How to Estimate Health Care Costs Before Retirement

Why planning for health care costs matters

Health care is one of the largest variable expenses in retirement. Underestimating it can force you to cut discretionary spending, delay retirement, or drain tax‑advantaged savings. Accurate estimates let you set aside the right amount, choose insurance options wisely, and decide whether to buy long‑term care (LTC) protection. In my practice helping clients plan retirement income, the couples who model health costs with scenarios (best, likely, worst) make fewer mid‑retirement changes and keep more of their portfolio intact.

A step‑by‑step method to estimate costs before retirement

1. Start with baseline data

• Collect current yearly spending for your household: premiums (employer or private), deductibles, co‑pays, prescriptions, dental, vision, and any ongoing therapies. If you don’t have recent numbers, use national medians from sources like the Kaiser Family Foundation to build initial assumptions (KFF).
• Use your medical history: chronic conditions, planned surgeries, and family history that increases risk will raise projected costs.

1. Project timing relative to Medicare

• Determine your planned retirement age and Medicare eligibility (usually age 65). If you retire before 65, plan how you’ll fill the coverage gap—COBRA, private market plans, or spouse/spousal coverage. Early retirees often need bridge strategies until Medicare starts (see bridging strategies for early retirees).
• Note that Medicare rules and premiums update yearly; link your plan to current rates on Medicare.gov to avoid using stale numbers (Medicare.gov).

1. Break costs into categories and forecast each

• Premiums: Employer plan or ACA marketplace premiums if retiring before 65; after 65, include Part B, Part D, and possible Medigap or Medicare Advantage premiums.
• Out‑of‑pocket (OOP) medical: Deductibles, co‑insurance, and co‑pays. Use recent spending and increase it by an assumed medical inflation rate (historical medical inflation often outpaces CPI by 1–2 percentage points).
• Prescriptions: Consider tier changes, specialty drugs, and whether you’ll hit a Medicare Part D coverage gap or catastrophic threshold.
• Dental, vision, hearing: These are commonly excluded from Medicare—budget separately.
• Long‑term care (LTC): Model a range—no LTC, moderate LTC needs, and high LTC needs (nursing home, assisted living). EBRI and other studies show large variation in LTC costs by state and service level; model local costs.

1. Use scenario planning (best, expected, worst)

• Best case: Healthy, low OOP, minimal LTC.
• Expected: Mild chronic conditions, regular prescriptions, some higher OOP in later years.
• Worst case: Major surgery, prolonged rehab, and LTC services.

1. Convert annual healthcare cost estimates into retirement income needs

• Add projected annual health costs to your retirement income needs each year and project through typical life expectancy scenarios. Don’t forget taxes: some distributions (e.g., traditional IRA withdrawals) may affect Medicare IRMAA surcharges and taxation of Social Security benefits.

1. Build buffers and funding strategies

• Maintain an emergency medical fund (3–12 months of expected OOP costs depending on risk tolerance).
• Consider targeted insurance (Medigap vs. Medicare Advantage), LTC insurance, and hybrids. In many cases, a mix of HSA savings (pre‑65 contributions and growth), a dedicated taxable account, and LTC policies creates a balanced approach.

Practical tools and sources to use

• Medicare.gov: enrollment windows, plan comparison tools, and current premium/deductible figures (Medicare.gov).
• Kaiser Family Foundation (KFF): reports on retiree health spending and prescription trends (KFF).
• Employee Benefit Research Institute (EBRI): studies on retiree out‑of‑pocket spending and long‑term care cost patterns (EBRI).
• Marketplace calculators and private insurer quotes if you’ll rely on ACA plans before Medicare takes effect.

How to use HSAs and tax‑advantaged accounts

Health savings accounts (HSAs) are powerful for pre‑Medicare years: contributions are tax‑deductible, investment growth is tax‑deferred, and qualified withdrawals are tax‑free. Many advisors (and I in practice) encourage maxing contributions for years before retirement when eligible, then using HSA funds for qualified medical expenses in retirement. Note: after you enroll in Medicare you can no longer contribute to an HSA, but you can continue to use the balance for qualifying medical costs. See our detailed guide to HSA strategies for retirement for specifics.

