Retirees may need hundreds of thousands of dollars more than they plan for to cover health-care costs in retirement, data from the Employee Benefit Research Institute finds.

That’s after accounting for Medicare, the U.S.’s federal health insurance program for people 65 and older. Medicare covers many services, though retirees often underestimate how much they’ll still pay out of pocket over time, experts say.

A 65-year-old couple may need about $405,000 to cover health-care expenses in retirement, based on a scenario that assumes a 90% chance of covering those costs and reflects common Medicare coverage choices, according to a March analysis from EBRI.

The estimate reflects how much retirees may need to have saved to cover premiums, out-of-pocket costs and prescription drug spending over the course of retirement, costs that tend to rise as people age and need more care. In scenarios where prescription drug costs are especially high, that total can rise to $469,000, EBRI finds.

When it comes to unexpected costs, “what most people don’t understand is that out-of-pocket costs can be significant once they get sick, which is usually later in retirement,” says Carolyn McClanahan, a physician and certified financial planner in Jacksonville, Florida. “No one thinks about it until it hits them in the pocketbook.”

Medicare is made up of several parts covering hospital care, outpatient services and prescription drugs. Some people add supplemental coverage, known as Medigap, while others choose Medicare Advantage plans instead.

Medicare Advantage plans, offered by private insurers, often have lower monthly premiums but require cost-sharing when care is needed and typically limit provider networks.

Whatever plan you choose, Medicare doesn’t eliminate costs. Most beneficiaries pay a monthly premium of about $202 for Part B, which covers medical insurance, along with an annual deductible of about $283 and typically 20% coinsurance for many services, according to Medicare.gov.

Additional coverage, such as prescription drug plans or supplemental insurance, can add roughly $100 to $300 or more per month, depending on the plan. Even with that coverage, traditional Medicare has no annual cap on out-of-pocket spending, unlike Medicare Advantage and many private insurance plans.

Health-care costs in retirement typically go beyond Medicare premiums and deductibles. Medicare beneficiaries spend about $6,330 a year on health care, including premiums, out-of-pocket costs for medical care and services Medicare doesn’t fully cover, such as dental or long-term care, according to the Kaiser Family Foundation, based on the most recent available data from 2022.

EBRI’s estimates are based on simulations of different lifespans, investment returns and health-care use, so the results show how much retirees may need to have saved at age 65 to have a certain chance of covering their health-care costs. The figures below compare two common coverage scenarios for couples.

Traditional Medicare with Medigap:

• About $267,000 for a 50% chance of covering costs
• About $405,000 for a 90% chance

Medicare Advantage:

• About $135,000 for a 50% chance
• About $203,000 for a 90% chance

While Medicare Advantage plans can come with lower projected costs, they also involve tradeoffs, says McClanahan. These plans often have more limited provider networks, and switching back to traditional Medicare with supplemental coverage later may require medical underwriting, which means that coverage could cost more or be harder to obtain, she says.

Given Medicare’s out-of-pocket costs, planning for health-care expenses in retirement starts with understanding what Medicare covers and what it doesn’t.

Many people focus on monthly premiums, but that’s just the starting point. Out-of-pocket costs tend to rise later in retirement, when people need more care and may have fewer options to change coverage, says McClanahan.

To account for that, McClanahan says her clients’ financial plans typically include an annual cushion for unexpected expenses — around $5,000 to $15,000 — with unused amounts able to carry over, though those cash-flow assumptions are updated each year.

“Health-care spending isn’t consistent — it comes in waves,” says Jim Shagawat, a certified financial planner in New Jersey. “You might have several low-cost years, followed by a $50,000 year.”

Shagawat says many of his clients keep one to two years of expected health-care costs in more stable assets as a cushion. After a higher-cost year, that reserve is typically replenished gradually, such as through portfolio rebalancing or by directing dividends and interest to cash, rather than being rebuilt all at once, he says.

Another approach is to set aside a consistent amount each year, with unused funds accumulating over time to cover larger expenses later in retirement, says Shagawat.

Either way, “the goal isn’t to predict exact expenses. It’s more to make sure health-care costs don’t disrupt the overall retirement plan,” he says.

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