Health-Care Costs Can Break Retirement Plans

Here is a number that surprises almost everyone the first time they hear it: a 65-year-old retiring in 2025 may need roughly $172,500 — for one person, not a couple — to cover health-care expenses through retirement. That figure comes from Fidelity's widely cited annual estimate, and it covers things like premiums, deductibles, copays, and prescriptions. Notably, it does not include long-term care.

Most retirement plans are built around two questions: how much should I save, and how long does it need to last? Health care is the third question, and it is the one most plans quietly skip. Many people assume Medicare will simply take over at 65 and handle whatever comes. It does handle a lot — but it was never designed to cover everything, and its biggest gap happens to be the kind of care families most often end up needing for years at a time.

Here's the good news: this is a planning problem, not a doom story. Once you can see the gap clearly, there are practical ways to prepare for it — and one of the most useful tools may already be sitting in your benefits package at work. This article walks through what Medicare actually covers, how an HSA (health savings account) can double as a health-cost retirement fund, and the full spectrum of long-term-care planning options.

Why this matters

When a health cost shows up unplanned, it doesn't just dent the budget. It forces exactly the decisions a retirement plan exists to prevent: selling investments in a down market, leaning on adult children, or spending down savings that were supposed to last decades. A long care need is also one of the most common ways one spouse's health quietly consumes the other spouse's retirement.

None of that is inevitable. The households that handle health costs well aren't necessarily the wealthiest ones — they're the ones that named the cost in advance and gave it a funding source, the same way they did for housing or travel.

What Medicare covers — and the gap that surprises families

Medicare is the federal health insurance program that generally begins at age 65. It does a solid job with what you might call medical care: hospital stays, doctor visits, and — with a prescription drug plan — medications. Retirees still pay premiums, deductibles, and a share of many costs, which is a big slice of where that $172,500 estimate comes from. So even "covered" care isn't free care, and it belongs as a real line in your retirement budget.

The bigger surprise is long-term care: extended help with daily living activities like bathing, dressing, and eating, whether that happens at home, in assisted living, or in a nursing facility. Medicare.gov is direct about this: Medicare generally does not pay for ongoing custodial care — care whose main purpose is helping you with daily activities rather than treating a medical condition. It covers some short-term skilled care in specific situations, such as limited skilled nursing care after a qualifying hospital stay, but it is not a long-term-care plan.

That distinction — medical care versus custodial care — may be the most important sentence in this article. Too many families first learn it during a hospital discharge meeting, when a parent needs daily help and someone asks, "So who's paying for this?" Learning it today, calmly, with years to prepare, is the entire advantage.

An HSA can double as a health-cost retirement account

If your health plan at work is a qualifying high-deductible health plan, you likely have access to an HSA — and it deserves a closer look than it gets during open enrollment. Under IRS Publication 969, an HSA carries a rare triple tax advantage: contributions are tax-deductible, the money can grow tax-free under current law, and withdrawals are tax-free when used for qualified medical expenses. No other account type in the U.S. tax code offers all three.

Two features make HSAs especially useful for retirement health costs. First, the balance rolls over year after year — it is not use-it-or-lose-it (that's a flexible spending account). Second, many HSA providers let you invest the balance once it passes a small cash threshold. Put those together and a quiet strategy emerges: pay today's modest medical bills out of pocket if you can, invest the HSA, and let it grow for decades as money earmarked for exactly the expense we just measured in six figures.

A hypothetical example shows the scale. Suppose someone contributes $300 a month to an HSA for 20 years and the invested balance grows at a hypothetical 6% per year:

Future value = P x (((1 + r)^n - 1) / r) $300/month for 240 months at 6%/year = roughly $138,000

About $72,000 of that is contributions; the rest is growth — a meaningful head start on a $172,500 problem, built $300 at a time. And the money is never trapped: after age 65, withdrawals for non-medical purposes are simply taxed as ordinary income, much like a traditional retirement account, without the extra penalty that applies earlier. Contribution limits and eligibility rules are set by the IRS and change over time, and HSA decisions interact with the rest of your tax picture — so before making an HSA a pillar of your retirement plan, talk it through with a tax professional or CPA.

The long-term-care planning spectrum

So Medicare won't fund ongoing custodial care, and an HSA may cover a healthy share of routine retirement health costs. What about the big risk — a care need that lasts years? There is no single right answer here, but there is a spectrum of options, and knowing the whole menu is what lets a family choose deliberately instead of by default.

Self-funding sits at one end: simply earmarking savings and investments for potential care. It offers full flexibility and works for some households, but a multi-year care need can become the single largest expense of a lifetime, so it asks a lot of a portfolio.

Traditional long-term-care insurance is a standalone policy that pays toward qualifying care. It directly targets the risk, though premiums can increase over time and approval depends on your health when you apply — which is why people who want this coverage tend to explore it earlier rather than later.

Hybrid, or linked-benefit, policies combine life insurance with long-term-care benefits. If care is needed, the policy helps pay for it; if care is never needed, beneficiaries generally receive a death benefit instead — an answer to the common worry of paying for protection you might never use.

A long-term-care rider is an add-on to a life insurance policy and one form of living benefits — features that pay while you're alive. A qualifying care need lets you draw on the policy early, with payments typically reducing the death benefit your beneficiaries would later receive. If you already own life insurance, it's worth checking whether features like this are included.

Finally, Medicaid acts as the safety net: a means-tested state and federal program that can cover long-term care after most assets are spent down, with rules that vary by state. It's a backstop, not a plan most families would choose first.

Two honest notes apply to everything above. Any guarantees inside an insurance policy are backed by the claims-paying ability of the issuing insurance carrier. And costs, benefit triggers, and terms vary widely by policy, age, health, and state — this is education to help you ask better questions, not a recommendation for any product.

Your next steps

You don't have to solve all of this in a weekend. Start by making the invisible cost visible, then give it a funding source.

Think of the health-care plan as the one piece of your retirement picture you hope you never have to lean on — and are glad is there when you do. You've now seen the gap, the tool, and the menu. The next step is simply a conversation.