Most retirement plans have a number for housing, groceries, travel, and utilities. Then we get to health care — and the plan often becomes "Medicare will handle it." That is an incomplete answer. A 65-year-old retiring in 2026 may face $185,500 in out-of-pocket health costs over retirement, even with Medicare in place. The goal of this article is not to frighten you with that number. It is to break it into five manageable pieces.

$371,000 Combined estimated out-of-pocket health costs for a married couple, both age 65, retiring in 2026

Most retirement plans have a number for housing. A number for groceries. A number for travel and utilities. Then we get to health care — and the plan often becomes: "Medicare will take care of it."

That sounds reassuring. It is also incomplete. Most pre-retirees — 54 percent — incorrectly expect Medicare will cover all of their health expenses in retirement, according to Fidelity. It will not. Medicare covers a significant share of health care costs, but retirement health care still comes with premiums, deductibles, copays, prescription costs, dental bills, vision expenses, and hearing care that can land directly in your lap — year after year.

And if you leave work before 65? You may have an entirely different challenge: how do you pay for health insurance before Medicare even begins?

That is why every retirement plan needs one more question: where will your health-care money actually come from? Not someday. Not theoretically. Which account? Which income source? Which bucket? That is what this article works through.

Fidelity Investments released its 25th annual Retiree Health Care Cost Estimate in July 2026, showing a 65-year-old retiring this year may spend an average of $185,500 on health care and medical expenses throughout retirement — a 7.5 percent increase from the prior year's estimate of $172,500.

Before that number causes concern, consider what it actually represents. The $185,500 breaks down into three parts: approximately 48 percent comes from Medicare cost-sharing — deductibles, copays, and coinsurance paid each time a covered service is used; 45 percent comes from monthly premiums for Medicare Parts B and D; and 7 percent covers out-of-pocket prescription drug costs not fully covered by Part D.

This is not a lump sum you need sitting in a checking account before you retire. Think of it the way you think about electricity. If someone told you your home would require thousands of dollars in electricity over the next 25 years, you would not prepay the electric company for a quarter century. You would budget for it month by month. Health care works the same way. The goal is not one enormous pile of money labeled MEDICAL. It is several reliable ways to pay those bills when they arrive.

One large frightening number becomes much more manageable when it is broken into five specific jobs. Each pocket handles a different type of health-care expense. Together, they cover the full range — from the monthly premium you can predict to the long-term care scenario you hope never arrives.

1 Monthly Health-Care Budget Line

Medicare premiums, supplemental coverage, Part D, and routine prescriptions — the predictable monthly expenses that belong in your regular retirement budget as a fixed line item.

Predictable · Monthly

2 Medical Cash Reserve

A separate account for the unexpected — a crown, a hearing aid, a specialist visit, a deductible that arrives before the year resets. Target: $1,000 to start, working toward $5,000.

Unpredictable · Cash Reserve

3 Health Savings Account (HSA)

If you have access to an HSA-eligible plan, this is one of the most tax-efficient tools available for future health costs. Contributions go in pre-tax, grow without tax, and come out without tax when used for qualified medical expenses.

Tax-Advantaged · Long-Term

4 Retirement Account Withdrawals

IRA and 401(k) funds for health costs that exceed normal cash flow — but coordinated carefully, because taxable withdrawals can affect Medicare premium calculations through IRMAA.

Coordinated · Tax-Aware

5 Long-Term Care Strategy

The expense Medicare was not designed to cover — assistance with daily activities, nursing home costs, or in-home care. Requires its own plan: personal savings, insurance products, home equity, or a combination.

Separate Strategy Required

The first step is straightforward: make health care a visible line in the monthly retirement budget — not buried under "miscellaneous" and not assumed to be handled. Start with the predictable monthly expenses: Medicare premiums, supplemental or Medigap coverage, Medicare Advantage if applicable, Part D premiums, and regular prescriptions.

The standard Medicare Part B premium in 2026 is $202.90 per month, with a $283 annual Part B deductible. That is before Part D, before any supplemental coverage, and before anything that is not covered. Most households will be looking at $350 to $600 or more per month in recurring health-related costs by the time all coverage is in place.

Monthly premiums are predictable. A cracked tooth is not. Neither is a hearing aid, a new pair of prescription glasses, a specialist copay your primary plan does not cover well, or a deductible that arrives in January before the new year's benefits have built up any momentum.

This is why a separate cash reserve specifically for medical expenses — distinct from your vacation account, your emergency fund, and your general savings — matters so much psychologically and practically.

