The Role of Financial Advisors in Managing Healthcare Expenses

Healthcare costs are rising at a pace that demands attention, particularly for individuals nearing retirement. In 2023, the United States’ National Health Expenditure (NHE) reached $4.9 trillion, equating to $14,570 per person, a 7.5% increase from the previous year. This upward trend is expected to continue, with PwC projecting an 8% annual rise in medical costs for the Group market and 7.5% for the Individual market by 2025.

A combination of persistent inflation, rising prescription drug prices, and growing demand for mental health services drives such increases. For retirees, these trends pose a significant financial challenge. Without proper planning, healthcare expenses can quickly consume a significant portion of retirement savings.

Healthcare financial advisors are invaluable in helping individuals tackle this complexity. They help with a variety of complex decisions, including Medicare for long-term care and unexpected medical needs. They can build a more resilient financial strategy for retirement.

Below are key areas where financial advisors add value in managing healthcare expenses:

1. Optimizing Medicare coverage to reduce healthcare costs in retirement

Medicare remains the primary health insurance program for Americans aged 65 and older, but navigating its various components (Parts A, B, C, and D) can be complex. Each part offers different types of coverage, cost structures, and enrollment requirements. Without careful selection and timing, individuals risk incurring avoidable penalties and paying more than necessary for healthcare in retirement.

Financial advisors specializing in healthcare planning provide clarity and structure in this process. Their role begins with understanding the client’s current and projected medical needs and continues through to selecting the most suitable coverage options. By focusing on these aspects, they bring in cost efficiency and adequate protection.

Here are some aspects that they can help with:

a. Advising on the right time to enroll in Medicare

Enrolling in Medicare at the appropriate time is essential to avoid lifetime penalties and gaps in coverage. Advisors guide clients through two key enrollment windows:

• Initial Enrollment Period (IEP): This seven-month window begins three months before an individual turns 65 and ends three months after. Timely enrollment in Part A and Part B during this period avoids late penalties and ensures uninterrupted access to care.
• Special Enrollment Period (SEP): For those with qualifying employer-sponsored coverage, advisors assess eligibility for SEP, which allows for delayed enrollment without penalties. This is especially relevant for individuals who plan to continue working past the age of 65.

b. Selecting the most suitable Medicare plan

Each part of Medicare offers a distinct form of coverage. An experienced financial advisor helps clients make informed Medicare choices that align with their long-term financial and health goals, minimizing unnecessary premiums and maximizing value.

• Part A (Hospital Insurance): Covers inpatient hospital care. Premium-free for most individuals, though a deductible of $1,676 per benefit period applies.
• Part B (Medical Insurance): Covers outpatient services, with a standard monthly premium and an annual deductible. Premium amounts may vary based on income.
• Part C (Medicare Advantage): Offered by private insurers, Part C includes all benefits of Parts A and B and often provides additional coverage (e.g., vision, dental). Advisors assist in evaluating trade-offs such as provider networks and out-of-pocket limits.
• Part D (Prescription Drug Coverage): Covers prescription medications. Selecting the right plan depends on individual medication needs, and advisors conduct cost-benefit analyses to reduce out-of-pocket spending.

c. Using Health Savings Accounts (HSAs) to manage healthcare costs in retirement

A health savings account (HSA) is one of the most tax-efficient tools available for covering qualified medical expenses, both before and during retirement. For individuals enrolled in a high-deductible health plan (HDHP), an HSA offers a structured way to build a healthcare reserve that grows with age and changing needs.

Financial advisors play a key role in helping clients leverage the full potential of HSAs, not just as a short-term expense account, but as a long-term asset within their broader retirement strategy.

Understanding the triple tax advantage

HSAs offer unique tax benefits that make them an attractive vehicle for retirement healthcare planning:

• Tax-deductible contributions lower current taxable income.
• Tax-free growth on interest and investment returns within the account.
• Tax-free withdrawals for qualified medical expenses at any age.

When strategically managed, HSAs can serve as a secondary retirement account, specifically earmarked for medical expenses in later life.

Advisor-led HSA strategies for retirement planning

Healthcare financial advisors assist clients in making informed decisions across the lifecycle of an HSA:

• Contribution planning: Advisors help determine the amount to contribute each year, taking into account income, tax implications, and anticipated healthcare needs. They also ensure contributions remain within IRS-defined limits.
• Investment selection: Beyond simple cash savings, many HSAs offer investment options. Advisors assess risk tolerance and time horizons to guide clients in selecting suitable vehicles to grow their Health Savings Account (HSA) balance over time.
• Utilization planning: Advisors help clients decide when to use HSA funds, whether to reimburse current medical expenses or preserve the account as a tax-free reserve for future healthcare costs in retirement.

