How to Build a Retirement Plan That Covers Your Healthcare Needs

The average life expectancy in the United States now stands at nearly 80 years, and by 2040, 20% of Americans will be over the age of 65. That is a big shift for the economy, and it brings some serious financial considerations for individuals, too. In 2023, healthcare spending in the U.S. jumped by 7.5%, reaching a staggering $4.9 trillion, about $14,570 per person. Projections for 2025 suggest costs could rise another 7% to 8%. With medical inflation outpacing general inflation, ignoring healthcare in your retirement plan is a risk no one can afford.

Factoring in retirement healthcare costs is a smart move. And if you are unsure where to begin, talking to a financial advisor can help you build a more personalized and realistic retirement plan. This article will also walk you through how to prepare, what to consider, and how to make sure your plan supports your healthcare costs in retirement.

Below are 5 things you can do for retirement healthcare financial planning:

1. Invest in a Health Savings Account (HSA)

An HSA is a tax-advantaged savings tool that can be used to build retirement health savings. It can only be used by people who are covered under a High-Deductible Health Plan (HDHP). It allows you to set aside money specifically for qualified medical expenses while enjoying several tax benefits along the way. Contributions to an HSA can be made through payroll deductions, which are excluded from your gross income. Additionally, any contributions your employer makes to your HSA are generally exempt from employment taxes like Social Security and Medicare. The money in the account also grows tax-free, and any distributions that are used for qualified medical expenses are tax-exempt. This triple tax benefit of pre-tax contributions, tax-free growth, and tax-free withdrawals makes HSA a unique tool. However, it is important to stick to eligible expenses. If you withdraw money for a non-qualified purpose before the age of 65, you will not only owe regular income tax on the amount but also a 20% penalty. Once you turn 65, the rules become more flexible. You can use your HSA funds for any purpose without facing the 20% penalty. However, if the expenses are not qualified medical expenses, they will still be subject to regular income tax.

It is important to note that eligibility to open and contribute to an HSA is tied to having an HDHP. Moreover, for 2025, the contribution limits for the account are set at $4,300 for individuals and $8,550 for families. Because you will need to pay out of pocket for healthcare expenses until you meet your deductible, it is wise to contribute at least enough to cover that deductible.

Over time, an HSA can serve not just as a healthcare fund but also as a supplemental retirement resource if managed carefully.

2. Understand what Medicare coverage to choose

When it comes to healthcare financial planning, choosing the right Medicare coverage is one of the most important financial decisions you can make. Medicare is available to most Americans over age 65. There are two main paths when using Medicare. The first is to opt for Original Medicare with a supplemental Medigap policy. The second is to select a Medicare Advantage plan. Each of these options comes with its own benefits and limitations, which is why understanding their coverage in detail is essential.

Original Medicare (Parts A and B) is the traditional government-provided option. It covers hospital stays and outpatient care. However, it does not cover everything. You will still face deductibles, coinsurance, and no cap on annual out-of-pocket costs. To fill these gaps, you can consider pairing Original Medicare with a Medicare Supplement plan (such as Plan G) and add Part D for prescription drug coverage. This combination offers broad access to doctors and hospitals across the country. Moreover, any provider that accepts Medicare will see you without the need for referrals or pre-approvals. This can typically result in higher monthly premiums, but you will know what to expect regardless of whether your health is stable or you face a sudden illness. However, it is important to note that dental, vision, and hearing are not included and will require separate plans.

On the other hand, Medicare Advantage (Part C) plans cover hospital, medical, and usually prescription coverage into one plan, often at a lower monthly cost. Many of these plans also include extras such as dental, vision, gym memberships, etc. They can offer convenience and lower upfront costs. In fact, most Medicare Advantage plans place a cap on out-of-pocket spending, which can be a relief if you face frequent medical visits. However, there are important limitations to consider. Medicare Advantage plans are offered by private insurance providers and often operate within specific geographic regions. You can only have access to doctors and hospitals in a specific network, and getting care outside that network can be expensive or sometimes even unavailable. In addition, insurance companies may deny certain treatments or services if they do not consider them medically necessary. This may be a good fit for healthy individuals living in areas with strong Advantage plan networks. However, the traditional Medicare route might offer more flexibility if you travel often or want unrestricted access to specialists.

Selecting the right Medicare coverage for your needs is not just about costs but also access and how much uncertainty you are willing to take on in retirement. To make the best choice, make sure to evaluate your health history, travel plans, and financial situation. You can hire a financial advisor for healthcare planning and compare all options.

3. Buy a long-term care insurance policy

It is important not to overlook the possibility of needing long-term care in your older years. This type of care includes assistance with day-to-day tasks at home, in an assisted living facility, or in a nursing home. These services are often not covered by Medicare, and in most cases, you have to pay for them out of pocket. Long-term care insurance helps manage these costs by providing financial coverage for non-medical care. With the rising cost of senior care, this coverage can protect your savings.

