Planning for Healthcare Costs in Retirement

If there’s one expense category that has a way of catching retirees off guard, it’s healthcare. Costs rise faster than general inflation, needs become harder to predict with age, and a single significant health event can put real pressure on even a well-constructed plan. Yet too often, healthcare is treated as an afterthought—something to figure out when the time comes.

What replaces that anxiety is a concrete plan—one that maps out likely costs, models their impact on your spending and portfolio, and puts strategies in place to either minimize those costs or meet them head-on. This post walks through that approach: estimating premiums and out-of-pocket costs, projecting their impact across retirement, and integrating them into a spending and investment plan that holds up over time.

Why Healthcare Deserves Its Own Place in Your Plan

Healthcare and longevity are arguably the two retirement variables with the greatest power to affect how long your money lasts. Here’s why they demand serious attention:

• Medical costs rise faster than general inflation. Over the past two decades, U.S. healthcare expenses have grown at an average annual rate of 4 to 6 percent—well above the Consumer Price Index. A retirement budget built on general inflation assumptions will quietly fall short.

• Out-of-pocket spending is unpredictable. Prescriptions, specialist visits, hospital stays, and chronic condition management vary enormously from one person to the next—and can overwhelm a budget that wasn’t built to handle them.

• Long-term care events can be financially devastating. A single year in a nursing facility can exceed $100,000. Even in-home care or assisted living can erode savings at a pace that’s difficult to recover from without a plan.

• Retirement is long. A healthy 65-year-old man today has a life expectancy of around 85; for women, it’s closer to 88—and both figures continue to rise. Planning for 20 or 30 years of healthcare spending isn’t pessimistic; it’s realistic.

That’s why healthcare and longevity modeling should be built into the foundation of every retirement plan—not as a footnote, but as a core input.

Pre-65 Retirement: Understanding Coverage Costs and Subsidies

If you retire before age 65, you’re facing what can be some of the most expensive healthcare years of your retirement. You’re no longer covered by an employer plan, you’re not yet eligible for Medicare, and the options available to you—COBRA, retiree coverage if available, or ACA marketplace plans—can carry significant price tags. Understanding what policies cost and whether you qualify for assistance is one of the first and most important planning steps.

What Policies Actually Cost

ACA marketplace plans vary by age, location, plan tier, and the level of cost-sharing you’re willing to accept. For a 60-year-old couple in most markets, unsubsidized premiums for a silver-tier plan can easily surpass $30,000 per year—before deductibles, copays, and out-of-pocket maximums. Gold and platinum plans cost more upfront but reduce exposure to large bills. Bronze plans carry lower premiums but higher cost-sharing, which can backfire if you’re a frequent healthcare user. COBRA is typically the most expensive option—you’re paying the full premium your employer covered plus an administrative fee—but it may make sense for short bridge periods or if you have ongoing care relationships you don’t want to disrupt.

The planning exercise here is straightforward: price out the options realistically for your age and location, choose a coverage structure that balances premiums against out-of-pocket costs, and build those costs into your retirement spending projections.

ACA Subsidies: Do You Qualify, and How Much?

ACA premium tax credits can dramatically reduce what you pay for marketplace coverage—sometimes by hundreds of dollars per month. But whether you qualify, and by how much, depends almost entirely on your Modified Adjusted Gross Income (MAGI) relative to the Federal Poverty Level (FPL). Under current rules, subsidies phase in for individuals and couples with MAGI above 100% of the FPL, and the credits reduce your premium contribution to a defined percentage of income.

At lower income levels, that cap is quite small. As of 2026, the temporary enhanced subsidy rules have expired, bringing back the strict “subsidy cliff.” This means as your income rises toward 400% of the FPL—which is $84,600 for a married couple in 2026—the credit phases out. If your income exceeds that threshold by even a single dollar, the subsidy disappears entirely and you are responsible for the full premium cost.

For early retirees, this creates a genuine planning opportunity. Unlike workers with a fixed paycheck, retirees often have significant control over how much taxable income they realize in a given year—and that control translates directly into control over healthcare premiums. For those near the threshold, managing MAGI to stay below the 400% FPL cliff can be worth thousands annually. For others, required distributions or income needs will push them beyond it, and that’s fine—as long as the full premium cost is built into the plan.

MAGI: What Counts, What Helps, and What to Watch

Modified Adjusted Gross Income for ACA purposes includes most forms of income you’d expect: wages (if you’re still working part-time), pension distributions, Traditional IRA and 401(k) withdrawals, capital gains, dividends, interest (even tax-exempt interest from municipal bonds), rental income, and taxable Roth conversions. Critically, it also includes all Social Security benefits—meaning both the taxable and non-taxable portions are added together for this calculation. It does not include Roth IRA distributions from qualified accounts, distributions from Health Savings Accounts (HSAs), return of basis from non-deductible contributions, or loans.

What this means in practice:

• Roth IRA distributions are MAGI-neutral. Drawing from a Roth account for living expenses doesn’t count toward MAGI and won’t affect your subsidy calculation.

• Traditional IRA and 401(k) withdrawals increase MAGI. Every dollar you pull from a pre-tax account counts. Managing the size of these distributions matters.

• Roth conversions add to MAGI for the year. This is the key issue: conversions can be valuable long-term tax planning, but they count as income in the year executed. Timing and sizing conversions to stay within subsidy-favorable MAGI bands is a real planning consideration.

• Capital gain harvesting must be managed carefully. Realizing gains in taxable accounts adds to MAGI. If you’re near a subsidy cliff, large capital gain events—even from a single fund sale—can eliminate thousands of dollars in annual credits.

• Social Security timing interacts with MAGI. Delaying Social Security keeps a significant portion of income off the books entirely during early retirement years, which can help preserve subsidy eligibility.

The planning goal in the pre-Medicare years isn’t to minimize income—it’s to be intentional about what you realize, when, and in what form. A thoughtful income strategy can save thousands annually in premiums while still allowing for Roth conversions, portfolio rebalancing, and appropriate living expenses.

Medicare: Costs, Coverage, and IRMAA

At 65, Medicare replaces the coverage gap—but it’s neither free nor simple. Understanding what Medicare costs, how to structure coverage, and how your income level affects premiums is essential to building accurate projections.

What Medicare Costs

Medicare Part A (hospital coverage) is premium-free for most retirees who have sufficient work history. Part B (outpatient and physician coverage) carries a standard monthly premium—which is $202.90 per month for 2026—that increases with income under IRMAA rules. Part D (prescription drug coverage) adds another premium that varies by plan and income. Depending on the coverage structure you choose, there are additional costs:

• Original Medicare + Medigap (Medicare Supplement): Higher total premiums but predictable, low out-of-pocket exposure. Medigap plans cover most or all of the gaps left by Parts A and B, offering budget certainty at the cost of higher monthly premiums.

• Medicare Advantage (Part C): Often lower premiums than Medigap alternatives but with network restrictions and variable out-of-pocket exposure. This can work well for healthy, lower-utilization retirees but may present access challenges as health needs increase.

The right structure depends on your health status, risk tolerance, and financial situation. What matters from a planning standpoint is choosing a structure and projecting its costs forward—including the out-of-pocket exposure appropriate for the coverage you’ve selected.

IRMAA: The Medicare Income Surcharge

IRMAA—the Income-Related Monthly Adjustment Amount—is a surcharge added to Medicare Part B and Part D premiums for retirees whose MAGI exceeds certain thresholds. These thresholds are based on income reported two years prior (so 2024 income affects 2026 premiums), which means IRMAA planning requires forward-looking income projection. For 2026, the first IRMAA threshold begins when MAGI exceeds $109,000 for single filers or $218,000 for married couples filing jointly. The IRMAA tiers step up at several income levels, with surcharges that can add significant monthly costs to Part B premiums alone—per person. For a couple, the annual cost difference between staying below the first IRMAA threshold and crossing into higher tiers can reach $10,000 per year or more for the highest earners.

