At a glance

  • Think of health care expenses as part of your overall budget—before and after retirement.
  • Understand Medicare choices so you can choose options that fit your lifestyle.
  • Prepare for changes in real spending during the different stages of retirement.

You may have seen scary estimates of how much money you’ll need for health care in retirement. The big numbers can make you feel as if you’ll never save enough. But there’s another way to look at these expenses.

Jacklin Youssef
Jacklin Youssef

“Health care is already part of your budget,” says Jacklin Youssef, a senior tax and wealth planning specialist in Vanguard Personal Advisor Services®. “If you calculated how much you’ll spend on food, shelter, and clothing in retirement, that number would look intimidating too.”

Like other basic living expenses, health care is a big line item. It’s also an expense that can ebb and flow during different life stages.

“Living expenses are usually highest before retirement. Health care is a big part of those expenses. Currently, many families pay more than 10% of their income toward health care,” Youssef says.*

Once people reach retirement, Youssef says spending often follows the line of a smile. Health care has the biggest impact during late retirement—making up one end of the smile.

  • Early retirement. Spending often stays high during the early years of retirement. Many retirees travel and eat out more often. Health care coverage shifts from employer-sponsored insurance to Medicare.
  • Middle retirement. Overall spending often drops to its lowest point during the second phase of retirement. Retirees in this phase spend more time closer to home. They’re active in their communities and with their families but aren’t spending their funds on expensive vacations. Health care costs may rise as these retirees age.
  • Late retirement. During the late years of retirement, retirees are faced with more health issues. As a result, health care costs peak. If retirees need long-term care, these costs can be substantial.

Calculate what you pay now

To get an idea of how your future expenses may look, start with your current costs. Dig out your paycheck or insurance premiums along with doctor bills to get the big picture.

Calculate how much your employer pays toward your coverage and how this may play out as you transition into retirement. On average, employers pay about 68% of health care costs for active employees.**

Remember to include all of your current expenses, including:

  • Monthly premiums: The amount you pay out of your paycheck or directly to your insurer.
  • Co-pays: Flat fees for doctor visits or hospital stays.
  • Deductibles: The amount you pay toward costs until your health insurance kicks in.
  • Coinsurance: A percentage of the cost for a medical procedure, office visit, or prescription. (If you have 80% coinsurance, you’re responsible for 20% of the bill.) There is an out-of-pocket maximum to cap expenses every year.
  • Health Savings Account (HSA) contributions: Pre-tax paycheck deductions that can be used now to cover your current deductible or saved to pay for future expenses. HSAs are only available to participants in high-deductible health plans (HDHPs). You may want to think of your HSA as a savings vehicle rather than an expense.

Once you add it up, it can put your health care expenses in perspective. Youssef uses Mary as an example to show how medical expenses can accumulate:

“Mary is enrolled in a high-deductible health plan (HDHP) through her employer. She’s responsible for:

  • Monthly premiums ($100 per month).
  • A yearly deductible ($1,500 per year).
  • 20% coinsurance up to an out-of-pocket maximum of $4,000 per year.
  • HSA contributions ($3,400 per year). This can cover her deductible and coinsurance, or she can save it to use tax-free during retirement.

Mary is healthy and usually just has to cover her premiums ($1,200 per year) and her HSA contributions, which she sees as an investment. Soon she’ll turn 65 and will need to make decisions about Medicare. We can consider Mary’s Medicare choices next.”

*Bureau of Labor Statistics (BLS) report on health care spending

**BLS share of premiums paid by employers

HSAs: A retirement saving tool?

Make the most of Medicare

Medicare is the government health care insurance program for everyone age 65 and up.

There are two primary options: Original Medicare and Medicare Advantage.

  • Original Medicare is made up of Part A (hospital costs) plus Part B (outpatient costs). You can also choose Part D (prescription drug coverage) and Medigap (supplemental insurance).
  • Medicare Advantage is a plan offered by a private company that contracts with Medicare. These plans include coverage provided by Parts A and B in one. Most plans also cover prescription drugs. If you choose a Medicare Advantage plan, you’ll be limited to providers in a network.

See the following chart for a detailed description of the different parts of Medicare.

Type of coverage

What it covers


Additional info

Part A


Hospital costs

No premium. A deductible and coinsurance apply.


Most people get Part A for free at age 65. But there is a prerequisite: You or your spouse must have worked (and paid payroll taxes) for 10 years.

Part B



Doctor visits and outpatient procedures.

The monthly premium is set on an annual basis, and you may pay more depending on your income.

