Many retired people in the U.S. receive their medical benefits from Medicare and their savings. The 2024 Employer Health Benefits Survey from the Kaiser Family Foundation reveals that only 24% of companies currently offer subsidized health insurance for retirees. Milliman also reports that a healthy 65-year-old man can expect to spend up to $281,000 (male) or $320,000 (female) on healthcare costs in retirement. This means they need to save $188,000 (or $207,000 for a female) immediately.
For employees who want to start saving for their retirement healthcare costs and for employers who are helping them, this paper provides several effective ways to save for expenses not covered by Medicare or other government programs. It also provides employers with choices that support these strategies.
The basics: health insurance plans for retirees paid for by their employers
Most people who work in the U.S. (72% of private sector workers and 89% of state and local government workers) have health insurance through their jobs. Flexible spending accounts (FSAs), health savings accounts (HSAs), and other tax-advantaged savings vehicles are often given to these workers to help them save for medical costs.
People who retire or stop working before age 65 can get health insurance through the Affordable Care Act exchanges, non-ACA individual policies, a spouse’s employer-sponsored plan, or employer-provided retiree medical coverage.
When employers offer retirement benefits, they usually do one of two things:
- Money to pay for a regular group health plan
- An account, like a health reimbursement account (HRA), that lets people buy their health insurance without paying taxes on the money
How much do you need to save for health care costs when you get older?
The amount depends on health, life expectancy, and inflation in medical costs. Acquiring this much money typically requires saving for a considerable amount of time. Factors include when you start saving, your investment returns, and whether you save pre- or post-tax.
What are the effects of employer-provided retiree health insurance?
Employer coverage can reduce retirees’ savings needs, but it’s hard to predict future value. Factors include:
- Annual healthcare cost inflation (e.g., 4.9% per year assumed in Milliman’s Retiree Health Cost Index)
- Account-based plans (like HRAs) may vary by contribution method and investment growth
- Future employer benefits may change
Ways for retirees to save money for healthcare
Employees can use:
- 401(k) or similar retirement plans (403(b), 457)
- HSAs
- Personal savings plans
When evaluating these vehicles, consider:
- Pre-tax deferrals
- Access to investment options
- Tax-free growth
- Tax-free withdrawals for medical care
- Rules and fees
401(k) plan as a way to save for healthcare
While 401(k)s are excellent for retirement, they may not be best for healthcare because withdrawals are taxed, subject to required minimum distributions, and contribution limits apply. Still, they can be used alongside Social Security to cover costs.
HSA as a way to save money for health care
HSAs offer triple tax benefits: contributions, investment growth, and withdrawals (for qualified medical expenses) are tax-free. Limits in 2025 are $4,300 (individual) and $8,550 (family). However, HSAs require a high-deductible health plan (HDHP), which can be costly for employees with frequent medical needs.
Savings on your own and other choices
Employees can also save through taxable accounts, which offer flexibility but less tax efficiency. Alternatives include variable life insurance, which allows for tax-free withdrawals, but these aren’t detailed here.
Conclusion
Employees should estimate future medical needs and plan accordingly. 401(k)s remain valuable, but HSAs may be the most efficient tool for medical costs. Workers with retiree health benefits should also understand how these reduce their overall savings needs.
