Many Americans underestimate their health care costs in retirement, which is an issue because those future bills may turn out to be significantly higher than you expect.

For example, a 65-year old man enrolled in Medicare with a Medigap plan will need to stash away $166,000 for medical expenses to have a 90% chance of covering his projected health care costs in retirement, according to 2023 research. Due to longer life spans, a 65-year-old woman will need $197,000.¹

Below we explain several options to help cover health care costs.

The Two Most Popular Programs To Cover Health Care Costs

Medicare

Medicare, a standardized federal insurance program, provides hospital and medical insurance coverage to people aged 65 and older, those younger than 65 with certain disabilities, and dialysis patients.

The standard monthly premium for Medicare is $164.90 in 2023, according to www.Medicare.gov.

Medicare has three parts: Hospital insurance (Part A), medical insurance (Part B), and prescription drug coverage (Part D).

You can choose from original Medicare and Medicare Advantage coverage. Original Medicare includes Part A and Part B coverage as standard; you have to add Part D coverage separately.

Medicare Advantage programs, which are similar to managed health care insurance programs, bundle Part A, Part B, and Part D. They may also include additional benefits, depending on the insurance provider. (Get more program details in Medicare and You² available on www.Medicare.gov).

Medicaid

With Medicaid, states establish and administer their own assistance programs for low-income people of any age. The federal government provides some funding.

States determine the type, amount, duration, and scope of services within broad federal guidelines. Federal law requires states to provide certain mandatory benefits and allows states the choice of covering other optional benefits. (Get more program details at www.Medicaid.gov).

Some people turn to Medicaid to cover long-term care costs. Of the $728 billion total Medicaid in 2021, 7% of it was spent on long-term care services.³

The Health Insurance Situation

The Patient Protection & Affordable Care Act (also referred to as the Affordable Care Act, PPACA, ACA, or Obamacare) was enacted in March 2010.

According to HealthCare.gov, the law has three primary goals:

• Make affordable health insurance available to more people. The law provides consumers with subsidies (premium tax credits) and cost-sharing subsidies.
• Expand the Medicaid program to cover all adults with income below 138% of the federal poverty level. (Not all states have expanded their Medicaid programs).
• Support innovative medical care delivery methods designed to lower the costs of health care.

Combining the programs

Depending on a retiree’s situation, either—or both—Medicare and Medicaid may be used to cover health care costs.

More Programs That Can Help

There are a number of programs you can explore to help cover health care costs, such as:

• Health Savings Accounts (HSAs), which are tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP).
• Aid and Attendance support for veterans and their families.
• Long-term care insurance to pay for personal and custodial care in settings including your home, a community organization, or other facility.

Health Savings Accounts (HSAs)

HSAs are triple tax free:

1. Contributions are tax deductible.
2. Earnings accrue tax free.
3. Withdrawals are also tax free, with one exception: Once you reach age 65, while you can withdraw for nonqualified expenses without penalty, you are required to pay income tax on that amount. No RMDs are mandated.

According to the IRS, the individual maximum you can contribute to a health savings account (HSA) in 2023 is $3,850, while the family maximum is $7,750.

Additional Benefits for Veterans and Their Spouses

Aid and Attendance is a benefit paid by Veterans Affairs (VA) to veterans, veteran spouses, or surviving spouses.

The program is for applicants who need financial help for in-home care, or to pay for an assisted-living facility or nursing home.

Benefits are paid to veterans (and living or surviving spouses) who:

• Are eligible for a VA pension
• Meet service requirements
• Meet certain disability requirements
• Meet income and asset limitations

For 2023, the benefit amounts are $2,229 per month for a qualifying veteran, $2,642 per month for a veteran and living spouse, and $1,432 per month for a surviving spouse according to the Social Security Administration.

Additional Funding Choices For Long-Term Care Costs

There are a variety of long-term care (LTC) insurance policies, such as traditional LTC policies, life insurance with LTC riders, and asset-based annuity plans.

Costs vary based on the type of coverage you choose. (Learn more about long-term care coverage at LongTermCare.gov.)

Two other common options to cover long-term care costs are spending down your assets and then applying for government programs such as Medicaid or self-insuring through your savings or investments.

Deciding Which Solutions Fit You

Because health care and long-term care costs can have such an outsized effect on your comfort in retirement, it’s wise to include them in your financial plan. Talking through the various choices with a Financial Advisor can help you sort through the complexities, so you make an informed decision that suits your situation.