Planning for Healthcare in Retirement: Why Employers Must Step Up

Retirees’ out-of-pocket medical costs are some of the most significant — and arguably most critical — expenses in post-retirement life. Unlike a mortgage, which can eventually be paid off, or discretionary spending that can be cut back, healthcare costs are ongoing and unavoidable. If not planned for, they can quickly drain retirement savings built up over the course of decades. The reality is clear: Unless health costs are understood and budgeted for well in advance of retirement, retirees face financial strain at a time when stability is most crucial.

Retirement healthcare planning isn’t just about finances; it also requires understanding the complexities of Medicare. For many nearing retirement, choosing Medicare coverage can be confusing and stressful. Medicare isn’t a single plan but a set of coverage “parts,” each with its own rules, costs and decisions affecting your finances for years. Part A is hospital insurance, Part B covers medical (doctor) services and Part D provides prescription drug coverage. Retirees also need to decide whether to add a Medigap plan, which helps cover deductibles and coinsurance, or select Medicare Advantage, a bundled option offered through private insurers. While Medicare Advantage plans may seem simpler, they vary greatly, so retirees should carefully review networks, out-of-pocket limits and coverage to avoid unexpected expenses.

Access additional Workspan Daily articles from this series:

The stress in healthcare planning comes from the complexity of the decision. Making the wrong choice or missing enrollment deadlines can lead to higher lifetime premiums, less coverage or gaps in care. For many retirees, this process occurs as they leave the workforce, manage a new budget, exhaust long-term savings for retirement income and face health issues that make informed decision-making even more crucial. That’s why education and planning are so important.

Current assessments highlight the financial burden of these decisions. Investment firm Fidelity forecasts that the average 65-year-old retiring in 2025 will need about $172,500 per person (themselves and their spouse) to cover healthcare costs in retirement. Annual spending confirms this: It is estimated that people with Medicare spend thousands of dollars each year for out-of-pocket medical expenses, even before including dental, vision and long-term care services that Medicare does not cover.

Against this backdrop, careful planning is essential. That’s where employers can truly make a difference. By integrating healthcare education, Medicare guidance and savings tools into financial wellness programs, employers can help workers reduce uncertainty, avoid costly mistakes and retire with greater confidence.

What Employers Can Do — Now

Organizations and their total rewards professionals can help their employees fully consider and plan for retirement healthcare costs by emphasizing these five action steps.

1. Make healthcare a core pillar of financial wellness.

Workers should consider healthcare insurance and costs as a fourth pillar of retirement, alongside Social Security, retirement savings and personal savings. Employers can offer planning tools that estimate retiree health expenses, compare Original Medicare plus Medigap with Medicare Advantage and demonstrate how different choices impact monthly retirement budgets.

2. Start a “Medicare readiness” track between the ages of 58 and 60.

Confusion about when and how to enroll is common, and late-enrollment penalties can be permanent. Employers should notify employees that the initial enrollment period is a seven-month window starting around their 65th birthday, and that special enrollment period rules apply if they keep employer coverage after turning 65. Providing a checklist and access to licensed advisors can reduce stress and help employees make informed decisions.

3. Connect HSAs to retirement savings.

Health savings accounts (HSAs) are powerful retirement tools. Contributions are made pre-tax, earnings grow tax-free and withdrawals for qualified medical expenses are tax-free. HSA accounts are portable. HSA contributions can be invested in a wide range of options, like those in 401(k) plans. Employers should encourage workers to invest their HSA balances when possible and to keep them for future medical expenses in retirement.

Employers might consider implementing HSA auto-enrollment (with an opt-out option) for employees enrolled in high-deductible health plans (HDHPs), including auto-escalation features and employer contributions that encourage ongoing savings. Framing the HSA as a “retirement health account” rather than just a copayment fund helps promote long-term planning and use.

4. Provide robust tools and one-on-one guidance.

Provide calculators that forecast retiree health costs across various Medicare options, estimate annual out-of-pocket expenses and premiums (including Income-Related Monthly Adjustment Amount [IRMAA] surcharges for higher-income retirees), and compare the benefits of investing HSA assets versus spending them now. Partnering with unbiased Medicare education services ensures employees receive trustworthy, non-sales-driven guidance.

5. Target education to life events.

Employers should notify employees when they turn 64½, when a spouse reaches 65 or when their coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) ends. Workers planning to retire mid-year should remember Medicare coverage isn’t automatic if they haven’t enrolled yet, and delaying Part B without qualifying employer coverage can lead to penalties. Coordinating these milestones with retirement income planning emphasizes the link between healthcare costs and financial security.

Messages to Share with Pre-Retirees and Retirees

Healthcare costs and retirement income are two key determinants for retirees’ financial well-being. These elements represent significant expenses with compounding effects. When pre-retirees and retirees understand fixed costs (such as the Part B premium), variable costs (deductibles, coinsurance and uncovered services) and the new expense caps, they can turn their stress and concerns into a measurable impact, encouraging proactive planning.

Inform pre-retirees of the need to set aside a separate “medical reserve” in their retirement income plan to shield against unexpected costs that could threaten their long-term security. If they are still working, they should consider treating the HSA as a stealth individual retirement account (IRA) for health by:

Maximizing their contributions;
Investing those contributions; and,
Keeping receipts to reimburse themselves tax-free later.

The Employer Dividend

Why should employers get involved? Fear of medical costs often causes delayed retirements, lower employee engagement and disrupted workforce planning. Providing clear, credible pathways to manage healthcare risks can allow employers to improve their financial wellness, prevent costly mistakes and enable more confident retirements.

The retiree health bill isn’t going away. However, with better planning tools, earlier education and more creative use of HSAs and Medicare, it can become a manageable reality instead of a nasty surprise. That’s a win for both employees and employers.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics: