Healthcare Costs and Inflation

The size of the problem. Fidelity has published an annual retiree healthcare estimate for over two decades. In 2025 it reached $172,500 for a single 65-year-old — a lifetime, after-tax figure covering Medicare premiums, deductibles, coinsurance, and out-of-pocket drug costs, but not long-term care. For a couple it's about $345,000. For perspective, Fidelity's first estimate in 2002 was $80,000; the number has more than doubled, rising over 4% in the past year alone. This isn't a scare statistic — it's a planning input. If you don't have a healthcare line in your retirement budget, you're implicitly assuming one of your largest lifetime expenses is zero.

Why it inflates faster than everything else. General inflation runs around 3% over the long run; medical care has historically run 5%–6%. That means healthcare costs roughly double every 12–14 years, versus every ~24 for general prices. Over a 30-year retirement, a category growing at 5.5% while your income grows at 2.8% (the Social Security COLA) becomes a larger and larger share of your budget every single year. This is the mechanism behind the "retiree inflation gap" from Chapter 9 — healthcare's weight is why older households experience higher inflation.

What Medicare does and doesn't cover. At 65 you become eligible for Medicare, which is essential but incomplete. Part A (hospital) is premium-free for most; Part B (outpatient/physician) carries a standard premium of $202.90/month in 2026 plus 20% coinsurance with no out-of-pocket cap under Original Medicare; Part D covers drugs with its own premium and cost-sharing. Higher earners pay IRMAA surcharges on top (Chapter 12). What Medicare largely doesn't cover: routine dental, vision, hearing aids, and — critically — long-term custodial care. Retirees fill these gaps with a Medigap (supplement) policy or a Medicare Advantage plan, plus out-of-pocket spending.

The cost-sharing you actually pay. The premium is only the visible part of the bill. Underneath it sit deductibles and coinsurance that most people never see until they're sick. The premium is monthly; the deductibles and coinsurance below hit only when you use care — but a single bad hospital year can trigger most of them at once. These are the numbers a Medigap or Advantage plan is designed to blunt.

The dangerous line is Part B's 20% coinsurance with no ceiling. On routine care it's trivial; on a $200,000 course of chemotherapy or a major surgery it's a $40,000 bill with nothing to stop it. Original Medicare, by itself, has no out-of-pocket maximum. (The one recent bright spot: the Inflation Reduction Act finally capped Part D drug spending — about $2,100 in 2026 — so catastrophic prescription costs are, at last, bounded.) Closing the coinsurance hole is the entire reason the two supplement paths below exist.

Path 1 — Medigap (supplement) + Original Medicare. A Medigap policy is private insurance that pays the deductibles and coinsurance Original Medicare leaves behind. The most popular choice, Plan G, covers essentially everything except the small Part B deductible — after which your covered medical costs drop to roughly zero and become fully predictable. You keep Original Medicare's nationwide any-doctor access (no networks, no referrals). The trade-off is premium: a Plan G runs on average ~$140–$170/month ($1,700–$2,000/year), rising with age, and you buy a separate Part D drug plan (another ~$40/month). A budget-friendly variant, High-Deductible Plan G, costs only ~$40–$50/month but you self-pay until ~$2,800 of out-of-pocket each year. Crucial timing: during your 6-month Medigap open-enrollment window at 65 you're guaranteed coverage regardless of health; miss it and insurers in most states can medically underwrite — or decline — you later.

Path 2 — Medicare Advantage (Part C). Medicare Advantage is an all-in-one private alternative that replaces Original Medicare: one plan bundles Parts A, B, and usually D, and typically adds dental, vision, hearing, and gym perks Medigap never touches. Premiums are strikingly low — the 2026 average is around $17/month, and many plans are $0 on top of your Part B premium. The catch is structural: you trade low fixed cost for variable cost and restricted access. Advantage plans use networks (HMO/PPO), often require referrals and prior authorization, and instead of Medigap's near-zero coinsurance you pay copays as you go — up to a legal out-of-pocket maximum of about $9,250 in-network (2026). In a healthy year you may pay almost nothing; in a serious-illness year you can be exposed to that full ceiling. It's lower baseline cost with higher tail risk, versus Medigap's higher baseline cost with almost no tail risk.

The premiums — what you pay every month. Cost-sharing is what you pay when you use care; premiums are what you pay to be covered at all. Here's the full monthly stack, from Original Medicare through the two supplement routes. Everyone pays the Part B premium; what you add on top depends on the path you pick. Note the mirror image: Medigap's premium is the largest add-on but buys the smallest cost-sharing, while Advantage's premium is the smallest (often zero) but leaves the most exposure when you're sick.

Medigap vs. Medicare Advantage at a glance. The two paths solve the same problem — Original Medicare's uncapped 20% — in opposite ways. Side by side, the trade-off is the whole decision:

The HSA: your best pre-retirement weapon. A Health Savings Account is the only account with a triple tax advantage: contributions go in pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. For 2026 you can contribute $4,400 (self-only) or $8,750 (family), plus a $1,000 catch-up if you're 55+. Two underused facts: first, you can treat an HSA as a stealth retirement account — pay small medical bills out of pocket while young, let the HSA compound for decades, and reimburse yourself later. Second, after 65 you can withdraw HSA funds for any purpose penalty-free (you just pay ordinary income tax on non-medical use, exactly like a traditional IRA), while medical use — including Medicare Part B and D premiums — stays tax-free. The main caveat: you can't contribute to an HSA once enrolled in Medicare, so the window is before 65.

