How to Protect Your Retirement Savings from Healthcare Costs

Healthcare is one of the largest and most unpredictable expenses in retirement. The average retired couple will need an estimated $315,000 or more to cover healthcare costs over the course of their retirement, and that figure does not include long-term care. When you add the potential need for nursing home care, assisted living, or extended home health services, the total can climb by hundreds of thousands of dollars. Without a strategy to manage these costs, healthcare expenses can erode the retirement savings you spent decades building.

The good news is that there are proven strategies to protect your savings. From insurance products like Medigap and long-term care coverage to tax-advantaged accounts like HSAs and income-generating tools like annuities, you can build a multilayered defense against rising healthcare costs. This guide explores the biggest cost drivers, the protection strategies available, and how to combine them into a plan that keeps your retirement on track.

The Biggest Healthcare Cost Drivers in Retirement

Understanding what drives healthcare costs in retirement is the first step toward managing them. The major cost categories include Medicare premiums, out-of-pocket cost-sharing, prescription drugs, dental and vision care, and long-term care. Each of these categories can consume a significant portion of your retirement budget, and together they represent a financial challenge that requires deliberate planning.

Medicare premiums alone represent a substantial ongoing expense. Most retirees pay the standard Part B premium, which is $185 per month in 2026, plus a Part D drug plan premium that averages $40 to $60 per month. Higher-income retirees face IRMAA surcharges that can more than double these amounts. When you add Medigap or Medicare Advantage premiums, total insurance costs can reach $5,000 to $10,000 or more per person annually.

Prescription drug costs are another major factor, particularly for retirees with chronic conditions requiring multiple medications. While the Inflation Reduction Act capped annual Part D out-of-pocket costs at $2,000, monthly costs can still be significant for those on specialty medications. Dental care is a growing expense as teeth require more restorative work with age. And long-term care remains the single largest potential healthcare expense, with nursing home costs exceeding $131,000 per year for a private room.

Medigap: Capping Your Medical Cost-Sharing

Original Medicare has no annual out-of-pocket maximum. This means that in a year with significant health issues, your share of medical bills is theoretically unlimited. The 20 percent coinsurance on Part B services, combined with hospital deductibles of $1,676 per benefit period, can result in bills of $10,000, $20,000, or even more in a single year. For retirees who want predictable costs and protection against catastrophic bills, Medigap is the most direct solution.

Medigap Plan G is the most popular choice for new enrollees. It covers the Part A deductible, Part A coinsurance for hospital stays, Part B coinsurance and copays, skilled nursing facility coinsurance, Part B excess charges, and foreign travel emergencies. The only cost it does not cover is the annual Part B deductible of $257. After paying that deductible, your out-of-pocket exposure for Medicare-covered services is essentially zero. Monthly premiums for Plan G typically range from $100 to $300 depending on your location, age, and the insurer.

Plan N is an alternative for cost-conscious retirees. It typically costs 15 to 30 percent less than Plan G but requires copays of up to $20 for some office visits and up to $50 for emergency room visits that do not result in admission. Plan N also does not cover Part B excess charges. For retirees in good health who see their doctors infrequently, Plan N can save hundreds of dollars per year in premiums while still providing strong protection against large medical bills.

Long-Term Care Insurance: Protecting Your Nest Egg

Long-term care is the elephant in the room of retirement planning. Medicare does not cover custodial care, which is the ongoing assistance with daily living activities that most people think of when they imagine a nursing home or home health aide. About 56 percent of people turning 65 today will need some form of long-term care, and the costs are high enough to threaten even well-funded retirement accounts.

Long-term care insurance transfers this risk to an insurance company. A policy purchased in your mid-50s to early 60s can provide $150 to $300 per day in benefits for three to five years, with inflation protection that ensures the benefit keeps pace with rising care costs. The cost of this coverage is significant, averaging $1,500 to $3,500 per year for a single person at age 65, but the alternative is self-funding a cost that can exceed $131,000 per year for a private nursing home room.

Hybrid life insurance and long-term care policies have become increasingly popular as an alternative to traditional long-term care insurance. These products combine a life insurance policy with a long-term care rider, allowing you to access the death benefit early if you need long-term care. If you never need care, the full death benefit passes to your beneficiaries. This addresses the common concern about paying premiums for decades and never using the long-term care benefit.

Health Savings Accounts: The Triple Tax Advantage

A Health Savings Account is one of the most tax-efficient ways to save for healthcare costs in retirement. HSAs offer three tax benefits: contributions are tax-deductible, investments grow tax-free, and withdrawals for qualified medical expenses are tax-free. No other savings vehicle offers this triple tax advantage. After age 65, HSA funds can also be used for non-medical expenses, with withdrawals taxed as ordinary income, similar to a traditional IRA.

