Planning for Health Care Expenses in Retirement

July 1, 2025

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.

Navigating Medicare

May 30, 2025

By: Elaine Floyd, CFP®

Back in the day, when full retirement age for Social Security was 65 and most people retired and claimed benefits then, Medicare basically took care of itself. Enrollment was automatic along with the Social Security application, and many employers offered retiree health insurance to supplement Medicare. Those who didn’t have retiree insurance could buy a Medigap policy to cover prescription drugs (Part D did not yet exist), and some of the gaps left by Medicare, primarily the Part A deductible and the Part B 20% coinsurance. Medicare Advantage did not yet exist. Once a person was on Medicare with their retiree insurance or supplement, there was very little for them to think about. Medical bills were paid behind the scenes and the occasional bill they did receive was easily paid out of pocket.

Medicare is much more complicated today. If you are not receiving Social Security at age 65 (which, hopefully, you are not), you will not automatically be enrolled in Medicare. If you are working past age 65 and staying on your employer plan, you will have to figure out when and how to make the transition to Medicare, also taking your spouse’s insurance into consideration. With medical costs now so high and fewer employers offering retiree coverage, private insurance plays a much bigger role than it did before. This opens up many more choices and complications, all of which hinge on your individual health status and expected health care usage both now and in the future.

Financial advisors are often called to help with Medicare, even though it is clearly outside their financial wheelhouse. But because HR people who are helping employees with the rest of their retirement don’t really understand Medicare (and how it interacts with COBRA), and because you are being bombarded with marketing messages from private insurers who don’t have your best interests in mind, a little direction from your financial advisor can go a long way. It is not necessary for them to pry into your personal health situation, but by receiving a few tools and resources you should be able to navigate Medicare on your own.

Medicare enrollment periods

There are specific times a person can enroll in Medicare. In fact, the Medicare application asks a series of questions to determine if the person is currently in one of the enrollment periods. If not, they will not be allowed to proceed with the application.

The first is when they turn 65. This is called the initial enrollment period. A person can enroll in Medicare up to three months before their 65th birthday. Coverage will start the first of the month they turn 65. If they’re a little late it’s okay—they can apply up to three months after their 65th birthday. Coverage will start the first of the month after they enroll.

The second is called the special enrollment period and it’s for people who want to stay on an employer plan (based on active employment of self or spouse) after age 65. As long as they maintain continuous coverage under the employer plan, they can switch over to Medicare at any time. Most commonly the transition to Medicare is done when they leave employment. But they can do it anytime after age 65 (i.e., while still working) and up to eight months after termination. There is really no reason to utilize the 8-month grace period, though, because it could result in coverage gaps. COBRA pays secondary to Medicare for anyone age 65 or older, so even if a person takes COBRA (too expensive!), they will have to enroll in Medicare.

The third enrollment period is the general enrollment period, from January 1 to March 31 of each year, with coverage starting the month after enrollment. This is for anyone who missed one of the other Medicare enrollment periods. If there has been a gap in coverage, there may be a late-enrollment penalty: 10% of the Part B premium for every 12-month period they went without health insurance after age 65. This penalty will be assessed every year.

Part A and Part B enrollment is through SSA

The Social Security Administration handles Medicare enrollment. The easiest way to enroll is to do it online. Or people can call the main number: 800-772-1213. They’ll need to provide their Social Security number and place of birth as well as current health insurance information. It will not be necessary to prove insurance if they are enrolling during their initial enrollment period. But if they are enrolling after age 65, during their special enrollment period, in order to avoid penalties they’ll need to have their employer sign CMS Form L-564 attesting to their continuous health insurance coverage. If their initial enrollment period overlaps with their special enrollment period, the initial enrollment period takes precedence.

What Clients Need To Know About Opening and Managing Their Social Security Account

Go to Medicare.gov for private insurance options

Once a person is enrolled in Medicare Parts A and B, they can sign up for: 1) a Medigap policy and Part D drug plan, or 2) a Medicare Advantage Plan. Note that enrollment in these plans cannot take place until they are enrolled in Medicare, but shopping can start earlier. People who want to do it themselves can go to medicare.gov and “find health and drug plans” based on their zip code.