Long-term care: the wildcard that breaks plans

Why this is the expense that ruins otherwise-good plans. Everything above is about medical care — doctors, hospitals, drugs. Long-term care (LTC) is different: it's help with the ordinary activities of daily living — bathing, dressing, eating, toileting, transferring, and continence — when age, frailty, or cognitive decline make them impossible alone. It is largely not medical, which is exactly why Medicare barely touches it: Original Medicare covers only short, skilled, rehabilitative stays (up to 100 days of skilled nursing after a hospitalization), not the months or years of custodial help most people eventually need. Fidelity's $172,500 estimate deliberately excludes all of it. So this is a second, separate, and potentially far larger liability sitting behind your medical budget — and it's the one that most often forces a spouse into poverty or consumes an entire estate.

How likely you are to need it — and for how long. The federal government's own research (HHS/ASPE) is blunt: about 70% of people who reach 65 will develop a severe enough need to require long-term services and supports before they die, and roughly 48% will receive some paid care over their lifetime. Most of that care is short — but the tail is what bankrupts you. About 1 in 7 (14%) will need care for longer than five years. Duration also splits sharply by sex: women average about 3.7 years of care versus 2.2 years for men, both because they live longer and because they're less likely to have a spouse at home to provide unpaid care. The planning takeaway is uncomfortable but simple: needing some care is the base case, not the exception — the real question is only how long and how expensive.

What it actually costs. These are not medical-copay numbers — they're rent-sized, recurring, and rising faster than inflation. Genworth/CareScout's 2024 Cost of Care Survey puts the national median annual costs as follows, and note that costs climbed 3%–10% in a single year and vary enormously by state (a nursing home in the Northeast can run more than double the national median).

The four ways to pay for it. There is no clean answer, but there are exactly four levers, and doing nothing simply defaults you into the first or second by accident. (1) Self-fund — pay from your own portfolio. Viable if your assets are large enough that a $100k–$250k+ hit won't destabilize the surviving spouse; increasingly painful below roughly $1.5–2M in investable assets. (2) Medicaid — the actual payer for the majority of nursing-home days in America, but only after you've spent down to near-poverty (generally ~$2,000 in countable assets, with limited protections for a spouse). It means Medicaid-accepting facilities and little choice. (3) Traditional LTC insurance — a dedicated policy that pays a daily or monthly benefit once you can't perform 2 of the 6 activities of daily living. Cheapest bought in your 50s; the catch is that premiums are not guaranteed and insurers have repeatedly raised them on existing policyholders. (4) Hybrid (asset-based) life/LTC or annuity policies — you fund a life-insurance or annuity contract that lets you draw the death benefit for care; if you never need care, your heirs get the payout instead. Premiums are typically guaranteed (no rate-hike surprises), which is why hybrids now dominate new sales — but they require a large lump sum or high fixed premium up front.

When to buy, and what it costs. Timing is the whole game with LTC insurance. Buy too early and you pay premiums for extra decades; buy too late and either the price is punishing or your health disqualifies you — roughly 1 in 5 applicants in their 50s and nearly half in their 60s are declined for health reasons. The industry "sweet spot" is age 55–65, while you're healthy enough to qualify and young enough that premiums are manageable. The figures below (AALTCI, 2025) are average annual premiums for a $165,000 initial benefit pool growing 3% a year — and the pattern is the lesson: waiting from 55 to 65 raises a couple's premium by roughly 40%, every year, for life.

What to look out for in a policy. The premium is the least important number; the design details decide whether the policy is worth anything when you're 85. Watch these:

• Inflation protection. Non-negotiable. Care costs rise ~4–5%/year, so a fixed benefit bought at 55 is nearly worthless at 85. Choose 3% compound (better) over simple or 5% if affordable — a $165k pool at 3% compound roughly doubles by the time most people claim.
• Elimination (waiting) period. The deductible in days — commonly 90 days — during which you pay out of pocket before benefits start. A 0-day period costs much more; 90 days is the standard trade-off.
• Benefit amount and pool. A daily/monthly cap (e.g., $150–$200/day) and a total pool (e.g., $165k, or expressed as "3 years"). Match the daily benefit to real costs in your state, not the national median.
• Rate-increase risk (traditional policies). Premiums are "not guaranteed." Legacy policyholders have seen increases of 50%–100%+. Budget for hikes, or choose a hybrid with guaranteed premiums.
• The benefit trigger. Benefits start when a licensed professional certifies you can't do 2 of 6 ADLs, or have severe cognitive impairment (e.g., dementia). Confirm the policy is tax-qualified so benefits are received income-tax-free.
• Spousal / shared-care discounts. Couples often get 15%–30% off and can buy a shared pool either spouse can draw from — usually the best value.