The Growing Healthcare Burden for Retirees: How to Prepare

The Importance of Planning for Healthcare Costs in Retirement

Healthcare costs are a significant component of any retirement budget, and proper planning can make a substantial difference in financial preparedness. Many Americans overlook the importance of considering healthcare needs during their retirement years. According to Fidelity’s 2025 State of Retirement Planning survey, one in five Americans has never thought about their healthcare needs in retirement, and 17% have taken no action to plan for them.

Retirees should be aware that they may face considerable expenses. A 65-year-old today can expect to spend an average of $172,500 on healthcare throughout their retirement, which is an increase of more than 4% from the previous year, according to Fidelity’s 2025 Retiree Health Care Cost Estimate.

Understanding Medicare and Additional Expenses

It's crucial to understand what Medicare covers and what it doesn't. Some people mistakenly believe that Medicare is free, but in reality, it comes with monthly premiums and out-of-pocket costs. Additionally, it does not cover all medical expenses. For example, long-term care costs are not included in Fidelity’s estimates.

Fidelity assumes that retirees will use traditional, government-run Medicare. This includes premiums for Part B outpatient coverage and Part D drug coverage, which together account for 44% of the total cost. Most Americans qualify for premium-free Part A hospital coverage. Out-of-pocket costs such as copayments, coinsurance, and deductibles make up another 47%, while out-of-pocket prescription drug costs account for the remaining 9%.

In addition, Fidelity factors in spending on dental, vision, and hearing needs, which traditional Medicare does not cover. While some Medicare Advantage plans offer limited coverage for these services, they still do not fully address all potential healthcare expenses.

Medigap and Other Considerations

Fidelity’s estimate does not assume Medigap supplement coverage, which many individuals on traditional Medicare purchase to cover out-of-pocket costs. These policies are designed to cover those expenses for enrollees in aggregate. Whether someone pays predictable monthly premiums through a Medigap policy or faces unexpected costs without one, Fidelity’s total effectively accounts for those expenses.

Mike Casey, a certified financial planner and president of American Executive Advisors in Alexandria, Va., emphasizes the importance of budgeting for both routine healthcare expenses and unexpected crises like heart attacks, strokes, or cancer diagnoses. He recommends setting aside a rainy-day fund for medical emergencies outside of the pool used to generate retirement income. The goal is to create a liquid fund that can be accessed quickly without affecting retirement income or causing significant tax consequences. This could include investing in a high-yield savings account or a money-market fund.

Health Savings Accounts (HSAs) as a Powerful Tool

For those still working, health savings accounts (HSAs) are an effective way to save for various medical expenses. HSAs offer a rare triple tax advantage: contributions are made with pre-tax dollars, earnings grow tax-free, and withdrawals for qualifying medical expenses are also tax-free. This category includes a wide range of expenses, from diabetic socks to dental treatment, both now and in retirement.

To contribute to an HSA, individuals must be enrolled in a qualifying high-deductible health plan (HDHP). The IRS defines a 2025 HDHP as having a deductible of at least $1,650 for self-coverage and $3,300 for a family. Unlike flexible spending accounts, HSAs are not "use it or lose it." Even if you’re no longer contributing, you can access the funds at any time during retirement to pay for qualifying expenses.

According to Fidelity research, only three in 10 account holders invest their HSA assets, with most leaving their balances in cash and missing out on growth opportunities.

The Long-Term Benefits of HSAs

Consider a single 35-year-old male who opens an HSA this year and contributes the 2025 maximum of $4,300 for an individual. If he continues to max out his contributions every year, earns a 7% annual return, and doesn’t tap his assets while working, he would have $504,000 for healthcare expenses in retirement, according to an illustration by HealthView Services. Additionally, his lifetime tax savings would amount to $140,000.

Planning for healthcare costs in retirement is essential, and tools like HSAs can provide significant financial benefits. By understanding Medicare, considering additional insurance options, and utilizing HSAs, retirees can better prepare for the financial challenges that come with aging.