Many retirees are scared of a market crash because it could destroy retirees’ financial security at the point when they probably won’t be able to recover from it. But the real biggest risk of all is the rising expense of healthcare as people ages.
According to Fidelity Investments, someone retiring at 65 years old in 2025 needs about $172,500 to cover all health and medical costs over time. Although this projection has been rising for years, it’s not usually included in financial planning.
Are we in denial of aging and needing assistance? Or are we just bad at planning?
You can find a more appropriate plan if you think about how health can affect your future and significantly reduce your retirement budget.
The real impact of rising medical costs in retirement
Medical costs can seem reasonable in the early years of retirement, when people are around the 50 or 60 years old.
But, the actual impact of medical expenses over time, is highly important because as time passes, the probability that people will need additional medical care rise—the size of the bills too.
A lot of retirement plans do take general inflation into account: For example, the popular 4% rule suggests taking that portion of savings out in the first year and then adjusting it for inflation.
The problem is that medical expenses are rising way more quickly than the regular cost of everyday necessities.
The rapid rate of rising healthcare costs shown by Fidelity’s projections for 2025 ($172,500), which is more than 4% higher than the previous year and far away from the $80,000 estimated in 2002, shows that.
Medicare gaps and long-term care costs that can drain retirement savings
Medicare does not guarantee complete cost protection either. In addition, you can even end up paying high copays and deductibles if you make poor supplemental plan choices or if you miss the initial enrollment period. “Many of our clients are surprised by how much they pay out of pocket for medical care,” stated planner Tyler End.
Therefore, evaluating coverage carefully and deeply is vital for avoiding unnecessary expenses that can quickly drain your retirement funds.
The Department of Health and Human Services estimates that nearly 70% of people over 65 years old will eventually need long-term care (which is not included in the $172,500 estimate). And the prices to pay are high: In 2024, living in an assisted living community cost about $70,800 annually, while a semi-private room in a nursing home cost an average of $111,325… That was two years ago.
According to a CareScout report, the annual cost of hiring an in-home health aide was nearly $77,796.
Planning ahead for medical costs in retirement
Retirees often find themselves without money because a lack of preparation for those health costs, it end up exceeding any initial projections.
Most of us want to think we will be healthy enough to be independent until we die, statistics keep proving that wrong. Although some people do get to enjoy their last year in good shape, assistance is always needed.
Knowing that, specialists recommend planning a health budget to be included on any retirement plan. How, or where do you do it? That’s your call, but there are many ways in which you can put your money aside for it, besides what Medicare or Social Security retirements benefits can give you:
- Establishing an individual fund for future medical costs, like an emergency fund, can be a useful tactic for some retirees.
- The Health Savings Account (HSA) is another possible tool. This one offers already some benefits like, tax-deductible conttributions, the money kept on it is tax-free, and withdrawals for qualified medical expenses are not taxed either.