By: Elaine Floyd, CFP®

Customized Strategies for Your Financial Security

Nearly everyone agrees on the importance of planning for health care expenses in retirement. However, this task can feel overwhelming due to the many unknowns: the future cost of health care, your personal health care needs based on past experiences, your individual life expectancy (which determines how long premiums must be paid), and the potential need for long-term care—the most dreaded possibility for many.

Fidelity has popularized the idea of starting retirement with a lump sum to cover health care costs throughout your lifetime. Their latest estimate suggests that a 65-year-old retiring this year will spend an average of $165,000 on health care expenses and medical expenses during retirement. However, because no one is truly “average,” Fidelity also provides a tool that allows you to personalize this figure by inputting your current age, retirement age, and life expectancy. For example, if you plan to retire at 68 and have a life expectancy of 93, today’s 65-year-old couple would need $392,786 at the start of retirement to fund lifetime health care expenses.

The advantage of such tools is their flexibility; you can see how changes to basic assumptions affect the estimate. However, it’s important to understand what these estimates include. According to Fidelity, their calculation accounts for cost-sharing provisions like deductibles and coinsurance associated with Medicare Part A and Part B (inpatient and outpatient medical insurance), as well as premiums and out-of-pocket costs for Medicare Part D (prescription drug coverage). It also considers services excluded by Original Medicare. Notably, the estimate does not cover other health-related expenses such as over-the-counter medications, most dental services, and long-term care.

While Fidelity’s estimate can serve as a helpful starting point, the reality is that planning for health care expenses — like all financial planning —should be tailored to your unique circumstances. Let’s delve into key areas where we can customize health care planning for you.

Understanding IRMAA: The Income-Related Monthly Adjustment Amount

For 2025, the base Medicare Part B premium is $185. This figure represents about 25% of the total cost, with the government subsidizing the remaining 75%. If the government didn’t assist, the full premium would be $740 ($185 x 4). Since 2007, higher-income beneficiaries have been required to pay more through the Income-Related Monthly Adjustment Amount (IRMAA).

A recent paper, titled How Medicare “Means Testing” and Tax-Deferred Savings Threatens Retirement Security, raises concerns about how IRMAA can significantly increase health care spending for high earners. This cost is further exacerbated by rising balances in tax-deferred retirement accounts. Required Minimum Distributions (RMDs) from these accounts could push high earners into higher IRMAA tiers, resulting in substantial premium surcharges over time.

For instance, a hypothetical couple, age 50 today, with $1 million in tax-deferred savings, contributing $38,000 annually until retirement at 66 and earning a 6% return, would have $4.65 million in their account by age 70. Their RMDs would total $169,689. Over a 25-year retirement to age 90, they could pay $763,193 in Medicare Part B and Part D premiums, with $343,279 attributable to IRMAA surcharges.

While not all clients will face IRMAA-related costs, it’s important to identify strategies to mitigate this risk early. Let’s explore ways we can help you prepare proactively.

Strategies to Mitigate Retirement Health Care Costs

Maximizing Health Savings Accounts (HSAs)

One of the best tools for addressing health care expenses is an HSA. For 2025, the family contribution limit is $8,550, with an additional $1,000 catch-up contribution for individuals over 55. Prioritizing funding your HSA after capturing your employer’s 401(k) match can yield significant benefits. Unlike flexible spending accounts, HSAs are not use-it-or-lose-it, allowing you to let the account grow tax-free. Use other funds for current medical expenses and let your HSA serve as a long-term health care funding source.

Shifting 401(k) Contributions to Roth Accounts

Traditional advice often suggests contributing to tax-deferred accounts while you’re in a high tax bracket. However, this approach doesn’t always account for the IRMAA “surtax.” Over time, growing RMDs and IRMAA costs could result in a combined tax rate higher than anticipated—for example, a 38.5% rate for our hypothetical couple at age 80.