The income sources that trigger IRMAA are similar to those for ACA MAGI. The same income management strategies—coordinating Roth distributions, managing conversion timing and size, and sequencing portfolio withdrawals—apply here.

Importantly, IRMAA is not a cliff—it’s a step function. Crossing a threshold by even $1 triggers the surcharge for the full year. That’s why annual income projections and mid-year monitoring matter: a large unexpected distribution or capital gain event can inadvertently push you into a higher IRMAA tier and cost thousands.

Modeling Healthcare Costs Into Your Plan

Understanding the cost structure is step one. Step two—the one that actually changes retirement outcomes—is projecting those costs forward and integrating them into your spending and investment plan. This is where vague worry becomes a concrete, manageable number.

Premiums: Year-by-Year Projection

Building an accurate premium projection means mapping coverage across each phase of retirement: the pre-Medicare years with estimated ACA premiums (net of any subsidies), the transition to Medicare at 65, and then Medicare costs going forward—including expected IRMAA exposure based on projected income. Each year has a specific premium figure attached to it.

Apply a healthcare-specific inflation rate of 4 to 6 percent when projecting these premiums forward—not the general CPI used for other living expenses. Healthcare has consistently inflated faster than general prices, and a plan built on the wrong assumption will quietly fall short. Over a 20-year retirement, the difference between 2.5% and 5% healthcare inflation is substantial.

Out-of-Pocket Expenses: Beyond the Premium

Beyond premiums, there’s the day-to-day reality of healthcare spending: copays, deductibles, prescriptions, dental, vision, and specialty care. A good starting point is anchoring on recent actual spending data, then layering in a healthcare inflation rate and an age-based adjustment that reflects increasing utilization as you move through retirement. The out-of-pocket maximum of your coverage structure serves as a ceiling for modeling catastrophic year scenarios. Stress-testing the plan against a year where you hit that maximum—or multiple years in sequence—helps confirm that the broader portfolio and spending plan can absorb that level of spending without derailing longer-term goals.

Integrating Healthcare into the Retirement Spending Plan

Healthcare premiums and out-of-pocket costs are “must-pay” fixed expenses—not optional or discretionary, and not subject to the same flexibility as travel or entertainment. They get their own line item in the spending plan, inflated at the appropriate rate, and are funded alongside other core living expenses.

From a portfolio perspective, this means the investment plan needs to generate sufficient returns—net of withdrawals—to sustain spending that includes these healthcare costs inflating at 4 to 6 percent annually. Modeling this explicitly, rather than folding healthcare into a single “general inflation” assumption, produces materially different and more accurate projections of portfolio longevity.

The Spending Smile: How Healthcare Reshapes Retirement Spending Over Time

One of the most useful frameworks for understanding retirement spending patterns is the concept of the “spending smile”. Research consistently shows that retirement spending doesn’t follow a straight line inflated at a constant rate. Instead, it tends to follow a curved pattern: higher in the early years of retirement (the “go-go” years of travel, activity, and experiences), gradually declining through the middle years as activity levels moderate, and then creeping back up later in retirement as healthcare and care-related expenses increase.

This matters for planning because the standard assumption of steady inflation-adjusted spending overstates what you’ll likely need in your 70s and early 80s—and potentially understates what you’ll need in your late 80s and beyond. The implication: your portfolio needs to be sized not just for a constant withdrawal rate but for the actual shape of your anticipated spending.

Healthcare is the primary driver of the upturn in later spending. Prescription costs, specialist visits, supportive services, and eventually long-term care all increase in prevalence and cost with age. In practice, modeling the spending smile means segmenting retirement into phases—typically early (65–75), mid (75–85), and later (85+)—with different spending assumptions and healthcare inflation rates applied to each, producing a more accurate projection of portfolio balance trajectories over time.

Modeling Portfolio Balances in Later Life: Will the Resources Be There?

One of the most productive exercises in healthcare planning is running forward projections to estimate expected portfolio balances at advanced ages—say, age 80, 85, or 90. This isn’t a prediction; it’s a modeling exercise that helps answer a critical question: when the more intensive healthcare and care needs of later life arrive, will sufficient resources be available to fund them?

