Rising Healthcare Costs and Medicare Options for Retirees

Medical care costs have surged, witnessing a 2.85% rise year-over-year up to January 2026, surpassing the general inflation rate of 2.16%. This escalation poses considerable challenges for retirement planning, where healthcare costs are a significant and unpredictable variable. Currently, healthcare expenses account for 17.1% of personal consumption expenditures, closely following housing costs.

From January to November 2025, healthcare spending increased by 6.9%, outpacing the 4.6% rise in overall consumer spending. For those retiring at age 65, projections indicate a substantial necessity for after-tax savings to address healthcare costs in retirement, excluding long-term care expenses. A critical choice for retirees is between Original Medicare and Medicare Advantage plans. Original Medicare imposes no annual cap on out-of-pocket expenses, risking unlimited costs during serious illness, while Medicare Advantage plans offer a spending cap but include network constraints and prior authorization requirements.

For those opting for Original Medicare, a Medigap supplement policy is often needed to manage costs. Medigap premiums typically increase with age, with various plans providing differing coverage levels based on health history and risk tolerance. The baseline annual healthcare costs are a primary concern, especially as the U.S. personal savings rate declined from 6.2% in early 2024 to 4.2% by mid-2025. This decrease in savings underscores the necessity for retirees to carefully select an appropriate coverage structure at 65, highlighting that this decision is fundamental to a comprehensive retirement budget plan.