How do retired people afford health care?

According to a 2025 Fidelity estimate, a 65-year-old individual may need approximately $172,500 in after-tax savings to cover healthcare expenses throughout retirement. Affording healthcare in your later years requires careful planning and a deep understanding of the available options, a critical part of knowing how do retired people afford health care.

Quick Summary

Retired individuals typically afford healthcare through a combination of government programs like Medicare, strategic use of savings vehicles like Health Savings Accounts (HSAs), and other supplemental insurance options. Financial planning and understanding the nuances of these plans are crucial for managing costs effectively.

Key Points

• Medicare is the core: Most retirees rely on Medicare, but they must understand its different parts (A, B, C, D) and costs.

• Plan for coverage gaps: Medigap policies or Medicare Advantage plans are essential for covering expenses not fully paid by Original Medicare.

• Leverage tax-advantaged accounts: Health Savings Accounts (HSAs) offer a triple tax advantage for covering medical expenses, including some premiums.

• Manage your income: Strategic withdrawals from retirement accounts can help control your Modified Adjusted Gross Income (MAGI) to avoid higher Medicare premiums (IRMAA).

• Address long-term care needs: Since Medicare doesn't cover long-term custodial care, consider long-term care insurance or other savings plans.

• Explore options for early retirement: Before age 65, options like ACA Marketplace plans, COBRA, or a spouse's plan are crucial for bridging the coverage gap.

• Seek government assistance: Retirees with lower incomes may qualify for Medicaid or free counseling through State Health Insurance Assistance Programs (SHIPs).

Navigating Medicare: The Cornerstone of Senior Healthcare

For most retirees, Medicare is the primary health insurance program. However, it does not cover all costs.

Original Medicare: Parts A and B

Original Medicare includes:

• Medicare Part A (Hospital Insurance): Covers inpatient care, skilled nursing, hospice, and some home health. Often premium-free if you paid Medicare taxes for enough years. Includes deductibles and coinsurance.
• Medicare Part B (Medical Insurance): Covers doctors, outpatient care, medical supplies, and preventive services. Requires a monthly premium, which can be higher for those with higher incomes (IRMAA). Includes deductibles and 20% coinsurance for most services.

Medicare Advantage (Part C) vs. Medigap

Retirees can choose between:

• Medicare Advantage (Part C): Private plans combining Parts A, B, and often D, with potential extra benefits like vision and dental. Plans often have $0 premiums but require paying the Part B premium. May have limited provider networks.
• Medigap (Medicare Supplement Insurance): Private policies filling gaps in Original Medicare costs (deductibles, copays, coinsurance). Allows seeing any provider accepting Medicare nationwide. Requires a separate monthly premium in addition to Part B.

Comparison of Medicare Advantage vs. Medigap

Feature	Medicare Advantage (Part C)	Medigap (Medicare Supplement)
Coverage	Bundles Parts A, B, and often D; often includes vision/dental.	Fills gaps in Original Medicare (A & B) costs.
Provider Network	Generally a managed care network (e.g., HMO or PPO).	Allows you to see any provider who accepts Medicare.
Monthly Premium	May have a low or $0 premium, plus your Part B premium.	Separate premium paid to private insurer, plus Part B premium.
Referrals	Often required to see specialists in HMO plans.	Generally not required.
Out-of-Pocket Max	Includes an annual maximum on out-of-pocket costs.	No out-of-pocket maximum on its own; depends on plan coverage.
Prescription Drugs	Often bundled with the plan (MA-PD).	Requires a separate Part D plan.

Strategic Use of Savings Vehicles

Using savings tools strategically helps manage retirement healthcare costs.

Health Savings Accounts (HSAs)

HSAs offer a triple tax advantage for those with high-deductible health plans. Contributions grow tax-free and withdrawals for qualified medical expenses are tax-free. After age 65, funds can be used for any purpose, though non-medical withdrawals are taxed as ordinary income. HSAs can also pay for certain Medicare and long-term care insurance premiums.