Instead, consider shifting contributions to a Roth 401(k) or Roth IRA. Current tax rates are historically low and could rise in the future. If a Roth option isn’t available, contribute to tax-deferred accounts up to the employer match and allocate additional savings to taxable investment accounts, using tax-advantaged strategies to minimize capital gains.

Roth Conversions

The window between retirement and age 73 is often ideal for Roth conversions. However, high-earning clients may find their tax brackets remain elevated due to future IRMAA costs and higher-than-expected tax rates. The earlier you complete a Roth conversion, the more funds you can shelter under the tax-free umbrella, potentially reducing long-term expenses.

The Top 5 Funding Reminders for Roth IRAs

Need for Long-Term Care

The report Long-Term Services and Supports for Older Americans: Risks and Financing Research Brief says that about half (52%) of Americans turning 65 today will develop a disability serious enough to require long-term care; most will need assistance for less than two years.

A Vanguard-Mercer research paper, Planning for Health Care Costs in Retirement concludes that half of individuals will incur no long-term care costs; a quarter will consume less than $100,000, while 15% will consume more than $250,000.

So you might say the need for long-term care is luck of the draw: either you’ll need it or you won’t; if you need it, you could spend a lot or a little. Here are some of the factors that influence the need for long-term care:

  • Age—The older you are (that is, the longer you are expected to live), the greater the likelihood of needing long-term care.
  • Gender—Women tend to outlive men so they are more likely to live home alone when they are older.
  • Disability—69% of people age 90 or older have a disability.
  • Health status—Chronic conditions such as diabetes and high blood pressure make you more likely to need long-term care.
  • Living arrangements—If you live alone you are more likely to need paid care than if you live with a partner.

Another factor to take into consideration are your feelings about it. Some are willing to take their chances and hope they’ll be among the 50% who won’t have any long-term care costs, either because they think they’ll die before needing it or won’t mind turning to family or the government (i.e., Medicaid) for assistance. Others will want to make sure they’ll have any potential long-term care costs covered, even if it means buying an insurance policy or setting aside funds for that purpose that they may never need (in which case the fund becomes their legacy).

Life Expectancy

Life expectancy figures into health care planning in two ways: The longer you live, 1) the more you’ll pay in insurance premiums, and 2) the more likely you’ll need long-term care due to the frailties of old age. Although life expectancy can never be predicted with certainty, the Actuaries Longevity Illustrator lets you look at the odds. If your chances of living to the average life expectancy are 50%, what age would you have to plan for in order to have a 20% or 10% or 0% chance of running out of money? The Longevity Illustrator can show you, based on your age now, your gender, whether or not you smoke, and how you rate your health.

The life expectancy conversation goes hand in hand with the long-term care discussion in that both are dependent on your attitude and preference for dealing with uncertainty. Those who want to be 100% sure there will be enough money to pay health insurance premiums (including IRMAA) for the rest of their life, and also cover long-term care expenses in case they might be needed, will want to set aside enough assets or ensure there is sufficient income to pay for everything to age 100, at least. Others might see such planning as overkill and would not be willing to sacrifice current consumption on the unlikely chance that they might live to 100 and need long-term care. They would require some level of planning, setting aside whatever amount they’re comfortable with.

A big part of health care planning is simply understanding what the variables are, even when some of those variables cannot be predicted with certainty. By assessing your comfort level, doing some math, and earmarking a portion of your assets and/or income to health care expenses in retirement, you may avoid surprises at a time in life when you are least able to recover from them. Don’t let the uncertainties of life absolve you of this responsibility. Some planning is better than none.

Tailoring Health Care Planning to Your Needs

Health care planning is a critical component of your overall financial strategy. While tools like Fidelity’s estimate provide a helpful baseline, true success lies in customizing these plans to fit your unique financial situation, income level, and goals. By addressing considerations like IRMAA and proactively managing tax-deferred accounts, we can help secure a brighter financial future for you. Together, we can develop a comprehensive plan to safeguard your financial well-being.

Source: Horsesmouth, LLC
Horsesmouth, LLC is not affiliated with Lane Hipple or any of its affiliates.