Healthcare Risk: Protecting Your Retirement from Medical and Long-Term Care Costs

Written by John Macy, Financial Coach, MBA, Retirement Income Certified Professional® (RICP)

Part 7 of the Retirement Risk Management Series

"The greatest wealth is health." — Virgil

Introduction

Good health is one of the greatest blessings in retirement. Unfortunately, it is also one of the greatest sources of financial uncertainty.

Many people approaching retirement worry that healthcare costs will consume their savings. Headlines warning that the average retired couple may spend hundreds of thousands of dollars on healthcare only add to the anxiety. Yet for most retirees, routine healthcare isn't the greatest financial threat. The more significant risks tend to occur either before Medicare eligibility or among the relatively small percentage of retirees who experience years of expensive long-term care.

Understanding these risks — and planning for them before they occur — can help you protect both your retirement savings and your ability to make confident decisions when healthcare needs arise.

Not All Healthcare Risks Are the Same

Healthcare risk is often discussed as though it were a single problem. In reality, retirees face three distinct risks across three distinct phases, each with different planning considerations.

Healthcare Risk	Typical Timing	Potential Financial Impact
Health insurance before Medicare	Early retirement	Moderate to High
Routine healthcare during retirement	Throughout retirement	Moderate
Long-term care	Usually later in retirement	Potentially Very High

As the timeline below illustrates, healthcare planning changes significantly over the course of retirement. The biggest financial questions are different at age 58 than they are at age 70 or age 85.

Phase 1: Retiring Before Medicare

One of the biggest surprises for early retirees is discovering that replacing their paycheck is only part of the challenge. They must also replace their employer-sponsored health insurance.

Someone retiring at age 55 may need private health insurance for ten years before Medicare begins at age 65. Even someone retiring at age 62 must bridge a three-year gap.

Depending on your circumstances, coverage may come from:

• An Affordable Care Act (ACA) Marketplace plan

• COBRA continuation coverage

• A spouse's employer-sponsored health plan

• Employer retiree health benefits

• Private individual insurance

• Health-sharing ministries (which are not insurance and have important limitations)

The Affordable Care Act has made obtaining coverage much easier than it once was, particularly for people with pre-existing medical conditions. However, premiums can still represent a significant retirement expense, especially for households with incomes too high to qualify for premium subsidies.

Planning Tip 1: Estimate Health Insurance Costs Prior to Early Retirement

If you're considering early retirement, estimate your health insurance costs before making the decision. For many households, these premiums become one of the largest expenses during the years before Medicare eligibility.

Planning Tip 2: Use an HSA if You're Eligible

If you're covered by a high-deductible health plan before retirement, contributing to a Health Savings Account (HSA) can be one of the most tax-efficient ways to prepare for future healthcare expenses. HSAs offer triple tax advantages: contributions may be tax-deductible, investments can grow tax-free, and qualified medical withdrawals are tax-free.

Phase 2: Healthcare After Medicare

Once Medicare begins, the financial picture often becomes much more predictable. Although Medicare does not eliminate healthcare expenses, it substantially reduces the risk of devastating medical costs. For many retirees, healthcare becomes a manageable ongoing expense rather than a financial catastrophe.

However, higher-income retirees should also be aware of the Income-Related Monthly Adjustment Amount (IRMAA). Medicare Parts B and D premiums increase for beneficiaries whose income exceeds certain thresholds, based on their tax return from two years earlier. For retirees with substantial retirement income, Roth conversions, large capital gains, or required minimum distributions, IRMAA surcharges can become a meaningful additional healthcare expense. Learn more from our guide to IRMAA surcharges.

Most retirees should budget for:

• Medicare Part B and Part D premiums (including potential IRMAA surcharges)

• Deductibles and copayments

• Prescription drug costs

• Dental care

• Vision care

• Hearing services

• Other out-of-pocket expenses

Traditional Medicare or Medicare Advantage?

One of the first decisions new Medicare beneficiaries face is whether to enroll in Original (Traditional) Medicare or choose a Medicare Advantage plan. Neither option is universally better. The right choice depends on your health, travel patterns, preferred physicians, and financial priorities.

Traditional Medicare	Medicare Advantage
Broad nationwide provider access	Usually lower monthly premiums
Often paired with Medigap insurance	Annual out-of-pocket maximums
Few referral or preauthorization requirements	Network restrictions and preauthorizations may apply
Excellent for frequent travelers	Often includes additional benefits such as dental or vision
Higher predictable premiums	Lower premiums but potentially higher costs when receiving care

Traditional Medicare generally provides greater flexibility and is often preferred by retirees who travel extensively or divide their time between multiple states.

Many retirees who choose Original Medicare also purchase a Medicare Supplement (Medigap) policy to help cover deductibles, copayments, and coinsurance that Original Medicare does not pay. This combination generally provides broad provider access and more predictable out-of-pocket costs, but it comes with an additional monthly premium.

Medicare Advantage plans may offer lower premiums and additional benefits but often require using provider networks and obtaining prior authorization for certain services.