Tax-Efficient Retirement Withdrawals

Managing your income, or Modified Adjusted Gross Income (MAGI), is key to controlling Medicare premiums, which are higher for high earners (IRMAA). Withdrawing strategically from different account types (taxable, tax-deferred, Roth) can help manage MAGI. Qualified Charitable Distributions (QCDs) from an IRA after age 70.5 can also reduce MAGI.

Planning for Long-Term Care

Long-term care is a significant expense not typically covered by Medicare. Options include:

• Long-Term Care (LTC) Insurance: Covers services like in-home care or skilled nursing facilities. Best purchased in your 50s or early 60s.
• Hybrid Policies: Life insurance with riders that allow using the death benefit for long-term care.
• Self-Funding: Using personal savings and investments to cover costs.

Solutions for Early Retirees (Pre-Medicare)

Retiring before age 65 requires bridging the healthcare coverage gap:

• Affordable Care Act (ACA) Marketplace Plans: Losing job coverage allows enrolling during a Special Enrollment Period (SEP). Subsidies based on income can make plans more affordable.
• COBRA: Allows temporary continuation of employer coverage (up to 18 months), but is often expensive as you pay the full premium plus fees.
• Spousal Coverage: Joining a working spouse's employer plan is often a cost-effective option.

Government Assistance and Other Resources

Additional programs can help retirees, especially those with limited income.

• Medicaid: Provides free or low-cost coverage for low-income individuals and can supplement Medicare. Some states have expanded eligibility.
• State Health Insurance Assistance Programs (SHIPs): Offer free counseling on Medicare and other insurance options.
• Retiree Health Benefits: A few employers still offer health coverage to retirees; check with your former employer.

Conclusion

Affording healthcare in retirement requires comprehensive planning, including utilizing savings strategies, understanding Medicare options, and preparing for long-term care. Proactive decisions regarding tax-advantaged accounts, Medicare plan selection, and potential long-term care needs are crucial for financial security and health in retirement. For official Medicare information, visit https://www.medicare.gov.

Frequently Asked Questions

What is the average cost of healthcare for retirees?

According to a 2025 Fidelity estimate, a 65-year-old individual may need approximately $172,500 in after-tax savings to cover healthcare expenses in retirement, though this amount varies widely based on health and longevity.

Does Medicare pay for all my medical bills in retirement?

No, Medicare does not cover all medical expenses. Original Medicare (Parts A and B) requires beneficiaries to pay deductibles, copayments, and coinsurance. Many retirees purchase supplemental coverage like Medigap or a Medicare Advantage plan to help cover these out-of-pocket costs.

What is the difference between Medicare Advantage and Medigap?

Medicare Advantage (Part C) is an all-in-one plan from a private insurer that replaces Original Medicare, often including drug coverage and extra benefits. Medigap is supplemental insurance that works with Original Medicare to cover out-of-pocket costs and does not have provider network restrictions.

How can an HSA help retired people afford health care?

An HSA is a powerful tool because contributions, growth, and qualified medical withdrawals are all tax-free. Retirees can use accumulated HSA funds for Medicare premiums and other out-of-pocket medical expenses. After age 65, funds can be withdrawn for any reason without penalty, though they will be taxed if not used for qualified medical expenses.

What if I retire before I am eligible for Medicare?

If you retire before age 65, you can get coverage through options like COBRA (continuing your employer's plan temporarily), a plan from the Health Insurance Marketplace (with potential subsidies based on income), or through your spouse's employer-sponsored plan if they are still working.

Do I need to plan for long-term care costs?

Yes, it is wise to plan for long-term care, as Medicare generally does not cover long-term custodial care. Options include purchasing long-term care insurance or self-funding through investments and savings.

How can I lower my Medicare premiums?

Your Medicare premiums for Parts B and D can be influenced by your income. Retirees can strategically manage their Modified Adjusted Gross Income (MAGI) through tax-efficient withdrawal strategies, such as using tax-free Roth accounts, to potentially reduce or avoid income-related premium surcharges.