(Internal links: “How HSAs Work as a Retirement and Health Planning Tool” — https://finhelp.io/glossary/how-hsas-work-as-a-retirement-and-health-planning-tool/.)

Medicare specifics to model (and common pitfalls)

• Premiums and deductibles change yearly: use Medicare.gov for current Part A/B/D numbers and the annual open enrollment period to reevaluate plan choices.
• Part B premiums are income‑related for higher earners (IRMAA). Plan withdrawals and tax planning can affect IRMAA and Part B/Part D premiums — discuss timing of Roth conversions and large RMDs with a tax advisor (Social Security and Medicare rules).
• Supplemental coverage: Medigap policies cover many gaps left by Original Medicare but increase monthly premiums. Medicare Advantage plans can have lower premiums but variable provider networks and out‑of‑pocket limits; run realistic utilization scenarios.

(Internal link: “Medicare Basics: What Retirees Need to Know” — https://finhelp.io/glossary/medicare-basics-what-retirees-need-to-know/)

Long‑term care (LTC) planning

LTC is the most volatile single category. Options include:

• Self‑funding from retirement assets (common but risky if needs are prolonged).
• Traditional LTC insurance (best if bought in your 50s–early 60s when premiums are lower).
• Hybrid life/LTC policies that combine death benefits with LTC riders.
• Medicaid planning for low‑income scenarios (be mindful of lookback rules).

Costs vary dramatically by state and care type—use state nursing home cost reports and EBRI or Genworth data when modeling. If you’re age 50–65, at least consider a formal LTC decision framework; delaying the decision can sharply raise costs later.

(Internal link: “Long‑Term Care Planning Basics” — https://finhelp.io/glossary/long-term-care-planning-basics/)

Example calculation (simplified)

Couple retiring at 66 (Medicare eligible):

• Annual Part B & D combined estimate: use current Medicare.gov figures (example placeholders are not used here; check Medicare.gov).
• Supplemental Medigap premiums: $2,000–$4,000 per person (varies by plan/state/age).
• OOP medical: $3,000 per person/year baseline, rising with medical inflation.
• Prescriptions and dental/vision: $1,500 per person/year.
  Total estimated baseline: $10,000–$20,000 per couple/year; with serious health events or LTC, add tens of thousands. Use scenario planning to see whether your portfolio, guaranteed income, and HSAs cover these amounts.

Common mistakes to avoid

• Assuming Medicare covers everything. It doesn’t cover routine dental, vision, or many long‑term care costs (Medicare.gov).
• Ignoring state differences in LTC and provider costs.
• Forgetting IRMAA and how taxable income affects Medicare premiums.
• Failing to update projections annually or after major health events.

Actionable checklist before you retire (6–12 months ahead)

• Run actual‑spend analysis: collect 3 years of medical bills and insurer explanations of benefits (EOBs).
• Get Medicare quotes and check your Part B/D choices.
• Price Medigap vs. Medicare Advantage for your likely utilization.
• Evaluate HSA balances and investment allocation.
• Get LTC cost quotes for your area and decide on a funding strategy.
• Add a 10–25% buffer for unexpected or infrequent high‑cost events.

FAQs (brief)

Q: Should I buy long‑term care insurance?
A: Consider buying in your 50s–early 60s if you want traditional LTC insurance and are healthy; otherwise, review hybrid options and self‑funding tradeoffs.

Q: How often should I revise my estimate?
A: Revisit annually and after any major health or financial events.

Q: Can HSAs pay LTC premiums?
A: Under limited circumstances, HSA funds can pay qualified long‑term care insurance premiums subject to IRS limits—consult IRS guidance and a tax advisor (IRS).

Sources and further reading

• Medicare.gov — official Medicare information and plan tools (https://www.medicare.gov)
• Kaiser Family Foundation (KFF) — retiree health spending reports (https://www.kff.org)
• Employee Benefit Research Institute (EBRI) — studies on retiree OOP healthcare costs (https://www.ebri.org)
• IRS — HSA rules, Form 8889, and tax guidance (https://www.irs.gov)

Professional disclaimer: This article is educational and not personalized financial, tax, or medical advice. For advice tailored to your situation, consult a certified financial planner, tax professional, and licensed health advisor.

If you’d like, I can help convert your personal medical expenses into a sample projection or a downloadable spreadsheet to test scenarios.