An annual deductible and coinsurance apply.

Part C (Medicare Advantage)










These plans are an alternative to Original Medicare. They include Parts A and B. They may also include Part D, plus dental, hearing, and vision coverage.

Premiums vary by plans offered in different locations. An annual out-of-pocket limit applies to these plans.

Medicare Advantage plans are offered by insurance providers contracted by Medicare.

Part D

Prescription drug coverage (can be stand-alone with Parts A and B, or included with Part C).

Premiums vary by plan, and you may pay more depending on your income. An annual deductible and coinsurance apply.

It’s important to enroll during your enrollment period to avoid paying a late penalty.

Medigap insurance plans

This may cover Parts A and B co-pays, coinsurance, and deductibles.

Premiums vary by plan depending on your location, age, and insurance provider.

These policies are sold by private companies and may cover certain expenses that Original Medicare doesn’t cover. You can’t buy a Medigap plan when you have Part C.

Getting back to Mary as an example, you can see how the different parts of Medicare add up:

“Mary chooses Original Medicare and Part D. She plans to travel and likes that she won’t have to worry about going out-of-network.

Here’s how her costs break down:

  • Part A: She doesn’t have to pay a premium for Part A, but she’ll have a $1,316 deductible. If she has to spend more than 60 days in the hospital, she’ll also have to pay coinsurance (from $329 to $658 per day).
  • Part B: The premiums for Part B are $134 per month ($1,608 per year). For Part B, she’ll have a deductible of $183 per year, plus 20% coinsurance. There is no out-of-pocket maximum.
  • Part D: The premiums for Part D are $30 per month ($360 per year). Mary will have a deductible (set by her plan) of $400, plus cost-sharing for brand name and generic drugs.

The bottom line: Mary’s health care premium will go up marginally in the early years of her retirement. Her lowest costs will be $1,968 per year. In the future, she can use her HSA account to pay for the Medicare premiums as well as out-of-pocket expenses.

Mary should reevaluate her health care needs from year to year. She might want to add a Medigap plan at a later date, which could cover her coinsurance and deductibles. She doesn’t have an out-of-pocket maximum, which could help her if she needs expensive care.”

Choosing the right Medicare plan depends on your needs and priorities

“Don’t focus just on the cost of premiums,” says Youssef. “Look at the total costs and coverage provided, whether your doctor is in-network or not, and the quality of care.”

Worried about making the wrong decision? You can review your Medicare plan options each and every year to assess what will work for you at that time. Open enrollment usually starts in early October and ends in early December. Medicare offers several online tools to help you make decisions that are right for you.

Choosing Medicare coverage

Getting started with Medicare

Medicare Advantage plans

Plan for long-term care

There is one major expense Medicare won’t cover: long-term care.

“Long-term care scares people the most,” says Youssef.

There’s a good reason. Costs can add up quickly. According to insurance provider Genworth, the average annual cost for room, board, and care in an assisted living facility in 2017 was $45,000. The cost for a private room, board, and care in a nursing home was $97,455.*

Studies from the Department of Health & Human Services show that almost 50% of individuals won’t have to pay long-term care expenses. But more than 15% of individuals may face more than $100,000 in paid long-term care expenses.**

Some people buy peace of mind by purchasing long-term care insurance. However, insurance isn’t the right solution for everyone. Depending on your situation it may be better to look for alternatives.

Consider these strategies:

  • Maintain an ample reserve in your portfolio to self-insure.
  • Combine paid care and informal care by family members.
  • Move to states that offer less-expensive care.
  • Sell your primary residence.

“It may be best for some investors to reduce—not eliminate—the risk of being unable to afford long-term care,” says Youssef.

This approach works for many retirees. They focus on their health. They save a little more. And they keep an open mind about how they’ll pay for nursing care:

“Mary invests in her HSA for her health care and possible long-term care needs. That will give her more cash in case she needs hands-on nursing care in the future. If she needs to move into an assisted-living facility, she plans to sell her house. She accepts the risk that this might affect her legacy planning.”

*Genworth report on the cost of care

**Department of Health & Human Services

Consider the big picture

There’s no getting around it: Health care is expensive—now and in retirement.

However, costs fluctuate, especially for retirees. Instead of making general calculations about how much you’ll need, consider a more personalized approach.

“Keeping health care costs in perspective is important,” says Youssef. “Otherwise investors might make decisions based on numbers that don’t apply to them.”


All investing is subject to risk, including the possible loss of the money you invest.

We recommend that you consult a tax or financial advisor about your individual situation.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.