Health Expense Risk

Posted September 23, 2025, By Cole Ferrier

Key Takeaways:

• Health Expense Risk is the danger that the high and rising cost of medical care will consume an unsustainable portion of your retirement assets.

• Most retirees are surprised to learn that Medicare is not free and does not cover all services, leaving significant out-of-pocket costs for premiums, co-pays, dental, vision, and hearing care.

• For high-income earners, Medicare premiums are subject to significant surcharges (IRMAA), which can be managed through proactive tax planning.

• The most powerful tools for mitigating this risk are making smart Medicare choices, leveraging a Health Savings Account (HSA) as a triple-tax-advantaged medical fund, and creating a plan for the pre-Medicare gap if retiring early.

In our journey through the 18 retirement risks, we've covered the foundational challenges of a long life (Longevity Risk), rising costs (Inflation Risk), and unsustainable spending (Excess Withdrawal Risk). Now we turn to the risk that is often the primary driver of the last two: Health Expense Risk.

This isn't a simple bug in your financial plan; it's a highly complex and unpredictable subroutine that can run in the background for years, suddenly demanding massive processing power and draining system resources when you least expect it. It is, without a doubt, one of the largest and most volatile expenses in retirement, capable of derailing even the most carefully constructed plans.

As a planner, my goal is to debug this complexity and replace uncertainty with a clear, logical plan. You cannot predict your future health with perfect accuracy, but you can build a robust defensive system to protect your financial well-being, no matter what health challenges arise.

By the Numbers

• $315,000: The estimated lifetime amount a 65-year-old couple retiring in 2022 would need to cover their health care and medical expenses throughout retirement. This figure does not include the potentially catastrophic cost of long-term care. (Source: Fidelity Investments, "How to plan for rising health care costs," May 2022)

• $361,000: The amount of savings a 65-year-old couple would need to have a 90% chance of covering their medical expenses in retirement, assuming higher-than-average prescription drug costs. This highlights the massive range of potential outcomes. (Source: Employee Benefit Research Institute (EBRI), "Savings Needed for Health Expenses for People on Medicare," Issue Brief No. 544, January 2022)

• 62%: The average percentage of a retiree's medical expenses that are covered by Medicare. The rest must be paid for through supplemental insurance and out-of-pocket spending. (Source: EBRI, "Savings Needed for Health Expenses for People on Medicare," Issue Brief No. 544, January 2022)

From the Case Files

Consider Bob and Carol, both 66, who recently retired. They were diligent savers, paid off their mortgage, and had a solid $1.5 million portfolio. They assumed Medicare would cover most of their health costs. In their first year, they were hit with three surprises. First, their combined Medicare Part B and D premiums were higher than expected due to income-based surcharges (IRMAA) from their final working years. Second, Carol needed a significant amount of dental work, none of which was covered by Medicare. Third, Bob needed hearing aids, also not covered. By the end of the year, their planned healthcare budget was off by nearly $15,000, forcing them to pull extra money from their portfolio in a down market—a classic case of Sequence of Returns Risk triggered by unmanaged health costs.

Understanding the Risk: It's More Than Just Doctor Visits

Health expense risk is the potential for unexpected and rising medical costs to consume a significant and unplanned portion of your retirement income. Many retirees are shocked to learn that Medicare is not a free, all-inclusive program. The risk is a combination of several distinct costs:

• Premiums: You will pay monthly premiums for Medicare Part B (medical insurance) and usually for Part D (prescription drugs). These premiums are often deducted directly from your Social Security check.

• Deductibles and Co-pays: For most services, you will have to pay a deductible first, and then a percentage of the bill (typically 20% for Part B services) with no annual out-of-pocket maximum under Original Medicare.

• Services Not Covered: Medicare generally does not cover routine dental, vision, or hearing care—three services that retirees frequently need.

• The Pre-Medicare Gap: For early retirees, especially in the FIRE community, the period between their retirement date and age 65 is a period of maximum vulnerability, where they must fund 100% of their health insurance premiums through COBRA or the ACA Marketplace, often at a very high cost.

The Impact on Your Plan: A Volatile and Growing Drain

Unmanaged health expenses can launch a multi-pronged attack on your retirement blueprint.

• Interaction with Longevity & Inflation Risks: Healthcare is the epicenter where these two risks collide. A longer life (Longevity Risk) means more years of paying premiums and a higher chance of a costly chronic condition. These costs rise faster than general inflation (Inflation Risk), meaning they consume a larger and larger slice of your budget over time.

