How Much Will Healthcare Actually Cost?
Fidelity's annual Retiree Healthcare Cost Estimate — the most widely cited benchmark — projects that a 65-year-old individual will need approximately $165,000 in today's dollars to cover healthcare costs throughout retirement. For a couple, the combined estimate exceeds $330,000. These figures exclude long-term care, which can add hundreds of thousands more in costs for those who need it.
Healthcare costs inflate at roughly 5-6% annually — significantly faster than the general 2-3% CPI rate. At 5% healthcare inflation, a $165,000 cost in today's dollars becomes $269,000 in 10 years and $438,000 in 20 years. Plans that assume 2-3% general inflation for healthcare expenses systematically understate the real burden.
These projections include Medicare premiums, deductibles, copays, coinsurance, dental, and vision — but not long-term care. They assume Medicare enrollment at 65 and average utilization based on demographic data. Individual experience will vary significantly based on health status, geography, and plan selection.
Understanding Medicare: Parts A, B, D, and Medigap
Medicare is not free, and it does not cover everything. Understanding the four parts is essential for budgeting accurately:
IRMAA: The Medicare Surcharge High Earners Miss
Income-Related Monthly Adjustment Amount (IRMAA) surcharges add significant costs for retirees with higher incomes. Medicare uses your income from two years priorto set your current-year Part B and Part D premiums. If your MAGI was above $103,000 (single) or $206,000 (married) in 2023, you are paying IRMAA surcharges on your 2025 Medicare premiums.
The surcharges are steep: a couple with 2023 MAGI of $400,000 pays an additional $5,148 per year in Part B premiums alone (on top of the standard $185/month each), plus additional Part D surcharges. This "two-year lookback" creates an important planning consideration: a large Roth conversion, capital gain recognition, or IRA distribution in a given year can spike IRMAA costs two years later. Retirees should model IRMAA thresholds when planning major income events.
Long-Term Care: The True Wildcard
Medicare covers skilled nursing facility care only for short-term recovery from an acute illness — not the long-term custodial care (assistance with bathing, dressing, eating) that most people associate with nursing homes. Medicaid covers long-term care only after you have spent down most of your assets.
The median annual cost of a private room in a nursing home is over $108,000; home health aide care averages $68,000 per year. The average long-term care need lasts about 3 years, but significant variation exists — some people never need it, while others require care for 5+ years. For a couple, the probability that at least one partner will need significant long-term care exceeds 70%.
Traditional long-term care insurance has become expensive and is offered by fewer insurers. Hybrid life/LTC policies offer a death benefit alongside the LTC coverage, addressing the "use it or lose it" concern with traditional LTC policies. Self-insuring (reserving a portion of your portfolio for potential LTC costs) is another option for those with substantial assets. Anyone considering LTC insurance should buy before age 60 — premiums increase dramatically in the mid-60s and beyond.
The HSA: Your Best Tool for Healthcare Funding
A Health Savings Account funded consistently during working years and invested in equities is the single most tax-efficient way to fund retirement healthcare costs. HSA contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses — which in retirement include Medicare premiums for Parts B, D, and Medicare Advantage — are completely tax-free. A family contributing $8,550/year (the 2025 family limit) and investing the balance in a broad equity fund for 20 years accumulates roughly $350,000-400,000 in purchasing power — all available tax-free for healthcare.
If you have an HSA-eligible health plan, maximizing HSA contributions should rank alongside maxing your 401(k) in your savings priority. The triple tax advantage makes the HSA the most powerful savings vehicle in the tax code specifically for the expense that will be your largest and most unpredictable cost in retirement.