To contribute to an HSA, you must be enrolled in a high-deductible health plan and not enrolled in Medicare. In 2026, contribution limits are $4,300 for individuals and $8,550 for families. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. The strategic approach is to maximize HSA contributions during your working years, pay current medical expenses out of pocket if possible, and let the HSA balance grow for use in retirement.

A retiree with a well-funded HSA can use it to pay Medicare premiums, prescription drug costs, dental and vision expenses, long-term care insurance premiums (up to age-based limits), and other qualified medical expenses, all tax-free. Even retirees who can no longer contribute to an HSA can continue to use existing balances for qualified expenses indefinitely. The HSA essentially functions as a healthcare-specific retirement account with superior tax treatment.

Annuities and Guaranteed Income Strategies

Annuities can provide a reliable income stream dedicated to covering healthcare expenses in retirement. A single premium immediate annuity converts a lump sum into guaranteed monthly payments for life. By allocating enough of your savings to an annuity to cover predictable healthcare expenses like Medicare premiums, supplemental insurance premiums, and regular prescription costs, you create a floor of income that persists regardless of market conditions.

Deferred income annuities offer another approach. Purchased in your 60s with payments beginning at age 80 or 85, these products provide a substantial income boost during the years when healthcare costs tend to be highest. The trade-off is that you give up access to the premium for many years, and if you pass away before payments begin, some or all of the premium may be lost depending on the contract terms. Adding a return-of-premium or cash refund provision reduces this risk but increases the cost.

Social Security optimization is a related strategy. Delaying Social Security benefits from age 62 to age 70 increases your monthly benefit by about 77 percent. This higher guaranteed income provides more capacity to cover healthcare costs without drawing down investment accounts. For married couples, coordinating Social Security claiming strategies can maximize the combined lifetime benefit and provide stronger survivor income.

Medicare Optimization and Cost Reduction

Choosing the right Medicare plan can save thousands of dollars per year. The decision between Original Medicare with a Medigap plan and Medicare Advantage has significant cost implications. Original Medicare with Medigap provides the most predictable costs and the broadest provider access, but the combined premiums are higher. Medicare Advantage plans often have lower or zero premiums and include drug coverage and dental and vision benefits, but they use provider networks and have out-of-pocket maximums that can reach $8,850 in 2026.

Review your Medicare coverage annually. Part D drug plans change their formularies and costs each year, and a plan that was the best value last year may not be optimal this year. Use the Medicare Plan Finder tool on Medicare.gov to compare options based on your specific medications and preferred pharmacies. Even a small formulary change can shift your costs by hundreds of dollars per year.

IRMAA surcharges are another area where planning can reduce costs. If your modified adjusted gross income exceeds certain thresholds, you will pay higher premiums for both Part B and Part D. Managing your taxable income in the two years before you start Medicare, through strategies like Roth conversions, charitable giving, or careful withdrawal sequencing, can help you avoid or minimize these surcharges.

Medicaid Planning and Asset Protection

For retirees whose assets are not sufficient to self-fund extended long-term care but who do not have long-term care insurance, Medicaid may serve as a last-resort safety net. Medicaid covers long-term care for individuals who meet strict income and asset limits. However, qualifying for Medicaid typically requires spending down most of your assets, which can leave a surviving spouse in a difficult financial position.

Medicaid planning involves legal strategies to protect assets while qualifying for coverage. These may include irrevocable trusts, spousal protections under Medicaid rules, and the Medicaid Long-Term Care Partnership Program, which allows policyholders of qualifying long-term care insurance to protect assets equal to the benefits the policy pays. Medicaid planning is complex and state-specific, making it essential to work with an elder law attorney who understands the rules in your state.

Putting It All Together: A Layered Protection Strategy

The most effective approach to protecting retirement savings from healthcare costs is a layered strategy that combines multiple tools. Start with Medicare as the foundation. Add Medigap or choose a well-rated Medicare Advantage plan to manage cost-sharing. Layer in long-term care insurance or a hybrid policy to address the biggest single cost risk. Use an HSA if you built one during your working years to fund out-of-pocket expenses tax-free. Consider an annuity to guarantee income for predictable healthcare costs. And review your entire coverage package annually to adapt to changing needs and costs.

No single product can eliminate all healthcare cost risk in retirement. But by combining insurance, tax-advantaged savings, guaranteed income, and smart Medicare choices, you can build a financial buffer strong enough to absorb the costs that aging inevitably brings. The retirees who fare best are those who plan proactively, purchase coverage while they are healthy and premiums are favorable, and treat healthcare cost management as an ongoing part of their financial plan rather than a one-time decision.

Start today by estimating your annual healthcare costs, identifying any coverage gaps, and evaluating whether your current savings trajectory will be sufficient. Work with a financial advisor who specializes in retirement healthcare planning to stress-test your assumptions and identify opportunities to strengthen your protection. Your retirement savings represent a lifetime of work. Protecting them from healthcare costs is among the most important financial decisions you will make.