The rising cost of healthcare is a concern for many, but few truly understand the impact it can have, especially on retirees who are living on a fixed income. The average 65-year-old couple retiring today will need $280,000 to cover their medical expenses in retirement, according to a Fidelity study. This number continues to rise every year with inflation and advances in medicine.

If you haven't budgeted for this in your retirement plan, you could deplete your savings before you know it. Struggling to pay bills in the final years of your life is a stress that could then lead to more health problems. You're much better off proactively building the cost of healthcare into your retirement savings plan. Below, I'll explain how the $280,000 estimate can be interpreted, how you can budget for it, and how Medicare helps.

Stethoscope on $100 bills.

Image source: Getty Images.

What healthcare costs are covered by Medicare?

When you turn 65, you become eligible for Medicare, which covers some of your medical expenses in retirement, but not cover all. You'll still pay premiums for Part B coverage (medical insurance) and Part D coverage (prescription drugs), and there will be an annual deductible and coinsurance that you'll owe when you receive medical care. You'll need to pay all these costs with money from retirement savings, Social Security benefits or other income streams like annuities or dividends.

Then there are the medical devices and services that Medicare doesn't cover at all, including hearing aids, dental work, and long-term care. The average cost of a private room in a nursing home is more than $92,000 per year, according to the U.S. Department of Health and Human Services. If you end up needing long-term care, the $280,000 ballpark won't be nearly enough to cover the costs, so it's good to overestimate your goal to insulate your savings from shocks.

For reference, Fidelity's healthcare estimate included the cost of Part B and Part D premiums as well as deductibles and coinsurance for Parts A (hospital insurance), B, and D. It also includes the cost of certain common medical devices like hearing aids, but it does not include long-term care or dental expenses.

How to plan for healthcare costs in retirement

The first thing you need to do is estimate how much you'll spend on healthcare during retirement.

Evaluate your lifestyle habits and your family history. A reasonably healthy person with no family history of serious illness, may feel comfortable saving less than someone who doesn't exercise at all and already struggles with their health. If you think long-term care could be in your future, consider purchasing a long-term care insurance policy when you enter retirement.

In planning for medical costs in retirement, don't forget to take inflation into account. For the past 20 years, medical costs outpaced standard inflation by 70%. Inflation during that time has risen by about 2.2% per year, while medical costs have risen by 3.6% per year. This means today's $280,000 won't suffice by the time you're ready to retire. By these estimates, a couple retiring next year would need $290,000 ($280,000 plus 3.6% inflation), and a couple retiring the following year would need $300,500. Of course, these are just estimates and every retiree's healthcare costs will be different.

Once you have an estimate of how much money you need to save for healthcare in retirement, roll that goal into your monthly savings plan. You'll probably need to increase your retirement contributions to regularly put away enough every month.

Another option is to contribute the money to an HSA if you have a high-deductible health plan that offers one. You contribute pre-tax dollars to this account, and you won't pay any taxes when you withdraw the money either, as long as you use the money for a qualified medical expense.

When you turn 65, you can use money in an HSA for any purpose, not just medical expenses, so this is a potential income stream if you encounter non-medical surprise expenses in retirement. You will owe  taxes if you use it for nonmedical expenses, though, taxed at your usual income rate. Individuals are allowed to contribute up to $3,500 to an HSA in 2019, and families may contribute up to $7,000.

Health problems are always stressful, but they worsen if you can't afford them. If your existing retirement plan doesn't include coverage for signficant healthcare spend, go back and revise it. Should you not use all the savings you've allocated for healthcare, spend the extra money on yourself or leave to your heirs. But if you do need it, you'll sure be glad you have it.