Ask most pre-retirees to name the expense they are least prepared for, and healthcare is nearly always the answer. It is not that people ignore it — it is that the cost structure of healthcare in retirement is genuinely different from anything experienced during working years, and the projections are often startling enough to feel implausible.
They are not. A healthy 65-year-old couple retiring today can expect to spend hundreds of thousands of dollars on healthcare over the course of their retirement, and that figure rises meaningfully for those who retire early or have significant medical needs. Planning for this cost requires understanding two distinct phases: the years before Medicare eligibility at 65, and the years after enrollment — which turn out to have their own surprises.
Phase One: The Pre-Medicare Gap
For retirees who leave work before age 65, one of the most pressing immediate challenges is how to cover health insurance costs during the gap years. Employer-sponsored coverage ends at retirement. Medicare does not begin until 65. That gap — which can be as short as a few months or as long as a decade for early retirees — is typically the most expensive healthcare period of retirement on a per-year basis.
The primary options for bridging that gap are COBRA coverage from a former employer, marketplace plans through the Affordable Care Act, coverage through a spouse’s employer plan, or, for CalPERS and CalSTRS members, retirement health benefits that the system offers to qualifying retirees.
COBRA extends your employer plan but at full cost — both the employee and employer share of premiums — plus an administrative fee. For most people, that comes as a shock. A monthly premium that felt manageable at $200 per paycheck can become $1,500 or more per month under COBRA.
ACA marketplace plans vary significantly by state, age, and income level. The premiums are income-sensitive — lower income in retirement can qualify you for meaningful subsidies. But “income” for ACA purposes is based on your Modified Adjusted Gross Income, which means that large Roth conversions or capital gain realizations in a given year can reduce or eliminate subsidy eligibility. Coordinating ACA coverage with Roth conversion strategy during the pre-Medicare years is one of the more nuanced planning opportunities available to early retirees.
The practical implication: if you plan to retire before 65, healthcare coverage cost needs to be explicitly modeled in your retirement income plan — not estimated vaguely as a monthly budget line. The difference between good and poor planning in this area can be several hundred dollars per month for multiple years.
Phase Two: Medicare — What It Covers and What It Does Not
Medicare eligibility at 65 brings relief — but also a new set of decisions and costs that most people underestimate. Medicare is not free, it is not comprehensive, and navigating its parts correctly at enrollment has long-term consequences.
Medicare consists of four main parts. Part A covers hospital inpatient care and is premium-free for most people who paid Medicare taxes for at least 10 years. Part B covers outpatient care, doctor visits, and preventive services — and carries a monthly premium that changes annually and is subject to IRMAA income surcharges for higher-income enrollees. Part C, also called Medicare Advantage, is an alternative way to receive Medicare benefits through private insurers. Part D covers prescription drugs.
What Medicare does not cover is equally important to understand. Medicare has no cap on out-of-pocket costs in traditional Parts A and B. Dental, vision, and hearing care are largely excluded. Long-term care — meaning custodial care in a nursing home or assisted living — is not covered by Medicare in any meaningful way. And Medicare does not cover care outside the United States, which matters for retirees who travel internationally.
Most retirees address the gaps in traditional Medicare through either a Medigap (Medicare Supplement) policy or a Medicare Advantage plan. Medigap fills in the copays, coinsurance, and deductibles left by traditional Medicare. Medicare Advantage replaces traditional Medicare with a private plan that often bundles drug coverage and may include dental and vision. The choice between them involves tradeoffs in premium cost, coverage flexibility, network restrictions, and predictability of out-of-pocket expenses.
The Enrollment Timing Trap
Medicare enrollment decisions are not purely financial — they are also time-sensitive. Missing the Initial Enrollment Period (the seven-month window around your 65th birthday) without qualifying for a Special Enrollment Period can result in permanent premium penalties: 10% added to your Part B premium for each 12-month period you were eligible but not enrolled, for as long as you have Part B. The Part D late enrollment penalty is calculated differently but similarly permanent.