• Forced Portfolio Withdrawals: Large, unexpected medical bills can force you to sell assets at the worst possible time, triggering Sequence of Returns Risk and permanently damaging your portfolio.

• Tax Inefficiency: For high-income earners and those with large tax-deferred retirement accounts (like 401(k)s and traditional IRAs), large withdrawals to cover medical costs can push you into a higher tax bracket and trigger Medicare premium surcharges (IRMAA), creating a vicious cycle of higher costs leading to higher taxes.

Solutions & Your Risk Mitigation Toolkit

While you can't control your future health, you can build a powerful set of financial defenses to manage the costs. This is about transferring risk and creating dedicated funding sources.

• Tool #1: Master Your Medicare Choices. When you turn 65, you face a critical decision. This is a "system configuration" choice that sets the stage for the rest of your retirement.

  • Option A: Original Medicare + Medigap + Part D. This combination typically has higher monthly premiums but provides comprehensive coverage with very predictable, low out-of-pocket costs. It gives you the freedom to see any doctor who accepts Medicare nationwide.

  • Option B: Medicare Advantage (Part C). These are private plans that bundle Parts A, B, and usually D. They often have lower (or zero) additional premiums but come with network restrictions (HMOs/PPOs) and higher co-pays when you use services.

• Tool #2: Leverage a Health Savings Account (HSA). For those who have access to a high-deductible health plan during their working years, an HSA is the single most powerful tool for funding retiree medical costs. It offers a unique triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. It's the ultimate medical retirement account.

• Tool #3: Plan for the Pre-Medicare Gap. If you plan to retire before 65, you must have a specific, well-funded plan for this period. This means budgeting for the high cost of COBRA or ACA Marketplace plans and understanding how your income may affect your eligibility for subsidies.

• Tool #4: Actively Manage Income to Control Premiums. High-income retirees face the Income-Related Monthly Adjustment Amount (IRMAA), which can add thousands of dollars per year to Medicare premiums. The "great balancing act" for affluent retirees is to manage their taxable income to stay below the IRMAA thresholds. Strategies like funding spending with Roth IRA withdrawals or using Qualified Charitable Distributions (QCDs) from an IRA can be powerful tools to keep your income—and thus your premiums—under control.

A Strategic Defense Against Healthcare Costs

Strategically, health expense risk is a unique threat due to its volatility; it can introduce a massive and unplanned drain on your financial plan. A plan is most vulnerable when it lacks dedicated strategies to handle the multiple layers of these costs: the routine expenses like premiums and co-pays, the significant costs for services not covered by Medicare, and the financial shock of a major, unexpected illness.

A resilient plan installs a robust, multi-layered defense. The first layer is making an informed choice about your primary insurance—Original Medicare versus Medicare Advantage—to set your baseline coverage. The second is building a dedicated and tax-efficient reserve, like a Health Savings Account (HSA), to fund the inevitable out-of-pocket costs. The final layer involves active income planning to manage your taxable income and control premium surcharges (IRMAA), preventing costs from spiraling higher.

Conclusion: The Great Balancing Act

Planning for health expenses is a perfect illustration of the great balancing act. The central trade-off is often between paying higher, more predictable premiums (like with a comprehensive Medigap plan) for cost certainty versus accepting lower premiums in exchange for potentially higher and more volatile out-of-pocket costs (like with many Medicare Advantage plans). By understanding your options and building a dedicated funding strategy, you can transform one of the biggest sources of retirement anxiety into a manageable part of your comprehensive financial blueprint.

Create Your Financial Compass with Us

Navigating the complexities of Medicare and retiree health costs can be daunting. We can help you analyze your options, understand the financial trade-offs, and integrate a robust healthcare funding strategy into your overall retirement plan. Contact us today to ensure your plan is protected.

Resources:

• Medicare.gov: The official U.S. government site for Medicare, with tools to compare plans and estimate costs. (www.medicare.gov)

• State Health Insurance Assistance Programs (SHIP): Federally funded program providing free, unbiased counseling on Medicare. Find your local office at www.shiphelp.org.

• Kaiser Family Foundation: An independent source for in-depth research and analysis on Medicare and U.S. healthcare policy. (www.kff.org/medicare)