The Hidden Reason So Many Retirees Are Running Out of Money
A stock market crash during your retirement years is a scary prospect. But there’s another threat that many retirees don’t think about: higher health care costs as you get older.
A 65-year-old retiring in 2025 can expect to spend an average of $172,500 on health care and medical expenses over the course of retirement, according to research from Fidelity Investments.
The reality of high health care costs
Health care costs may not be as high as the above estimate if you are in your 50s and 60s. But as you get older, your chances of needing health care — and facing a steep debt burden for that need — increase.
Many retirement planning strategies factor in inflation. For example, the 4% rule involves withdrawing 4% from your retirement savings accounts during the first year of retirement, then adjusting for inflation from then on. While this strategy may work for general living expenses, it may not work for health care expenses. Those prices tend to rise faster than average consumer prices. Fidelity’s estimate for 2025 was more than 4% above last year’s figure. The latest estimate of $172,500 in estimated health care costs continues as rising trends experts have seen for years. It was only $80,000 in 2002.
Medicare does not provide financial protection against health care costs, and any small choice can make health care costs more expensive. Missing the initial registration period or selecting the wrong add-on plan may result in significant payments and deductions. Carefully review your Medicare plan to make sure it gives you the right coverage.
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Don’t forget about long-term care
The Fidelity rate does not include the cost of long-term care, which nearly 70% of people over age 65 will need at some point in their remaining years, according to the Department of Health and Human Services. And costs can rise: The average annual cost of a private room in a nursing home was $111,325 in 2024 while an assisted living community came in at $70,800 a year and a home health aide, about $77,796, according to a report from CareScout.
Medicare does not cover long-term care. This can catch many retirees by surprise, but you can protect yourself with long-term care insurance.
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How to save on health care costs
Your nest egg will pay for your living expenses in retirement. But since health care costs are so high, it’s important to also save for any health care needs you may face in the future.
Your savings plan will depend on your specific situation, including your other goals, income and risk tolerance. For some retirees, it may make sense to build a separate fund for future health care expenses, similar to the emergency fund that financial advisors often recommend people have throughout their lives.
Putting money aside in a health savings account (HSA) is also a good idea. These accounts have a triple tax advantage: contributions are tax-deductible, capital growth is tax-deferred and withdrawals are tax-free.
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