Client outcomes

Why retirees still need to plan for healthcare costs

October 17, 2023
An elderly couple sharing a tablet device.

Key Takeaways:

  • Rising healthcare costs are a top worry among retirees and will still account for a sizable portion of their budgets.
  • Over time, the Inflation Reduction Act will help to lower drug costs for retirees enrolled in Medicare Part D.
  • Financial professionals can demonstrate their value by helping clients efficiently plan for healthcare costs in retirement.

The rising cost of healthcare plays a pivotal role in retirement planning—now more than ever. For example, from July 2021 to July 2022 alone, prices for more than 1,200 prescription drugs increased an average of 31.6%. That is significantly higher than the 8.5% inflation rate during the same time period.1

It’s no surprise, then, that out-of-control healthcare costs are a top retirement concern of most U.S. adults. In fact, 63% are very worried about what healthcare costs might do to their plans for retirement.2

The Inflation Reduction Act (the “Act”), a federal budget bill signed into law in 2022 that contained public investments in a broad array of social, infrastructural, and environmental programs, included provisions to reduce the frequency and size of drug price increases for people enrolled in Medicare. The Act allows Medicare to negotiate prices for certain prescription drugs covered under Medicare Part B and Part D, caps out-of-pocket Part D costs, and extends the Affordable Care Act insurance subsidies into 2025.

While this legislation will undoubtedly help with some prescription medication costs, retirees will still face potentially significant out-of-pocket costs for medical care. That’s why helping your clients plan ahead for healthcare costs remains a crucial part of the retirement planning process.

What (and How) Do Retirees Pay for Medicare?

Many people do not understand that Medicare isn’t free. In reality, there are a variety of potential costs involved—including premiums, coinsurance, copays, and deductibles.

Premiums, copays, and more

Aside from helping to fund Medicare through federal taxes, Medicare beneficiaries also share significantly in the direct costs of medical care and prescription drugs. This comes in the form of premiums, copays, coinsurance, and deductibles.

  • Premiums: Monthly premiums for Medicare vary based on a variety of factors, including the beneficiary’s income and the types of plan(s) they choose (including original Medicare or Medicare Advantage). In addition to the potential costs of Medigap or Medicare Advantage plans, your higher-income clients will likely have to kick in premium surcharges for their Medicare Part B or Part D plans. This added surcharge to the Medicare base premium is called an income-related monthly adjustment amount (“IRMAA”). Learn more about how Medicare premiums are calculated.
  • Copays and coinsurance: These are out-of-pocket expenses that beneficiaries must pay when they access healthcare services.
  • Deductibles: Before Medicare starts to pay its share, beneficiaries might need to pay a certain amount as a deductible. Both Part A and Part B have their respective deductibles, which generally increase each year.

How Will the Inflation Reduction Act Help?

Medicare cost-control measures of the Act kick in gradually over several years.3,4

  • Beginning in 2023:
    • Drug companies must pay rebates to Medicare if prices rise faster than inflation for drugs used by Medicare beneficiaries.
    • Monthly cost-sharing for insulin is capped at $35 for people with Medicare.
    • All vaccines are free for people with Medicare.
  • Beginning in 2024:
    • The 5% coinsurance for catastrophic costs will be eliminated.
    • Annual Part D premium increases are capped at no more than 6% through 2029.
  • Beginning in 2025:
    • Out-of-pocket spending for Medicare Part D enrollees is capped at $2,000 annually and can be broken down into monthly payments. This cap will be adjusted each year thereafter to reflect increases in per capita Part D costs.
    • Insurance companies and drug manufacturers are incentivized to limit drug prices.
  • Beginning in 2026 and beyond:
    • Negotiated prices begin to go into effect in 2026 for certain high-cost drugs covered under Medicare Part B and Part D.
    • Negotiated prices for additional high-cost drugs will go into effect each year through 2029 (and potentially longer).

Price Negotiations for the First 10 Drugs Begin in 2023

A long-standing clause in the Medicare Prescription Drug Improvement and Modernization Act, the 2003 law that established Medicare Part D, prohibited the federal government from interfering in the pricing of drugs covered under the program. This clause restricted the ability of the federal government to wield its purchasing power to lower drug costs—especially for high-cost drugs with no competitors.5

The Inflation Reduction Act changed that—requiring the federal government to negotiate prices for 60-plus drugs without competitors. The first 10 drugs for which Medicare will negotiate prices were announced in August 2023 and include the following:

  • Eliquis: Prevention and treatment of blood clots
  • Jardiance: Diabetes, heart failure
  • Xarelto: Prevention and treatment of blood clots; reduction of risk for patients with coronary or peripheral artery disease
  • Januvia: Diabetes
  • Farxiga: Diabetes, heart failure, chronic kidney disease
  • Entresto: Heart failure
  • Enbrel: Rheumatoid arthritis, psoriasis, psoriatic arthritis
  • Imbruvica: Blood cancers
  • Stelara: Psoriasis, psoriatic arthritis, Crohn’s disease, ulcerative colitis
  • Fiasp, NovoLog: Diabetes

Negotiated prices for these drugs will go into effect in 2026.6

Planning for Other Healthcare Costs

The new cost controls that first came into effect in 2023 are anticipated to reduce out-of-pocket drug costs for Medicare enrollees beginning in 2024. But retirees are still required to pay Medicare premiums, copays, and coinsurance, not to mention many other potential out-of-pocket costs for physician visits, surgeries and other procedures, hospitalizations, hearing care, dental care, and more.

These costs will add up over time. The Employee Benefit Research Institute (“EBRI”) estimates that to have a 90% chance of paying for Medicare premiums and prescription drug costs in retirement, a 65-year-old woman would need $197,000—and a 65-y         ear-old man $166,000. 7 EBRI projects a couple with high prescription drug costs would need $383,000 to meet that 90% target.8

As a financial professional, you can offer valuable guidance to clients by helping them create tax-efficient strategies to plan for these costs. Options can include:

  • Leveraging health savings accounts (HSAs): HSAs can provide a triple tax benefit. Contributions are tax-deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free. After age 65, HSA funds can be withdrawn for any reason without penalty, although income tax applies to non-medical withdrawals. Importantly, HSA withdrawals used for qualified medical expenses do not count toward modified adjusted gross income (“MAGI”), which is used to determine Medicare premium amounts for higher-income retirees.
  • Regulating withdrawals from taxable accounts: Carefully balancing withdrawals from taxable and tax-deferred accounts, such as traditional IRAs and 401(k)s, can help clients manage MAGI.
  • Roth conversions: A Roth IRA conversion allows your clients to move money from a traditional IRA into a Roth IRA. The conversion itself is a taxable event, so the conversion would need to take place more than two years prior to the year in which IRMAA is calculated. This is because the IRMMA calculation is based on a Medicare beneficiary’s MAGI from two years prior. Future withdrawals from the Roth IRA in retirement are tax-free and do not contribute to MAGI.
  • Planning charitable contributions: Qualified charitable distributions from an IRA can satisfy required minimum distributions while excluding the distribution from income—potentially reducing MAGI.

Find more resources

The Nationwide Retirement Institute offers a wealth of insights and resources to help you create tax-efficient strategies for your clients. You can also find tips and strategies on a broad array of financial topics at