Don’t go broke paying for healthcare in retirement

By Altelisha "Lisha" Taylor, MD, MPH
Published April 16, 2024

Key Takeaways

  • If you retire early (and before you are eligible for Medicare), you will be in charge of procuring your own health insurance—this cost will be subsidized for some, but not all.

  • Medicare parts A through D come with unexpected expenses, which can add up to $800 per month or more. 

  • As you prepare for the cost of healthcare in retirement, consider various investment accounts and payment systems. Many accounts make allowances for withdrawals intended to pay for healthcare costs.

No matter how close you are to retirement, it’s good to have a plan in place to ensure you can afford adequate healthcare during your golden years. 

Here are a few things to understand when it comes to planning for healthcare costs in retirement. 

Healthcare is expensive at any age

When you aren’t eligible for health insurance from your job (because you’ve retired early or stopped working), you can buy it on your own from federal or state healthcare exchanges online. The problem, however, is the price. 

When you were working, your employer most likely paid a significant portion of your health insurance.

"When you have to buy health insurance on your own, you might experience some sticker shock."

Lisha Taylor, MD, MPH

When healthcare is not subsidized by their employer, most people pay around $500 (for a single person) to $2,000 (for a family) in health insurance premiums per month. Once you add in other costs, such as co-insurance, co-pays, and prescriptions, the amount of money you spend on healthcare purposes easily doubles.

Many retirees are eligible for a subsidy, which helps, but they still pay substantially more out-of-pocket for healthcare than those who are working.

Two other options for health insurance in early retirement is to opt for COBRA or to pick one of the bare bones plans put in place by the Trump administration. Both of these options are temporary solutions that may be helpful if you are already in your 60s and only need health insurance until you qualify for Medicare. 

COBRA allows you to continue the health insurance you had at your last job (by paying the full cost of the premiums yourself) for up to 18 months. Plans under "Trumpcare" have lower premiums but high deductibles and many exclusions, including some medications and mental health care, among others. These plans aren’t ideal for everyone, but may be an attractive option if you only need health insurance for a short time. 

You may be surprised to know that many people in early retirement actually end up getting a part-time job.

They may be looking for more social interaction or they may just want better health insurance options that are partially paid for by their employer. If you’ve considered taking on a job during retirement, such as teaching or consulting, this can be a decent option. 

The finer points of Medicare

Once you turn 65, you will likely be eligible for Medicare. While this may feel like the golden ticket, many people are surprised to find that Medicare isn’t free or it’s not as comprehensive as they thought. 

Let’s break down Medicare and its cost: 

Medicare part A

Far from comprehensive, Medicare part A only covers certain things—primarily hospitalizations and skilled-nursing facilities (SNFs) after certain hospital admissions.

When you were working, around 2% of your paycheck was most likely deducted for this. And as long as your paycheck reflected these deductions for 10 years, you will be eligible to receive these benefits. 

Remember, while you may not have to pay a monthly premium for Medicare part A, you will still have to pay your full deductible if you get hospitalized—around $1,600 per year in 2024. And if you end up needing a SNF, the first 20 days are covered at no cost to you—after that, you can expect a copayment of around $200 per day, if not more.  

Medicare part B 

This is what covers the cost of doctor’s visits, outpatient hospital services, durable medical equipment, lab tests, and other physician services, and it is not free. You have to pay a monthly premium ranging from $174 to $594 per month, depending on your retirement income, as well as an annual deductible before the insurance kicks in—around $240 for 2024.

Medicare part C 

This is actually called Medigap insurance, or Medicare Advantage. This part helps to pay for things that are not fully covered by Medicare parts A, B, and D, and is usually purchased from private health insurance companies. Many retirees purchase this coverage to help with the cost of copays, deductibles, and other expenses. 

The cost for this kind of insurance varies widely depending on how comprehensive the coverage is and which provider you buy from. 

Medicare part D 

This covers the cost of prescription drugs and has a monthly premium of around $40. It also requires you hit a certain deductible and that you pay coinsurance costs for various medications. 

My point? Healthcare isn’t free in retirement. The average retired person spends $800 to $1,200 per month in healthcare premiums. When you factor in the cost of copays, co-insurance, and deductibles, this amount can easily double.

Which accounts to use for healthcare costs

In the US, healthcare is expensive—at any age. As you get older, you are also more likely to have more healthcare needs.

Related: Retiring early? Consider these 5 health insurance options

Relieve yourself of some of the financial burden and consider these advantageous accounts:

401k or 403b

These are retirement accounts, but you can use the money saved here to pay for healthcare regardless of how old you are when you retire.

While you typically cannot withdraw money from this account before age 59.5 without paying a penalty, an exception is when paying for healthcare premiums if you are not employed.

457b

These are pre-tax, deferred compensation plans that are available to employed physicians at nonprofit organizations or academic institutions making above a certain amount. You can contribute money to this account, invest it, and then get access to the money and its profits once you leave the employer. You can choose whether you want to receive the money in this account as a lump sum or in small payments over time after a certain age. 

HSA

This is a health savings account (HSA) which is a type of tax-advantaged account open to people who have high-deductible health insurance plans.

If you are eligible, you can contribute money from your paycheck to this account tax-free, invest it, let it grow, then withdraw the money tax-free—as long as it is used for healthcare expenses. 

Social Security

Many people will have access to Social Security benefits in retirement, and you can use it for living expenses, healthcare, or whatever else you desire. Be aware that you are not be eligible to receive this money until you reach a certain age, so you may need another way to pay for healthcare expenses until then.

What this means for you

Regardless of when you retire, be sure to prepare for the significant costs associated with healthcare. If you retire early, you may need to buy your own from the federal marketplace. If you are age 65, you may be eligible for Medicare. However, Medicare comes with its own potentially unexpected costs. Although healthcare can be expensive, you can take advantage of certain investment accounts to bypass the usual penalties and fees to pay for medical care—even if you retire early.

Read Next: Retirement investing: Everything you need to know
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