If they have opted for Original Medicare with a Medigap policy, they’ll be shopping for both a Part D drug plan and the Medigap policy. For the drug plan, they’ll want to enter their drugs and dosages in order to see what their out-of-pocket costs would be under each plan. If they don’t take any drugs, they can simply choose the lowest-premium plan. (But they can’t skip Part D; if they go more than 63 days without creditable drug coverage there will be a late enrollment penalty.) Drug plans operate a year at a time. If a person’s drug regimen changes or if the plan changes, they can shop for a new drug plan during the fall open enrollment period (Oct. 15–Dec. 7) and the new plan will start January 1. For Medigap, they’ll want to focus on Plan G, the most popular and comprehensive plan. The Medicare.gov website shows the options from the different carriers. “Issue age” is the better pricing method, otherwise premiums will escalate rapidly as they age. Because benefits are the same for all Plan G policies, they’ll be focusing primarily on monthly premiums. For drug plans they can enroll directly through the Medicare.gov website or, if they have further questions, can call the insurer and have them take the application. For Medigap policies they can call the plan or enroll through the company’s website.

People who opt for a Medicare Advantage plan can pull up all the plans in their area and review benefits and costs. Most Advantage plans have very low (or no) premiums, so it will be a matter of reviewing benefits and out-of-pocket costs for the various services. Medicare Advantage shopping can be a challenge because if there are things that are wrong with the plan—such as a narrow provider network or a propensity to delay or deny care—they won’t be apparent other than indirectly through a low star rating.

Open Medicare account

Once a person has enrolled in Medicare they can establish an account at medicare.gov and keep track of their claims, costs, and other information.

While transitioning to Medicare can be rather time-consuming, once it’s set up it should be easy to manage, especially if the person has Original Medicare and a Medigap policy and drug plan. Virtually all Medicare-approved expenses will be covered and paid behind the scenes. Drug plans will need to be reviewed annually, but the switch to a new plan is easy. (Be sure to note if the preferred pharmacy changes.) Medicare Advantage plans could be easy or difficult to manage depending on your health care experience and whether you face delays or denials in care. If you are dissatisfied, these plans can also be changed once a year.

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

Health Insurance Before and After Retirement

April 1, 2025

Most employees depend on their employers for health insurance today. It is possible to go into the open market and buy an individual health insurance policy under the Affordable Care Act, but these policies tend to be expensive. Premium subsidies are available, but only if you meet asset and income limitations. Of the insurance options available to working people under age 65, their own employer plan—or a spouse’s plan if available—is likely to be the best choice.

If a client retires before age 65, they will have to find different insurance to take effect immediately after the employer insurance ends. If the client’s former employer offers retiree insurance to tide them over to Medicare age, great. Or, if the spouse is still working, the client may be able to get on the spouse’s plan. If neither of these options is available, the client may go onto COBRA, which will keep the employer insurance in force at full cost to the client. As a last resort the client will need to go into the open market and buy an individual policy to last until Medicare starts at 65. The cost of this pre-65 insurance will, of course, need to be figured into the post-retirement budget, and the client would need to be confident about covering the costs before making the decision to retire.

Once a client turns 65, the Medicare option becomes available. If a retiree has an ACA plan, they will leap at the chance to get into Medicare in order to lower their costs. If they have a retiree plan, they will be forced to have Medicare, either because the retiree plan ends at 65 or shifts to secondary payer status (serving as supplemental insurance) with Medicare as the primary payer. If they are on a spouse’s plan, and if the plan covers 20 or more employees, they may be able to stay on the spouse’s plan. But take note: Some plans specify that dependent spouses must enroll in Medicare upon turning 65. So if a client turns 65 while on a spouse’s plan they will need to check with the plan to see if Medicare enrollment is a requirement. (An over-20 plan can’t require an employee to enroll in Medicare, but it can require it of a dependent spouse.)

Related: Original Medicare vs. Medicare Advantage

Once Medicare becomes an option, by virtue of the client turning 65, health insurance should be reevaluated. Even if a client is still working and staying on an over-20 employer plan, or retired and staying on a spouse’s plan, the existing plan should be compared to Medicare, either traditional A and B with a drug plan and supplemental insurance, or a Medicare Advantage plan. Overall, employer insurance isn’t what it used to be: deductibles are up, cost-sharing is up, and certain specialist services may be hard to get. Clients should not assume that their employer insurance is better than Medicare paired with a good supplemental policy. It may be, but they don’t know that until they’ve compared benefits and potential out-of-pocket costs of both plans under their expected health care usage.

And that’s another thing that might change along with the passing of the client’s 65th birthday: they may need more health care services as they age. Employer plans are designed for younger, healthier populations. Deductibles can be high because employees don’t expect to get sick; in fact high deductibles are welcome if they keep premiums low. But high deductibles can be devastating for people who do get sick, or who contract conditions requiring expensive prescription drugs. Then you want a plan designed for more frequent and expensive health care usage. That’s Medicare, along with a supplemental policy and prescription drug plan or a Medicare Advantage plan.

