THE HEALTHCARE TAB FOR RETIREES KEEPS GROWING. HOW TO PREPARE.

Medical costs are a big line item in any retirement budget, but a little planning can go a long way to prepare.

One in five Americans say they have never considered healthcare needs during retirement, and 17% report taking no action to plan for them, according to Fidelity’s 2025 State of Retirement Planning survey.

Yet retirees should prepare to spend large amounts. A 65-year-old today can expect to spend an average $172,500 on healthcare throughout retirement, up more than 4% from last year, according to Fidelity’s 2025 Retiree Health Care Cost Estimate.

Costs add up fast. Some people mistakenly believe that Medicare, the government insurance program primarily for people 65 and older, is free. Instead, Medicare imposes monthly premiums and out-of-pocket costs, and it doesn’t cover everything. Long-term care costs, for instance, aren’t factored into Fidelity’s estimates.

Fidelity assumes men and women go with traditional, government-run Medicare. It includes premiums for Part B outpatient coverage and Part D drug coverage, which together account for 44% of the total. (Most Americans qualify for premium-free Part A hospital coverage.) Out-of-pocket costs like copayments, coinsurance, and deductibles count for another 47%, while out-of-pocket prescription drug costs make up the remaining 9%.

Fidelity also factors in spending on dental, vision, and hearing needs, which traditional Medicare doesn’t pay for. Most Medicare Advantage plans, offered by private companies, provide limited coverage for dental, vision, and hearing.

Fidelity’s estimate doesn’t assume Medigap supplement coverage, which many on traditional Medicare buy to cover out-of-pocket costs. Such policies are priced to cover those expenses for enrollees in aggregate. Fidelity’s total does, in effect, account for those costs—whether they’re paid in predictable monthly premiums as a Medigap policyholder, or less predictably at the time of care by someone without a policy.

Mike Casey, a certified financial planner and president of American Executive Advisors in Alexandria, Va., says his clients budget for both routine healthcare expenses and crises like a heart attack, stroke, or cancer diagnosis. “They specifically want to dedicate some funds for unexpected needs,” he says.

Casey sets aside a rainy-day fund for medical emergencies outside the pool used to generate retirement income. The goal is to create a liquid fund that can be tapped quickly without affecting retirement income or generating big tax consequences. It could be invested in, say, a high-yield savings account or a money-market fund.

For those still working, health savings accounts are a powerful way to save for all kinds of medical expenses. These accounts offer a rare triple tax advantage: Money goes in tax-free, grows tax-free, and can be withdrawn tax-free for qualifying medical expenses—a broad category that includes everything from diabetic socks to dental treatment—now and in retirement.

To contribute to a health savings account, you have to be enrolled in a qualifying high-deductible health plan, which the Internal Revenue Service defines for 2025 as having a deductible of at least $1,650 for self-coverage and $3,300 for a family. Unlike flexible spending accounts, these accounts aren’t “use it or lose it.” Even if you’re no longer contributing, you can tap the funds at any time throughout retirement to pay for qualifying expenses.

Only three in 10 account holders are investing their HSA assets, according to Fidelity research. Most leave their balance in cash, missing out on powerful growth opportunities.

If a single 35-year-old male opens an HSA this year and contributes the 2025 max of $4,300 for an individual, he will have $504,000 for healthcare expenses in retirement, assuming he maxes out his contributions every year, earns a 7% annual return, and doesn’t tap his assets while working, according to an illustration for Barron’s by HealthView Services, a firm that provides healthcare data and tools to financial advisors.

A bonus? His lifetime tax savings will be $140,000.

Write to Elizabeth O’Brien at [email protected]

2025-07-30T04:13:05Z