Medicare rules, premiums, and plan options change regularly, so reviewing your options annually is worthwhile.

Special Considerations for Americans Living Overseas

For Americans retiring abroad, healthcare planning looks very different.

With only limited exceptions, Medicare generally does not cover medical care received outside the United States. Instead, many expatriates rely on:

• International private health insurance

• Local private insurance

• National healthcare systems in their country of residence

• Paying directly for medical care where costs are relatively low

Fortunately, medical care in many countries costs substantially less than comparable care in the United States, allowing some retirees to purchase comprehensive private insurance at premiums well below what they would pay domestically.

However, retirees planning to return to the U.S. later should understand that delaying enrollment in Medicare Parts B and D without qualifying coverage may result in permanent premium penalties.

Phase 3: Long-Term Care (the Largest Healthcare Risk)

Ironically, the greatest healthcare risk in retirement is often not medical care at all.

It is long-term care.

According to the U.S. Department of Health and Human Services, many Americans who reach age 65 will need some form of long-term services and supports during their lifetime, although the duration and intensity vary widely.

Long-term care refers to assistance with the activities of daily living, such as:

• Bathing

• Dressing

• Eating

• Transferring

• Toileting

• Managing cognitive impairment

These services (referred to as "custodial care") may be provided at home, in assisted living facilities, or in nursing homes.

Many people mistakenly assume Medicare covers these expenses. Generally, it does not. While Medicare may pay for short-term skilled nursing or rehabilitation following a hospitalization, it typically does not pay for ongoing custodial care that many older adults eventually require.

Long-Term Care by the Numbers

• About 70% of adults who reach age 65 will eventually need significant long-term services or supports.

• Only about 48% will ever receive paid long-term care; many rely entirely on family or friends.

• Among those who need care, the average duration is about three years, but only 9% require care for more than six years.

• Research suggests that only about 15% of retirees incur more than $250,000 in lifetime long-term care costs, meaning catastrophic expenses are concentrated among a relatively small share of households.

• Cognitive conditions such as Alzheimer's disease often create the longest and most expensive care needs because they can require years of supervision rather than medical treatment.

• The Milliman LTC Index estimates that, on average, the lifetime cost of LTC for a 65-year old in 2025 is about $135,000 ($98,000 for a male and $171,000 for a female).

• According to the Milliman study, those who need formal LTC for 4-5 years will spend about $390,000 and those who need it for 6+ years will spend about $665,000.

This highly uneven distribution of LTC costs explains why long-term care planning is so challenging. Many retirees will experience modest costs, while a smaller group will face expenses that can significantly impact their financial security.

Key Planning Question: How do I protect my retirement if I'm one of the relatively few people who experience a very expensive long-term care event?

Why Long-Term Care Is So Challenging

Unlike routine medical expenses, long-term care is highly unpredictable. Some retirees never need it. Many retirees who do need long-term care receive it from family members at little cost. Others require only a few months of assistance following surgery or illness. Still others need several years of care because of Alzheimer's disease, Parkinson's disease, stroke, or general frailty.

This wide range of outcomes makes long-term care one of the most difficult retirement risks to plan for. The challenge is not simply that care can be expensive — it is that no one knows whether they will need minimal assistance or years of extensive support.

The same uncertainty that makes LTC difficult for retirees also makes it challenging for insurance companies. The insurer must estimate claims that may occur decades in the future. In addition, as healthcare costs have risen and policyholders have kept coverage longer than originally expected, many insurers have had to substantially increase premiums or exit the market altogether. According to a 2021 report by the NAIC LTC Insurance Task Force, many LTC insurance buyers over the past 20+ years have seen cumulative premium increases (across all insurance carriers) that averaged 112% over the past couple of decades. The average approved individual rate increase for a single year was 37%. (Long-term Care Insurance Rate Increases and Reduced Benefit Options: Insights from Interviews with Financial Planners,NAIC Center for Insurance Policy and Research, November 2022).

Furthermore, in addition to being very expensive, virtually all LTC insurance policies have daily reimbursement limits and lifetime utilization caps that mean they often provide meaningful protection against moderate long-term care expenses but may not fully cover the most prolonged or expensive care situations.

Another challenge with traditional long-term care insurance is its "use it or lose it" nature. Many retirees are reluctant to pay premiums for years without knowing whether they will ever need long-term care. Hybrid life insurance/long-term care policies have become increasingly popular because they address this concern by providing a death benefit to heirs if long-term care benefits are never used, although this additional flexibility generally comes at a higher upfront cost.

As a result, today's buyers should carefully evaluate policy features, insurer strength, and affordability before purchasing coverage.

Strategies for Managing Long-Term Care Risk

There is no universal solution. Instead, retirees generally choose one or more of the following approaches.