These projections account for the spending smile described above—drawing down the portfolio faster in the early years, more moderately through the middle years, and then modeling the uptick in later-life spending. They also incorporate the expected return assumptions and asset allocation appropriate for each stage of retirement, which typically becomes more conservative over time.

For many retirees, the picture that emerges includes not just portfolio assets but also home equity. A paid-off home represents a meaningful financial resource that can be accessed in later life through a sale, downsizing, or a reverse mortgage if needed. Including estimated home equity in the later-life resource picture alongside projected portfolio balances gives a more complete view of what’s available to fund significant care costs.

This modeling exercise serves two purposes. First, it identifies potential shortfalls early—when there’s still time to adjust savings rates, spending, or insurance coverage decisions. Second, for retirees with projected surpluses in later life, it can provide confidence that self-funding long-term care is a viable option—reducing or eliminating the need for additional insurance coverage. For those where the projections suggest meaningful uncertainty, it sets the stage for the next conversation: long-term care planning.

Planning for Long-Term Care

Long-term care is the part of healthcare planning that most people would prefer not to think about—which is precisely why it’s worth thinking about carefully. A significant care event can erode savings faster than almost any other retirement risk, and waiting until you need care to address it is too late. In fact, someone turning 65 today has an almost 70% chance of needing some type of long-term care services and support in their remaining years.

There are generally three approaches to funding long-term care, each with its own tradeoffs:

• Traditional LTC Insurance: Provides dedicated coverage for care costs but comes with premiums that can increase over time. Break-even analysis—comparing total premiums paid against potential payouts—helps clarify whether this approach makes financial sense for your situation.

• Hybrid Life/Annuity Policies with LTC Riders: Combine a death benefit or annuity with long-term care coverage. These can offer more flexibility and the reassurance that premiums aren’t “wasted” if care is never needed—though they require a larger upfront commitment.

• Self-Funding via a Dedicated Care Reserve: Sets aside a defined pool of assets—typically conservative holdings—earmarked specifically for care costs. This approach offers maximum flexibility but requires sufficient assets to make it viable.

The portfolio modeling exercise described above helps determine whether this is a realistic option. Running these options side by side—with realistic assumptions about care costs, timing, and your own risk tolerance—is the only way to make a genuinely informed choice. There’s no universally right answer, but there is a right answer for your situation.

Putting It All Together

Healthcare planning doesn’t live in isolation—it has to be integrated with everything else in your retirement plan. Premiums and out-of-pocket costs are “must-pay” fixed expenses, inflated at a healthcare-specific rate and funded alongside core living expenses. ACA subsidy eligibility and IRMAA thresholds feed directly into Roth conversion decisions and withdrawal sequencing. And the later-life spending model connects healthcare cost projections to long-term portfolio sustainability. Ongoing management means reviewing coverage annually before open enrollment, monitoring income relative to key thresholds, and updating projections as health circumstances evolve.

Healthcare is one of those topics that can cast a long shadow over retirement—not because it has to, but because it’s so often left unaddressed. When costs are estimated, projected, and built into the plan, they lose their power to unsettle you. A well-modeled healthcare plan doesn't eliminate uncertainty — it contains it, so that uncertainty doesn't define your retirement.

Coming Next: Estate Planning and Legacy

Retirement isn’t just about making your money last—it’s also about what you leave behind. In Part 7, we’ll explore how to translate your financial blueprint into a lasting legacy: wills and trusts, beneficiary designations, charitable giving strategies, and ways to minimize estate taxes—so that what you’ve built reflects your values and protects the people you care about most.

Tad Jakes, CFP®, EA, ECA

Disclaimer: Healthcare costs, Medicare rules, IRMAA thresholds, ACA subsidy rules, and insurance options are subject to change and vary significantly by individual circumstance. The figures and strategies referenced in this post are intended to be illustrative and educational—not personalized advice. Before making decisions about healthcare coverage, income planning, long-term care funding, or related financial strategies, consult with a qualified financial advisor and, where appropriate, a licensed insurance professional who can evaluate your specific situation.