For people who are still working and covered by an employer plan at 65, there are rules about when it is safe to delay Medicare enrollment without incurring penalties. The rules distinguish between coverage from your own current employer (which can allow delay) and coverage through a spouse’s employer or other sources (which has different rules). Getting this wrong is one of the more consequential and common Medicare mistakes.
If you plan to retire before or at 65, enrollment timing should be part of your retirement transition checklist — not something to figure out after the fact.
How Healthcare Costs Are Projected to Grow
Medical inflation has historically outpaced general inflation by a meaningful margin. Over a 20- or 30-year retirement, that gap compounds. A healthcare cost that feels manageable at 65 may be substantially more expensive at 80.
Healthcare costs in retirement also tend to follow a pattern: relatively stable and manageable in the early retirement years, higher in the middle years as chronic conditions develop, and potentially very high in the final years if significant medical care or long-term care is required. The early years of retirement — often the “go-go” phase of travel and activity — are frequently when healthcare costs are lowest. Planning as if every year will be equally expensive misses this profile.
Fidelity’s widely cited estimates place the projected healthcare cost for a 65-year-old couple in retirement at over $300,000 in today’s dollars, not including long-term care. That figure varies based on health, coverage choices, and geography, but it provides a useful order of magnitude that most people’s casual budgets significantly underestimate.
California-Specific Considerations
California retirees have some planning considerations unique to the state. CalPERS retirees have access to the CalPERS Health Benefits Program in retirement, which provides group coverage during the pre-Medicare years and Medicare supplemental coverage after 65. For qualifying CalPERS members, this coverage can be significantly more cost-effective than marketplace alternatives and removes much of the complexity from the pre-Medicare bridge period.
CalSTRS does not offer a comparable retiree health benefit directly, though some school districts provide post-retirement health benefits through their own programs. For CalSTRS members, the pre-Medicare years typically require marketplace coverage, which makes ACA premium subsidy planning and income management during those years particularly important.
California also does not tax Social Security benefits, which affects the income picture in ways that interact with ACA subsidy calculations and IRMAA. Understanding the full state and federal tax treatment of your income sources in retirement is part of building an accurate healthcare cost projection.
Building Healthcare Into Your Retirement Income Plan
The most important step in managing healthcare costs is treating them as a first-class planning input rather than a residual budget category. That means estimating, before retirement, what your coverage will cost in both the pre-Medicare and post-Medicare phases, what out-of-pocket maximums look like under your chosen plan, and how your income level in retirement will affect your Medicare premiums through IRMAA.
It also means maintaining a dedicated healthcare reserve — whether as part of your overall cash reserves or as a line item in your spending plan — so that a higher-than-expected medical year does not disrupt the rest of your withdrawal strategy.
Healthcare planning intersects with almost every other aspect of retirement income planning: withdrawal sequencing, Roth conversion strategy, Social Security timing, and long-term care planning all have healthcare implications. It is the one cost category that is both large enough to materially affect your plan and variable enough to require ongoing attention throughout retirement.
FAQ: How Much Should I Budget for Healthcare in Retirement?
The most commonly cited benchmark is approximately $150,000–$165,000 per person (or $300,000+ per couple) for healthcare costs in retirement, in today’s dollars, not including long-term care. This is an average that includes premiums, out-of-pocket costs, and dental — it is not a worst-case number. Your actual costs will depend on your health, the coverage you choose, when you retire relative to Medicare eligibility, and where you live. For early retirees, the pre-Medicare years can add substantially to this figure. The most important thing is to build a specific projection for your situation rather than relying on the average — because healthcare is one of the areas where your individual circumstances diverge most from population averages.
If you are approaching retirement and want to understand what healthcare will actually cost in your specific situation — including the pre-Medicare gap, your Medicare coverage options, and how to protect your plan from rising medical costs — a clear projection makes the difference between guessing and knowing.
Schedule a complimentary retirement planning consultation with our office. We will walk through your healthcare cost projection, model the pre-Medicare coverage options available to you, and show you how healthcare fits into your complete retirement income plan.
