Leaving the workforce behind has never been so expensive. Recent surveys put the average cost of retirement at somewhere between $1.5 million and $1.8 million. And if today's seniors are any indication, workers should expect a significant chunk of those savings to go toward healthcare costs.
About 13% of the typical senior household's spending went to medical expenses in 2022, according to the Bureau of Labor Statistics, and for some, this figure could be a lot higher. But the right strategy can help you reduce your out-of-pocket costs and prepare you for the ones you can't avoid.
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How much the average senior spends on healthcare
The average household headed by an adult 65 or older spent $57,818 in 2022 (the most recent year of available data). Of that, 13%, or $7,540, went to healthcare costs. Here's the full breakdown.
|
Healthcare Expense |
Average Cost for Household Headed by an Adult 65 or Older (2022) |
|---|---|
|
Health insurance |
$5,277 |
|
Medical services |
$1,142 |
|
Drugs |
$843 |
|
Medical supplies |
$278 |
Data source: Bureau of Labor Statistics.
Health insurance is by far the biggest expense, but it's not all from Medicare. Most seniors don't pay a Medicare Part A (Hospital Insurance) premium, and the Part B (Medical Insurance) monthly premium for most beneficiaries was just $170.10 in 2022. That adds up to about $2,041 annually. If we take that out, that still leaves us with $3,236 in other insurance-related costs.
This could be because many seniors purchase supplemental coverage to fill in Medicare's gaps. Private health insurance companies sell these policies, and they set their own premiums and coverage limits. The plan you choose has a big effect on how much you'll pay to keep the policy in force and what you'll pay out of pocket for medical care throughout the year.
The other things on the list -- medical services, drugs, and medical supplies -- aren't as easy to account for because they depend almost entirely on your personal health. A senior in fantastic shape may not need to visit the doctor at all or take prescription drugs. But someone else could have regular doctor visits and many medications.
You might be tempted to err on the optimistic side when estimating how much you'll need for retirement healthcare, but this can be dangerous. You can do your best to stay healthy, but injuries and illnesses can strike anyone at any time. And statistically, health problems become more common as people age.
How to budget for retirement healthcare without short-changing yourself
Rather than banking on good health, it's best to create a safety net to help you through whatever medical issues might arise in retirement. To do this, you'll need insurance and savings.
Retirement health insurance options
Medicare will likely be the foundation of your insurance coverage, as it's available to all seniors 65 and older. It also offers a large provider network and affordable premiums compared to many private plans.
Original Medicare consists of Parts A and B, but anyone expecting to need prescription drugs should consider adding a Part D plan. Private health insurers offer these, so costs and coverage options vary. If you decide to add one of these, you may do so during your initial enrollment period or the annual enrollment period. It'll give you another premium, but it'll probably reduce your out-of-pocket costs quite a bit if you need various prescriptions.
You may have noticed we skipped a letter when talking about Medicare coverage options. That's because Medicare Part C isn't an addition to Original Medicare. Medicare Part C -- or Medicare Advantage -- plans are an alternative private health insurers offer that includes all the benefits of Original Medicare, plus other perks. But these plans can also have more limited provider networks, and you can't see specialists without referrals.
A Medicare supplement, or Medigap, plan might be a better option if you want the flexibility of Original Medicare but need a little extra coverage. These are separate plans from private insurers that cover things that Medicare doesn't. This can include dental and vision care or hearing aids.
Personal savings for retirement healthcare
No matter which insurance policies you choose, you'll face some out-of-pocket healthcare costs in retirement. That makes personal savings a necessity. You can use the above Bureau of Labor Statistics data as a jumping-off point, but know that you could need a lot more, even if you're healthy.
We've all seen inflation drive up costs significantly over the past few years, and medical inflation usually rises faster than the general inflation rate. The general inflation rate is about 3.5% right now, but medical inflation is projected to be around 7% this year, according to PwC. This estimate didn't look at Medicare or retirement healthcare costs specifically, but it's not unreasonable to think they could also get more expensive over time.
You must decide how much you feel you need to save for retirement healthcare. Your health status, financial constraints, and life expectancy will play into this, but err on the side of caution as much as possible. It's better to save more than you need than to come up short in retirement.
