Why sequencing health care costs matters

Health care is one of the biggest single budget items in retirement. When costs arrive matters as much as how large they are. Sequencing lets you match the right funding source to each expense at the right time—reducing taxes, avoiding coverage gaps, and preserving liquid emergency savings.

A widely cited estimate from Fidelity shows that a 65‑year‑old couple can expect large cumulative health expenses in retirement, which underscores why sequencing is a planning priority (see Fidelity’s long‑term health care cost resources). Official Medicare guidance on coverage and enrollment timing is also essential when sequencing costs; mistakes can create penalties or gaps in coverage (Medicare.gov). For HSA tax rules and eligible distributions, refer to IRS guidance on HSAs (irs.gov).

Core categories to sequence

Break your retirement health costs into predictable buckets. Sequencing is easier once you know which bucket each expense belongs to.

  • Insurance premiums: employer retiree plans, Medicare Part B, Part D, Medicare Advantage, and Medigap (supplement) premiums. Premiums are recurring and usually come first in cash‑flow planning.
  • Cost‑sharing: deductibles, copays, coinsurance. These vary by plan and can create large year‑to‑year swings.
  • Prescriptions and maintenance care: ongoing medications, durable medical equipment, and routine visits.
  • Episodic care and emergencies: surgeries, hospital stays, and acute episodes that can spike expenses unexpectedly.
  • Long‑term care (LTC) and custodial support: home care, assisted living, and nursing home care; these costs often rise later in life and can be large and sustained.

A step‑by‑step sequencing process

  1. Inventory current costs and coverage
  • List current premiums, average yearly out‑of‑pocket medical spending, and ongoing prescription costs.
  • Review plan terms: in‑network providers, deductibles, and maximum out‑of‑pocket limits.
  1. Project cost trajectories
  • Use conservative escalation rates for medical inflation (commonly 3–6% annually depending on source). Model multiple scenarios: optimistic, expected, and adverse (higher medical needs).
  • For long‑term care, model the probability of needing care and the expected duration (many planning tools use a 25–50% probability of needing LTC for at least one spouse).
  1. Map expenses to funding sources by year
  • Near‑term (pre‑65 or early retirement): Expect to fund premiums and day‑to‑day care from liquid savings, bridge plans, or COBRA/individual market coverage. See bridge strategies to Medicare eligibility for options like short‑term policies and marketplace subsidies.
  • Medicare age (typically 65+): Premiums (Part B/Part D or Medicare Advantage) become primary. Coordinate secondary coverage or Medigap to cover gaps. See detailed Medicare planning resources on enrollment timing to avoid penalties.
  • Late life: Shift more funding toward liquid bucket or LTC insurance proceeds for sustained custodial care.
  1. Sequence account withdrawals and tax strategies
  • Use tax‑advantaged accounts intentionally: HSAs are the most tax‑efficient for qualified medical expenses (contributions may be tax deductible, grow tax‑free, and distributions for qualified medical expenses are tax‑free). Keep receipts for reimbursement later if you choose to let HSA funds grow.
  • Consider Roth conversions in years with low taxable income to reduce future required minimum distributions (RMDs) and potential Medicare income‑related surcharges (IRMAA). For related guidance, see using retirement plan conversions to manage future Medicare premiums.
  • Defer taxable account sales until years when tax brackets are favorable—unless you need cash for large medical events.
  1. Protect against volatility with insurance and reserves
  • Maintain a short‑term emergency fund (3–12 months of non‑discretionary expenses) and a dedicated health reserve for expected cost spikes.
  • Evaluate long‑term care insurance early (pricing and underwriting are age‑sensitive). If LTC insurance is not suitable, plan to use a combination of savings, Medicaid planning (if appropriate), and family care.

Practical rules of thumb I use with clients

  • Prioritize funding premiums first. If you lose coverage, costs can skyrocket and planning options may narrow.
  • Keep an HSA open and invest the balance once your short‑term medical costs are stable; HSAs are a powerful tax shield for health spending in retirement.
  • Use Roth conversions strategically to manage Medicare premium surcharges (IRMAA) that tie Part B/D premiums to modified adjusted gross income (MAGI).
  • Set a single ‘health bucket’ in your cash‑flow projection that aggregates predictable health costs for the next 5–10 years. Revisit annually.

Example sequencing plan (Illustrative)

Couple: both 65, entering Medicare

  • Year 0–2 (transition): Pay retiree or marketplace premiums from a liquid account. Use HSA balances for planned procedures. Keep 6 months of cash for immediate care events.
  • Year 3–10 (early Medicare): Pay Part B and Part D premiums from Social Security or monthly withdrawals. Use Medigap or Medicare Advantage plus Part D to manage out‑of‑pocket risk. Let invested HSA funds grow; reimburse yourself for past qualified expenses when convenient.
  • Year 11+ (late life): Shift more liquid assets toward anticipated LTC or custodial costs; activate LTC insurance benefits if available. Consider accelerating Roth conversions in low‑income years to reduce IRMAA exposure.

Tax and policy considerations

  • HSAs: Contributions and qualified distributions follow IRS rules (see IRS HSA page). After age 65, HSA funds can be used for non‑medical expenses without penalty but will be taxable—so plan withdrawals carefully.
  • Medicare IRMAA: Higher MAGI leads to higher Part B and Part D premiums. Large IRA withdrawals or capital gains in early retirement can increase premiums. Coordinate withdrawals and conversions to manage MAGI across the years when Medicare premium rules matter (generally when filing for Social Security and Medicare).
  • Medicaid and asset tests: If Medicaid might be part of a plan for LTC, understand state rules and look into legitimate, timely planning strategies—this is complex and often needs a specialist.

Tools and resources

  • Medicare.gov: enrollment timelines and coverage basics (authoritative for enrollment deadlines and penalties).
  • IRS HSA page (Publication 969 and HSA FAQs): rules for contributions and distributions.
  • Fidelity and other retirement research groups: provide long‑run health cost estimates and modeling assumptions to use as sanity checks.

Internal FinHelp resources that complement sequencing strategies:

Common mistakes to avoid

  • Relying only on national averages. Use your health history and family history to adjust models.
  • Forgetting to plan for non‑medical aging costs (mobility aids, home modifications) that are often not covered by Medicare.
  • Triggering higher Medicare premiums by taking large taxable withdrawals in the years the government looks back to set Part B/D rates (typically two years prior).

Checklist to implement sequencing this year

  • Gather last 2–3 years of medical spending and current insurance statements.
  • Confirm Medicare enrollment dates and whether you’ll need a bridge plan before 65.
  • Max out HSA contributions if eligible and invest the balance for growth.
  • Run at least two retirement cash‑flow scenarios (baseline and adverse medical shock).
  • Schedule a review of LTC options if you are age 55–70; premiums and underwriting change with age and health.

Quick case study (short)

A couple retiring at 66 had modest ongoing medical costs but a family history of dementia. We sequenced: keep 5 years of expected medical costs in liquid accounts, let HSA balances invested cover mid‑term costs, and buy a smaller, more affordable LTC policy that activates at later ages. They reduced their portfolio drawdown during the first 10 years and kept flexibility for later care needs.

Professional disclaimer

This article is educational and does not constitute personalized financial, tax, or medical advice. Rules for Medicare, HSAs, and tax treatment change periodically. Consult a licensed financial planner, tax advisor, and health care professional about your individual circumstances.

Selected authoritative sources

  • Medicare.gov: official enrollment and coverage guidance.
  • IRS: Health Savings Accounts (Publication 969) and HSA information pages.
  • Fidelity Investments research and health cost estimates.