Retirement planning tools often zoom in on the fun parts – that vacation home, your hobbies. But they usually skate over what might be your biggest expense: healthcare. Lots of people know more about their next car purchase than they do about what Medicare does and doesn’t cover. That gap in knowledge isn’t just risky. It could seriously blow up your retirement.
Let’s just say that a hypothetical couple saved hard, hitting $2 million for retirement. They planned trips, fun activities, even helping the grandkids. But they totally missed budgeting for healthcare costs beyond the basic Medicare premiums. When realistic numbers showed they might need another $300,000 just for healthcare, they were floored. Suddenly, their solid plan had a huge hole. Let’s make sure that doesn’t happen to you by getting real about what healthcare costs and how to get ready for it.
The True Cost of Healthcare in Retirement
The average 65-year-old couple retiring today should expect to spend approximately $300,000 to $350,000 on healthcare costs throughout retirement, not including long-term care expenses. This figure often shocks people because it’s so much higher than what they’re currently paying, especially if they’ve had employer-subsidized insurance during their working years.
This substantial figure includes Medicare premiums, supplemental insurance, deductibles, copays, prescription drugs, and services not covered by Medicare. What many don’t realize is that Medicare only covers about 62% of healthcare expenses, leaving retirees to fund the rest through supplemental insurance and out-of-pocket spending. And unlike your employer plans, Medicare comes with significant monthly premiums that increase annually.
Even more concerning is that these estimates typically assume average health conditions. If you develop a chronic illness or need specialized care, your costs could be substantially higher. Understanding these potential expenses isn’t about creating anxiety—it’s about developing a realistic plan that protects your retirement from healthcare-related financial shocks.
Breaking Down Medicare Costs
Medicare provides essential coverage for retirees, but understanding its structure and costs is crucial for accurate budgeting. Let’s break down the different parts and their associated expenses:
Medicare Part A (Hospital Insurance)
For most people, Part A has no premium if you or your spouse paid Medicare taxes for at least 10 years. However, it comes with a deductible of $1,632 (in 2025) for each benefit period. There are also potential coinsurance costs for hospital stays exceeding 60 days.
Many people assume that once they’re on Medicare, hospital stays are fully covered, but that’s not the case. A single serious illness requiring extended hospitalization could cost you thousands in out-of-pocket expenses under Part A alone.
Medicare Part B (Medical Insurance)
Part B covers doctors’ services, outpatient care, and some preventive services. Unlike Part A, Part B requires everyone to pay a monthly premium, which is income-based. In 2025, the standard premium is $174.70 per month, but it can go significantly higher for higher-income individuals through what’s called Income-Related Monthly Adjustment Amounts (IRMAA).
For high-income retirees (individuals with incomes above $103,000 or couples above $206,000), premiums can exceed $507.50 per month per person. That’s over $12,000 annually for a couple in the highest bracket—an expense many fail to factor into their retirement planning.
Beyond premiums, Part B has an annual deductible of $240 (2025) and typically covers only 80% of approved services. You’re responsible for the remaining 20% with no out-of-pocket maximum, creating potentially unlimited liability for expensive treatments.
Medicare Part D (Prescription Drug Coverage)
Part D premiums vary by plan but average around $55-$70 monthly in 2025. Like Part B, Part D also has income-related surcharges for higher-income individuals. The coverage structure includes a deductible (up to $590 in 2025) and various coverage phases with different cost-sharing requirements.
The complexity of Part D often catches retirees off guard, especially those who take multiple medications. Some drugs may be partially covered, others not at all, and out-of-pocket costs can fluctuate yearly as plans change their formularies or as your prescriptions change.
Supplemental Coverage Options
Given Medicare’s significant coverage gaps, most retirees purchase some form of supplemental coverage, either through Medicare Supplement (Medigap) policies or Medicare Advantage plans.
Medigap Policies
These private insurance policies are designed to cover the “gaps” in Original Medicare. Premiums vary by plan type, location, age, and insurer, but typically range from $150 to $500 monthly. While this represents an additional cost, Medigap policies provide valuable protection against the unlimited out-of-pocket exposure that comes with Original Medicare.
The best time to purchase a Medigap policy is during your initial enrollment period (the six months starting the month you turn 65 and enroll in Part B). During this period, insurers cannot deny you coverage or charge higher premiums based on health conditions. Missing this window could significantly impact your ability to obtain affordable supplemental coverage later.
