6 health care cost factors that can drain retirement savings

Missing the Medicare sign-up can cause a penalty

Even if people plan to delay receiving benefits because they're working, they still need to sign up for Medicare three months before turning age 65. If they don't enroll in Medicare medical insurance or prescription drug coverage when first eligible, they may have to pay a late enrollment penalty for as long as they have coverage.

Inflation will increase lifetime health care out-of-pocket costs

Short-term inflated health care costs can have long-term effects. For example, if inflation for health care costs remained at 1.5 times the CPI for just the next two years, a healthy 45-year-old couple today retiring in 20 years could expect to pay $259,808 more for their health care expenses during retirement.

The compounding effect of rising health care inflation can mean significantly higher lifetime out-of-pocket health care costs in retirement, projected to be:

Health care costs include Medicare Parts B and D, Medicare Supplement Insurance Premiums, Dental Premiums and out-of-pocket expenses. Calculations assume that a healthy male and female will have life expectancies of 87 and 89 respectively, and will have a combined future modified adjusted gross income (MAGI) up to $176,000.

Nearly half of retirees stop working sooner than they expected

Largely due to health reasons or job loss, 46 percent of retirees stop working earlier than they planned. That means they'll need to find a way to bridge the "income gap" created by the loss of wages they had planned on earning.

Longer lives, higher costs

About one out of every three 65-year-olds today will live until at least age 90, and one out of seven will live until at least age 95. The additional years of paying for medical insurance premiums and other health care expenses combined with health care inflation bump up lifetime costs.

Long-term care is a reality for many Americans

Considering healthy 65-year-olds today, there’s about a 70 percent chance of an individual needing long-term care at some time in their future. 

Factoring in rising costs, Americans living longer and how volatile markets have potentially impacted workers’ retirement savings, paying for long-term care could take a significant bite out of an individual’s retirement assets, especially if both people in a couple would need it.

Health care costs could outpace Social Security benefits

Although 2022 gave Social Security recipients the highest cost-of-living-adjustment (COLA) since 2008, these income boosts may not keep up with rising health care costs. In 2022, monthly premiums for Medicare Part B, prescription drug coverage and co-pays also jumped. Higher living expenses and health care costs that continue to trend up could easily outpace monthly Social Security benefits.