Healthcare Cost Estimation in Retirement

Healthcare is one of the largest and most unpredictable expenses in retirement. Understanding Medicare costs, supplemental insurance options, and potential long-term care expenses helps you build a realistic retirement budget. This guide breaks down the numbers so you can plan accordingly.

Medicare Part B: Hospital Outpatient and Physician Services

Medicare Part B covers doctor visits, outpatient care, preventive services, and medical equipment. Most retirees pay a standard monthly premium that's deducted from their Social Security benefits.

2024 Part B Costs:

After meeting the deductible, you generally pay 20% of the Medicare-approved amount for services. There is no out-of-pocket maximum, which is why many retirees purchase supplemental coverage.

Medicare Part D: Prescription Drug Coverage

Part D is optional prescription drug coverage offered through private insurance companies. Premiums vary based on the plan you choose and your income level.

2024 Part D Costs:

Your actual Part D costs depend heavily on which medications you take. Someone with no prescriptions might pay only $30/month for basic coverage, while someone with expensive brand-name drugs could pay $100/month or more plus significant copays.

Medigap (Medicare Supplement) Plans

Medigap policies help cover the gaps in Original Medicare, such as the 20% coinsurance for Part B services. Plans are standardized by letter (A, B, C, D, F, G, K, L, M, N) with the same benefits regardless of which company sells them.

Plan G is currently the most popular option for new enrollees:

Typical Medigap Plan G Premiums (2024):

Premiums vary significantly by location, insurance company, and how the insurer prices policies (community-rated vs. issue-age vs. attained-age).

IRMAA: Income-Related Monthly Adjustment Amount

Higher-income retirees pay more for Medicare Part B and Part D. The Income-Related Monthly Adjustment Amount (IRMAA) is based on your modified adjusted gross income from two years prior.

2024 IRMAA Brackets (Single Filers):

2024 IRMAA Brackets (Married Filing Jointly):

Large IRA withdrawals, Roth conversions, or capital gains can push you into higher IRMAA brackets.

Long-Term Care Costs

Medicare does not cover most long-term care. If you need extended help with daily activities, you'll pay out of pocket, through long-term care insurance, or eventually through Medicaid (after spending down assets).

2024 Average Long-Term Care Costs:

These are national averages. Costs vary substantially by location. Major metropolitan areas and states like Connecticut, Massachusetts, and Alaska have significantly higher costs.

Average length of care needed:

• Women: 3.7 years on average
• Men: 2.2 years on average
• 20% of people will need care for 5+ years

Worked Example: Couple Estimating Annual Healthcare Costs

David and Susan are both 68 years old. They want to estimate their annual healthcare costs in retirement.

Their Situation:

• Both enrolled in Original Medicare (Parts A and B)
• Both have Part D prescription drug plans
• Both have Medigap Plan G
• Combined MAGI is $180,000 (below IRMAA threshold for couples)
• David takes one generic medication ($10/month copay)
• Susan takes two medications ($25/month combined copays)

Annual Healthcare Cost Estimate:

David and Susan should budget approximately $12,000-15,000 per year for healthcare, allowing for unexpected expenses and cost increases.

Cost projection over time:

These projections assume no major health events. A serious illness or need for long-term care would significantly increase costs.

Strategies to Manage Healthcare Costs

Control IRMAA exposure:

• Time large Roth conversions to stay below IRMAA thresholds
• Be aware that the year you retire may have unusually high income
• You can appeal IRMAA if you had a life-changing event (retirement, divorce, death of spouse)

Choose coverage wisely:

• Compare Medigap plans during open enrollment
• Review Part D plans annually during open enrollment (October 15-December 7)
• Consider whether Medicare Advantage might work for your situation

Plan for long-term care:

• Long-term care insurance (if purchased before age 60-65)
• Hybrid life insurance/LTC policies
• Self-insurance through dedicated savings
• Understanding Medicaid rules if you may need to spend down

Healthcare Costs by Retirement Phase

Before Medicare eligibility at 65, retirees must find coverage through COBRA, ACA marketplace plans, spouse's employer plan, or direct purchase. This gap period can be expensive, with ACA premiums potentially running $500-1,500/month per person depending on age and location.

Checklist: Planning for Healthcare Costs in Retirement

• Learn your Medicare Part B premium ($174.70/month standard in 2024)
• Research Part D plans and estimate prescription costs ($30-100/month plus copays)
• Get quotes for Medigap coverage ($150-300/month depending on age and location)
• Calculate your MAGI to determine if IRMAA surcharges apply
• Budget for dental, vision, and hearing costs not covered by Medicare
• Estimate total annual healthcare costs (typically $6,000-8,000 per person minimum)
• Plan for cost increases of 5-7% annually
• Evaluate long-term care insurance options if under age 65
• Research Medicaid rules in your state for potential long-term care needs
• If retiring before 65, research bridge coverage options (COBRA, ACA, spouse plan)
• Mark your calendar for Medicare open enrollment (October 15-December 7)
• Review Part D and Medicare Advantage plans annually to ensure best fit
• Keep records of life-changing events that may allow IRMAA appeals