'Pay close attention': Suze Orman says many Americans underestimate this critical cost in retirement — 5 ways to prepare before it's too late

The true cost of health care

That crucial retirement expense, according to Orman, is health care — more specifically, the often misunderstood and underestimated costs of Medicare.

Most Americans assume that Medicare will cover most, if not all of their medical needs after retirement. But Orman cautions that this is a dangerous belief.

While Medicare Part A (hospital insurance) is generally premium-free, the 2025 inpatient hospital deductible is $1,676 per stay (up from $1,632 last year) — just one example of unexpected out-of-pocket costs.

Plus, Original Medicare (Parts A and B) doesn’t cover essentials such as dental, vision and hearing. Orman’s key advice is to get a solid Medigap policy to fill these gaps.

“Anyone with Original Medicare should also have a robust Medigap policy,” Orman wrote in a blog post in December 2024. “It will cover that 20% you are on the hook for.”

While Medigap plans do require paying more in monthly premiums, Orman believes the tradeoff is worth it to protect against large, unpredictable medical bills. These policies help with costs like coinsurance, copayments, deductibles and additional hospital and health care expenses.

According to Fidelity Investments, the average retired couple will need about $330,000 to cover health care costs after age 65, a steep figure underscoring Orman’s warning that Medicare doesn’t mean free.

Moreover, it doesn’t include expenses like over-the-counter medications and long-term care.

"I sure hope those of you who are not yet 65 pay close attention, too," Orman wrote in her blog post. "Understanding all the costs Medicare requires enrollees to cover out-of-pocket can be an eye-opener that can motivate you to save up more in your retirement accounts, calibrate your spending or even consider post-retirement opportunities to earn some income."

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Smart strategies to reduce health care costs in retirement

The numbers may seem daunting, but there are steps you can take to reduce health care costs in retirement.

1. Build a health savings account (HSA) before you retire. If you're still working and enrolled in a high-deductible health plan, an HSA offers three tax advantages: tax-deductible contributions, tax-free growth and tax-free withdrawals for qualified medical expenses. Unused funds roll over and can be a powerful tool to offset medical costs in retirement.

2. Set up a dedicated health emergency fund. Beyond general savings, consider setting aside a separate fund just for health care needs. This keeps you disciplined in saving for health care specifically, while helping to avoid drawing down your retirement accounts too fast when significant expenses arise.

3. Consider long-term care insurance. Fidelity's health care cost estimate excludes long-term care, which can cost upwards of $100,000 annually in some states. Purchasing long-term care insurance early can protect your retirement nest egg from these steep costs.

4. Reduce your income to lower Medicare premiums. Medicare Part B premiums are based on your modified adjusted gross income (MAGI). If you’re nearing retirement, consult a financial planner about reducing MAGI through Roth conversions, charitable giving or other tax strategies to avoid premium surcharges.

5. Stay healthy. It might sound obvious, but regular exercise, healthy eating, preventive care and looking after your mental health can dramatically reduce your health care needs. The Centers for Disease Control and Prevention notes about 90% of the country's annual $4.1 trillion health care expenditure is due to chronic diseases and mental health conditions. Many of these conditions are preventable.

For those who have already retired, another way to cut down on health care costs is to ask your doctor if a generic version of your medication is available. Switching to generics or using telehealth platforms or pharmacies can also significantly lower costs.