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

2025 Reference Guides

January 29, 2025

Updated tax rates, contribution limits, deductibles, and premiums for the new year

Bookmark these important “cheat sheets” that include just about every piece of key financial data one might need throughout the year. Collectively, these updates empower people to make informed financial decisions, safeguard their economic well-being, and ensure a more secure and comfortable future.

Original Medicare vs. Medicare Advantage

August 29, 2024

Understanding the Key Differences

The second most important decision clients make with respect to Medicare—after they’ve decided to enroll in Medicare in the first place—relates to how they want to get their care. Faced with the choice of Original Medicare and Medicare Advantage, people often fail to understand that this decision can affect both the quality and cost of health care they receive both now and in the future.

Original Medicare

Thanks to aggressive marketing, Medicare Advantage plans have firmly established themselves as “the way to get your Medicare.” Completely lost in the shuffle is what Original Medicare actually is. It is health insurance, pure and simple, funded by the U.S. government. From its inception in 1965 Medicare Part B has always been based on the classic health insurance model where the insured pays a monthly premium (taken out of the Social Security check) and when a medical bill is incurred the patient pays an annual deductible plus 20% of the bill. The federal government pays the rest. Implicit in this is that the insured has complete freedom and control over how and where to get their health care. The only requirement is that the provider must accept as payment the amount Medicare has set for any given service (which may be less than what others will pay). Most providers do accept Medicare because it covers so much of the population.

There has always been a place for private insurance in the Medicare world as a supplement to Medicare. Originally, these policies were designed mainly to cover prescription drugs. When Part D was instituted in 2006, an official public/private partnership was established specifically for drug coverage where private insurance companies offer various prescription drug plans with both the insurers and the federal government bearing the costs. Medigap policies remained viable, however, covering some of the key costs not covered by Medicare, mainly the Part A deductible and the Part B 20% coinsurance.

A typical insurance plan under Original Medicare involves enrolling in Parts A and B, choosing a drug plan under Part D, and also choosing a Medicare Supplement (Medigap) policy. With Original Medicare a person is free to go to any doctor who accepts Medicare, and there are virtually no prior authorizations or denials of care. If a provider orders a service and Medicare covers it, it will be covered with little or no out-of-pocket costs to the patient.

Medicare Advantage

Medicare Advantage, originally called Medicare+Choice, was kicked off by the Balanced Budget Act of 1997. This expanded private health insurers’ involvement in Medicare and now encompassed the delivery of care, not just the payment of bills submitted by providers. Under Medicare Advantage, the government pays private insurers an annual “rate” theoretically equal to what it would cost to insure a person under Original Medicare. In exchange, the insurer promises to deliver all care under Parts A and B. This was deemed a cost-cutting and risk-mitigation effort by the federal government.

The key difference for enrollees is that Medicare Advantage plans may offer additional benefits and lower premiums, but they also place restrictions on care. Patients must choose a provider within the plan’s network and many services and procedures must be authorized beforehand—and may even be denied.

There is a lot to say, both good and bad, about how private insurers’ involvement in Medicare has evolved. Most people have an opinion about which is better, Original Medicare or Medicare Advantage, based on their own experience or what they’ve read. But it usually comes down to this:

• If your main concern is high-quality care and you’re willing to pay higher premiums for the assurance of seeing the provider you want and getting the care you need, either now or in the future, go with Original Medicare.
  
• If your main concern is costs and you’re willing to accept an insurer’s assessment of what you need in the way of care, go with Medicare Advantage, understanding that if your health worsens and you do need care, your costs could end up being higher.

The following table, contributed by Rich Arzaga, illustrates the choice in a simple manner:

So there you have it in a nutshell. I wish we could say that your decision would not be binding, that you could start with one form of Medicare and switch to the other if you’re not happy with your plan or if your health care needs change. And to some degree that’s true. There are on- and off-ramps for both of these options. But the one hard sticking point in most states is the Medigap Open Enrollment period. If you don’t buy your Medigap policy within six months of enrolling in Part B, you will be subjected to underwriting and may be denied a policy. So, starting out with a Medicare Advantage plan with the intent of switching to Original Medicare after a few years may not be feasible.

References and further reading

The History of Medicare Advantage: From Inception to Growing Popularity

© 2024 Horsesmouth, LLC. All Rights Reserved.