Not everyone needs to buy a long-term care insurance policy. In fact, a lot of people who have substantial savings choose to pay for nursing care and other expenses on their own. However, it may still be advised to consider purchasing one to ensure you are not left financially insecure or dependent on others later. On the other hand, individuals with limited financial resources may qualify for Medicaid, which does cover certain long-term care services. But long-term care insurance can be non-negotiable for those who fall somewhere in between.

Several factors influence the cost of a long-term care insurance policy. Age is one of the most significant of these. Policies are less expensive when purchased at a younger age. Gender also plays a role in insurance, with women typically paying higher premiums due to their longer life expectancy. Married individuals usually qualify for discounted rates, although each spouse needs their own policy. Where you live also affects the pricing for these policies, as premiums vary by state and even city. Your health status is equally important when applying for a plan. Insurance companies may deny coverage if you already need help with daily activities or have certain medical conditions such as Alzheimer’s disease, metastatic cancer, Acquired Immunodeficiency Syndrome (AIDS), Parkinson’s disease, or if you have recently had a stroke. That is why many financial and insurance advisors recommend purchasing a policy in your mid-50s when you are more likely to be healthier and can qualify for a plan easily. A major benefit of purchasing a plan at this age is also that you can get a lower premium. Moreover, once your policy is in place, it cannot be canceled due to your age or health condition as long as you pay all the premiums on time. So, you can have peace of mind for the years ahead.

When exploring policies, look closely at the coverage options. Some plans offer inflation protection, which allows your benefits to grow and counter rising long-term healthcare costs in retirement. Also, pay attention to the waiting period, as this can impact your ability to make a claim. Every policy is different, so it is important to shop around and find one that aligns with your financial goals and health outlook.

4. Consider investing in Retiree Reimbursement Arrangement (RRA) and Health Reimbursement Arrangement (HRA)

An RRA is a tax-advantaged tool that some employers offer to help retirees cover retirement healthcare costs. Funded entirely by the employer, an RRA allows retirees to pay for qualified medical costs using tax-free dollars. Contributions made by the employer are tax-deductible, and the reimbursements retirees receive are not considered taxable income. The employer sets the contribution amount, and any unused funds in the RRA typically roll over from year to year, provided the retiree remains enrolled in the plan. Once eligible, retirees can access their RRA funds in several convenient ways. They can pay out-of-pocket for eligible expenses using cash, check, or personal credit card and then submit a claim for reimbursement online. They can also pay through a payment app or by mailing or faxing a paper claim. Additionally, online bill payment options may be available for direct payment from the RRA to healthcare providers.

Qualified expenses under an RRA may include medical, dental, and vision care, long-term care services, select living expenses, and Medicare premiums. However, if funds are used for non-qualified expenses, retirees may face taxes and penalties, reducing the account’s value.

While RRAs are geared toward former employees, HRAs serve a similar function for actively working employees. Like RRAs, HRAs are employer-funded and reimburse workers for out-of-pocket healthcare costs and individual health insurance plan premiums. The reimbursements are tax-free to employees and tax-deductible for employers. However, unlike RRAs, HRAs generally do not allow funds to roll over year to year unless specifically designed to do so.

It is important to note that not all employers offer RRAs or HRAs, and eligibility criteria can vary. But for those who qualify, these arrangements can provide significant tax-advantaged support in managing healthcare costs.

5. Estimate your potential rising healthcare costs in retirement

Retirement healthcare costs can vary significantly based on your personal situation, so it is important to take a closer look at your own needs. Make sure to evaluate your current and past health status, family medical history, age, and lifestyle. Understanding these factors can help you estimate future costs more accurately. For instance, if you have a family history of illnesses and anticipate the need for long-term care, your expenses may be higher.

It is also wise to assess your risk tolerance and whether you might need more intensive care down the line. Identifying these risks early allows you to plan ahead and select the most appropriate financial tools, like long-term care insurance, HSAs, Medicare, or reimbursement arrangements.

Because retirement healthcare financial planning can be complex, consider consulting with a financial advisor. A professional can help you project potential costs and recommend the right coverage options to prepare you for expected and unexpected medical needs.

Why Healthcare Should Be Made a Priority in Retirement

Planning for healthcare in retirement is not something you can afford to overlook or lump in with your general savings. It requires thoughtful evaluation, comparing multiple options, and understanding how future medical costs, insurance policies, and tax rules might affect you. Healthcare deserves its own dedicated space in your overall financial plan.

It is also important to consider working with a financial advisor. An advisor can help you understand the different retirement health savings plan rules, long-term care insurance coverages, and reimbursement arrangements. This allows you to plan more effectively, gain peace of mind, and protect yourself financially in retirement.