There can also be late penalties for those who delay enrolling. Medicare Part B premiums, which provide outpatient coverage, are also increasing by 14.5% in 2022. This is an increase equal to $21.60 which is the largest dollar increase in the program’s history2. Since 2007, an enrollee’s Medicare Part B premium is based on income which means the more an individual makes, the more they pay in premiums. (Please see Income Related Monthly Adjustment Amount (IRMAA) brackets at for more information.) 

Another important point to keep in mind is that the majority of those with Medicare will also see a 5.9% cost-of-living adjustment (COLA) which increases an individual’s social security benefit. This is the largest increase in 30 years. This COLA increase should cover the increase in the Medicare Part B premium for most retirees.  


A Few Steps Participants Can Take Now to Prepare for Rising Healthcare Costs in Retirement:    

Utilize a Health Savings Account (HSA)  

An HSA is only available in conjunction with a high deductible health plan. If your company offers an HSA program, now may be a good time to remind employees of this benefit and how to enroll into the account. This can be an effective and tax efficient way to save for healthcare costs in retirement. These accounts are triple tax-free, meaning: 

  1. Contributions are made on a pre-tax or tax-deductible basis 
  1. Savings will grow tax-free 
  1. Withdrawals are also tax-free if used to cover qualified medical expenses 

There is also a lesser known fourth advantage – Contributions made through a payroll deduction avoid Social Security and Medicare taxes, commonly known as FICA (Federal Insurance Contributions Act) taxes.  

Consider Postponing Retirement  

Approximately, one-third of early retirees who claim Social Security benefits at age 62 are doing so to help pay for medical expenses until they turn age 65 and are eligible for Medicare3. It’s important for participants to know their healthcare options prior to retirement. If an individual does not have access to an employer-sponsored healthcare plan or a spouse’s plan, waiting at least until age 65 until they are eligible for Medicare can be beneficial. Alternative options include COBRA and private insurance, but both typically come with a higher cost. 

Social Security is always an important topic for participants getting ready for retirement. However, participants need more than education, they need personalized planning on how to tie Social Security in with their other savings. A retiree can start taking Social Security at age 62 but their benefit will be smaller throughout the duration of their life – monthly benefits may be reduced by 30%. The longer someone waits to collect Social Security benefits, the higher the benefit will be. The benefit increases between 7.5% and 8% every year that you wait from Full Retirement Age to age 70. 

Where a Retiree Lives Matters 

Where an individual lives in retirement could have an impact on healthcare costs. Some areas are more expensive than others. Although traditional Medicare coverage is the same throughout the country, Medicare Part C, also known as Medicare Advantage, and Part D which covers prescription drugs, could vary. These plans are sold privately and vary by state. In the case of Medicare Part C, these plans generally have a limited-service area so a retiree could lose coverage if they move.  

Income in Retirement 

Retirement plan participants should know that starting to save early and gradually increasing contribution amounts over the course of their careers are important steps in helping cover future healthcare costs in retirement. Keep in mind that usage of healthcare generally increases as an individual ages. A great tool participants can utilize if they are age 50 or older is the catch-up contribution. This tool allows an individual to contribute an extra $6,500 for a 401(k), 403(b) or 457 plan and an extra $1,000 for an IRA in 2022.  

We Are Here To Help 

Employers, plan providers, and human resources professionals: if you are looking for additional resources to help your participants prepare for healthcare costs in retirement, trusted retirement plan advisors at ABG Southwest are available to help you answer any questions you may have about planning for this extra expense in retirement. Contact us.