Medicare Advantage Plans
These plans (Part C) provide an alternative way to receive Medicare benefits through private insurance companies. They typically include Part D drug coverage and often offer additional benefits like vision or dental care. Many have lower premiums than Medigap policies—some even have zero premiums beyond your Part B premium.
However, Medicare Advantage plans usually restrict you to network providers and require prior authorizations for certain services. They also typically have copays and coinsurance that can add up for those who use healthcare services frequently. While their out-of-pocket maximums (capped at $8,850 in 2025) provide some financial protection, you could still face significant costs before reaching that ceiling.
Long-Term Care: The Elephant in the Room
Perhaps the most significant healthcare expense that Medicare doesn’t cover is long-term care—assistance with daily activities like bathing, dressing, and eating. With nursing home costs averaging over $100,000 annually for a private room and continuing to rise faster than inflation, long-term care represents a major financial risk in retirement.
Approximately 70% of people over 65 will need some form of long-term care during their lifetime, with the average need lasting about three years. For some, particularly those with conditions like Alzheimer’s, care might be needed for a decade or more, potentially costing over a million dollars.
The options for addressing this risk include:
- Long-term care insurance, which has become increasingly expensive and harder to qualify for
- Hybrid policies that combine life insurance or annuities with long-term care benefits
- Self-funding through dedicated savings
- Medicaid planning (which requires essentially depleting your assets)
Each approach has significant trade-offs, but ignoring the possibility of needing long-term care is the riskiest strategy of all. This aspect of retirement healthcare planning deserves dedicated attention in your overall strategy.
Practical Steps for Estimating Your Personal Healthcare Costs
Generic averages only tell part of the story. To develop a more accurate estimate tailored to your situation, consider these steps:
Assess Your Current Health Status and Family History
Your current health conditions and family medical history provide important clues about your potential future healthcare needs. If you have chronic conditions like diabetes or heart disease, or if these run in your family, you’ll likely need to budget for higher healthcare costs throughout retirement.
For instance, someone with diabetes might spend an additional $1,500-$3,000 annually on supplies, medications, and more frequent doctor visits compared to someone without chronic conditions. Multiplied over a 20-30 year retirement, this represents a significant additional expense to plan for.
Understand Your Retirement Timing and Medicare Enrollment
If you plan to retire before age 65 (Medicare eligibility), you’ll need to budget for potentially expensive private insurance during the gap years. Pre-Medicare health insurance can cost $1,000 or more monthly per person, a shock for those accustomed to employer-subsidized premiums.
Additionally, failing to enroll in Medicare at the right time can result in permanent premium penalties—10% added to your Part B premium for each 12-month period you were eligible but didn’t enroll, lasting for the rest of your life. Proper timing and enrollment planning can avoid these unnecessary costs.
Project Your Retirement Income for Premium Planning
Since Medicare Part B and D premiums are income-based, your retirement income distribution strategy directly affects your healthcare costs. The premiums are based on your modified adjusted gross income from two years prior, creating a rolling impact that requires advance planning.
Strategic Roth conversions, careful timing of investment income, and thoughtful withdrawal sequencing can help manage your MAGI to potentially avoid premium surcharges. For higher-income retirees, these surcharges can add thousands of dollars annually to healthcare costs, making income planning a crucial component of healthcare cost management.
Research Local Costs for Services Medicare Doesn’t Cover
Medicare coverage gaps include routine dental care, vision care, hearing aids, and most alternative therapies. Research the costs of these services in your retirement location, as they can vary dramatically by region. Budgeting for these additional expenses—which can easily exceed $3,000-$5,000 annually for a couple—is essential for realistic healthcare planning.
Work With Us
Healthcare costs represent one of the most significant and least predictable expenses in retirement. The difference between thoughtful planning and simply hoping for the best can mean hundreds of thousands of dollars over your retirement lifetime. More importantly, it can mean the difference between receiving the care you need and making painful compromises due to financial constraints.
At True Life, our True Life Retirement Process incorporates healthcare cost analysis into your retirement strategy. We help you develop personalized projections based on your health status, retirement timing, income level, and coverage preferences. These projections become an integral part of your overall financial plan, so that healthcare costs don’t undermine the retirement confidence you’ve worked so hard to build. Ready to get realistic about healthcare in your retirement plan? Contact us today to see how the True Life Retirement Process can help you prepare for this crucial aspect of retirement planning.