Strategy	Advantages	Considerations
Pay from retirement income and investment portfolio	Maximum flexibility. No insurance premiums. Assets remain fully under your control until needed.	A prolonged care need could significantly reduce your portfolio and affect the amount available for a surviving spouse or heirs.
Set aside a dedicated LTC reserve fund	Creates a specific pool of assets earmarked for future care, making the risk easier to plan for psychologically and financially. Funds remain available for other purposes if never needed.	Requires discipline to keep the funds invested and reserved for long-term care rather than other spending.
Use home equity (downsizing or selling your home)	Home equity is often one of a retiree's largest assets and can provide substantial funding for assisted living or nursing home care.	May require leaving a long-time family home and could reduce the estate left to heirs.
Reverse mortgage	Allows homeowners to access home equity while continuing to live in the home, potentially helping pay for in-home care.	Loan costs and interest accumulate over time, reducing remaining home equity. Best suited to specific situations and should be evaluated carefully.
Traditional long-term care insurance	Transfers much of the financial risk of extended care to an insurance company.	Premiums may increase over time. Policies typically include daily benefit limits, elimination periods, and lifetime benefit caps.
Hybrid life insurance / LTC policy	Provides long-term care benefits if needed, while paying a death benefit to beneficiaries if LTC benefits are never fully used. Eliminates much of the "use it or lose it" concern.	Higher upfront cost or premiums than many standalone policies. Benefits and policy features vary widely.
Family caregiving	Can provide personalized care at relatively low financial cost while allowing the individual to remain at home longer.	Can create significant emotional, physical, and financial burdens for spouses or adult children. Family caregivers may eventually need to supplement their efforts with professional care.
Medicaid (Government Safety Net)	Provides a potential source of coverage for individuals who lack sufficient resources to pay for long-term care. Can cover nursing home care and, in many states, may provide assistance for home- and community-based services. Helps ensure that individuals are not left without access to care if their assets are exhausted.	Eligibility requires meeting strict income and asset requirements that vary by state. May require spending down assets or other financial planning before qualifying. Care options and provider choices may be more limited than with private resources. Estate recovery rules may allow states to seek reimbursement from a recipient’s estate after death.

Medicaid serves as an important safety net for individuals with limited financial resources, but it is generally not a substitute for proactive planning among households seeking to preserve assets and maintain greater control over care decisions.

LTC planning among retirees looks a lot like a "barbell":

• on one end of the spectrum, retirees with limited financial resources depend on family and Medicaid for LTC;

• on the other end of the spectrum, retirees with significant financial resources self-insure for LTC;

• retirees in the middle often combine some level of family care with self pay and a limited hybrid life insurance policy or an LTC policy.

In practice, many retirees combine several approaches based on their financial resources, family situation, and preferences.

The Key Insight: Long-term care is one of retirement's highest-impact risks, but catastrophic long-term care costs are concentrated among a relatively small percentage of retirees. The challenge isn't that everyone will face enormous expenses — it's that no one knows in advance who will.

Healthcare Is Also About Lifestyle

Warren Buffett has famously described health as one of life's greatest assets. The healthiest retirement plan isn't simply the one with the largest investment portfolio—it's the one that helps you remain active, engaged, and capable of enjoying life for as many years as possible. Few investments offer a higher potential return than taking care of your health today.

Regular physical activity, strength training, healthy nutrition, quality sleep, preventive medical care, and maintaining strong social relationships all contribute to healthier aging. While these habits cannot guarantee good health, they can reduce medical costs, delay disability, preserve independence, and lower the likelihood of extended long-term care.

Action Steps

As you review your retirement plan, consider these questions:

✓ If you retire before age 65, how will you obtain health insurance?

✓ Have you estimated your expected healthcare expenses after Medicare begins?

✓ Which Medicare option best fits your lifestyle and travel plans?

✓ If you live overseas, have you identified an appropriate healthcare strategy?

✓ How would you pay for several years of long-term care if it became necessary?

The best time to answer these questions is long before a health crisis occurs.

Key Takeaways

Healthcare expenses deserve a place in every retirement plan — but they should also be kept in perspective. The biggest financial risks are often not routine medical costs, but the periods before Medicare eligibility and the possibility of extended long-term care.

The good news is that these risks can be planned for. By thinking ahead, understanding your options, and building flexibility into your retirement plan, you can greatly reduce the likelihood that healthcare costs will derail your financial future.

A secure retirement rests on more than investment returns. It also depends on having a plan for life's inevitable uncertainties—including healthcare. By preparing for each phase of healthcare risk, you strengthen the financial foundation of your retirement and give yourself greater freedom to focus on what matters most: enjoying the years you've worked so hard to achieve.

Healthcare risk is just one of the many uncertainties that can affect retirement security. In the next article in this series, we’ll explore how behavioral risk can derail even a well designed retirement plan and strategy.

If you would like help identifying your retirement risks and building a more resilient plan, consider scheduling a retirement planning consultation. Visit www.flourishingpathfinancial.com/book-online to schedule a free Introductory Consultation.

Author:  John Macy, MBA, RICP®

John Macy is a professional financial coach and the founder of FlourishingPath Financial Coaching. With over six years of experience as a financial coach, John helps pre-retirees and retirees design resilient portfolios and income streams for their next act. Read his full story here.