A Health Savings Account, when used as a long-term planning tool rather than simply a way to pay today's co-pay, can become one of the most tax-efficient mechanisms available for covering future health costs in retirement.

For 2026, the IRS caps HSA contributions at $4,400 for self-only coverage and $8,750 for family coverage, with an additional $1,000 catch-up contribution available for those age 55 and older. Despite those advantages, 40 percent of HSA holders have not invested the funds sitting in their accounts — leaving years of potential growth unused.

Eventually, some health-care costs will be paid from an IRA, 401(k), or other retirement savings. That is entirely normal — that is what the money is for. But a retirement withdrawal can affect more than your bank balance, and understanding why matters before taking a large one.

For higher-income Medicare beneficiaries, income affects Medicare Part B and Part D premium costs through what are called Income-Related Monthly Adjustment Amounts, or IRMAA. The standard Part B premium in 2026 is $202.90 per month. Eliminating an IRMAA surcharge through a qualified life event using Form SSA-44 could reduce annual costs by up to $975 in 2026.

This is the most important pocket and the one most households have never formally discussed. Long-term care — assistance with daily activities like bathing, dressing, eating, or safely living at home — is not covered by Medicare in most circumstances. And the costs can be substantial, sustained, and unpredictable in both timing and duration.

Fidelity's $185,500 estimate does not include long-term care expenses. That means the headline number, large as it is, is still not the full picture.

Medicare generally begins at 65. The average retirement age in the United States is 62, meaning most people who leave work on schedule face roughly three years of coverage to fund before Medicare begins. That gap is one of the most underestimated costs in early retirement planning.

If you are considering leaving work before 65, pricing health insurance should be one of the first things you do — not one of the last. A retirement budget that works at $4,000 a month may stop working when health coverage adds a significant monthly expense on top.

Medicare does not cover routine dental, vision, or hearing care — yet these are among the most consistent health-related expenses retirees face. A separate sinking fund strategy addresses these before they arrive as surprises.

One of the most effective ways to build a medical reserve is to redirect a portion of any monthly expense that disappears. A car loan ends. A credit card balance clears. A subscription gets canceled. The full amount does not need to stay in the budget. Redirecting even a third of it toward the health-care reserve compounds quietly over time.

Before closing this article, consider scheduling one conversation — with a spouse, a partner, a financial professional, or a quiet hour with a piece of paper. Five questions cover the essential ground. Perfect answers are not the goal. A starting point is.

01 What will our monthly health insurance cost in retirement — and where does that money come from?

This is Pocket 1. Make it a named line in the budget, not an afterthought.

02 How much should we set aside as a medical cash reserve — and where will we keep it?

Pocket 2. Separate from emergency savings, separate from vacation funds.

03 Do we have an HSA or another account specifically designed for health-related expenses?

Pocket 3. If HSA-eligible, confirm whether funds are invested or sitting in cash.

04 Which retirement account would we draw from when health costs exceed normal monthly cash flow — and are we aware of any income thresholds that affect Medicare premiums?

Pocket 4. Coordinate withdrawals with a tax professional if large amounts are involved.

05 What is our current thinking on long-term care — and which resources would be used if one of us needs extended daily assistance?

Pocket 5. This conversation does not need a final answer. It needs a starting point.

The O55 Takeaway

For years, most of us had an employer involved in health coverage. The premium came out of the paycheck. HR handled the enrollment. We complained about rising costs but did not have to build the whole system ourselves. Retirement changes that. You become the person responsible for deciding what coverage you have, what it costs, where the money comes from, and how much you keep in reserve. That may sound like a burden. It is also an opportunity — to make deliberate decisions instead of accepting whatever the default is. The goal is not to predict every medical expense for the next 30 years. Nobody can do that. The goal is much simpler: when the bill arrives, know which pocket will pay it.

Educational Disclaimer: The content in this article is provided for general informational and educational purposes only. It does not constitute financial, legal, tax, or professional advice. Savings figures cited are general estimates based on publicly available 2025–2026 industry research and may not reflect your individual results. Program terms, discount availability, and savings amounts are subject to change by each retailer without notice. Always verify current program terms directly with the store or service provider before making purchasing decisions. The O55 Report does not receive compensation from any retailer or loyalty program mentioned in this article. Content is attributed to Mike Bridges, The O55 Report. © 2026 The O55 Report. All rights reserved. Visit www.theo55report.com for more free guides.

With care,

Mike Bridges

Founder, The O55 Report