2. Planning for long-term care needs and managing related healthcare expenses

Long-term care is one of the most significant and often underestimated components of retirement healthcare planning. It includes a range of services that support individuals with daily living activities such as bathing, dressing, eating, mobility, and other needs that often arise from chronic illness, cognitive decline, or physical disability.

What makes long-term care financially challenging is that it is typically not covered by Medicare. Without appropriate preparation, the cost of such care can place a considerable burden on retirement savings. In 2025, the median national cost for a private nursing home room is approximately $339 per day, while a semiprivate room costs around $302 per day.

Healthcare financial advisors help clients plan for these potential costs well in advance, using a combination of forecasting, insurance strategies, and savings recommendations. Here’s how:

a. Estimating long-term care needs

Advisors begin by assessing the likelihood of requiring long-term care, based on factors such as family medical history, current health conditions, and lifestyle. This enables clients to visualize the potential financial impact and plan accordingly.

b. Exploring insurance options

One of the most common strategies to manage long-term care costs is through insurance:

• Traditional long-term care insurance: These policies are designed specifically to cover the cost of services such as in-home care, assisted living, or nursing home stays. Financial advisors evaluate plan benefits, premium structures, and inflation protection riders to recommend suitable coverage.
• Hybrid insurance products: Some individuals may prefer life insurance or annuity products that include long-term care riders. These options offer more flexibility and can provide value even if long-term care is never needed.

3. Protecting against unexpected healthcare expenses with strategic financial planning

Even with Medicare coverage and well-structured retirement plans, unexpected medical events such as hospitalizations, accidents, surgeries, or the onset of chronic conditions can significantly impact a retiree’s financial stability. These unplanned expenses may lead to sudden out-of-pocket costs that strain savings allocated for other long-term goals.

Healthcare financial advisors help mitigate these risks by incorporating safeguards into the broader financial plan. Their strategies are designed to preserve liquidity, anticipate gaps in coverage, and provide a cushion against the financial consequences of medical uncertainty.

a. Establishing a dedicated healthcare emergency fund

Advisors typically recommend setting aside three to six months’ worth of essential living expenses in a liquid, easily accessible account earmarked for medical emergencies. This reserve provides a buffer that allows retirees to respond to unanticipated health needs without disrupting their core retirement assets or investment strategies.

b. Planning for non-covered services

Certain treatments, such as alternative therapies, elective procedures, or specific medications, may not be covered under Medicare or private insurance plans. Financial advisors help clients identify these potential gaps and incorporate them into the budgeting process to make sure that appropriate funds are available when needed.

c. Evaluating supplemental coverage options

For additional financial protection, advisors may recommend layering supplemental insurance policies onto existing coverage. For example:

• Medigap policies (also known as Medicare Supplement Insurance) help cover deductibles, co-payments, and coinsurance costs not paid by original Medicare.
• Other supplemental health plans may provide benefits for dental, vision, or hearing care, which are typically excluded from standard Medicare coverage.

4. Strategically withdrawing from retirement accounts to cover healthcare costs

For most retirees, traditional retirement accounts such as 401(k)s and individual retirement accounts (IRAs) serve as the primary source of income in later life. However, without careful planning, withdrawals from these accounts can create unintended tax consequences, particularly when used to cover rising healthcare expenses.

Healthcare financial advisors assist clients in aligning their withdrawal strategies with both healthcare needs and tax efficiency, helping to preserve long-term financial sustainability.

a. Coordinating withdrawals with healthcare expenses

Medical costs are often unpredictable and can vary significantly from year to year. Advisors help retirees plan for these fluctuations by spreading withdrawals strategically. For example, if a significant healthcare expense is anticipated in a particular year, it may be advisable to make smaller withdrawals in prior years to avoid crossing into a higher tax bracket when the larger expense arises.

b. Managing required minimum distributions (RMDs)

Beginning at age 73 (or age 75 for individuals born in 1960 or later), retirees must begin taking required minimum distributions from traditional IRAs and 401(k)s. These mandatory withdrawals are treated as taxable income. Advisors help ensure that RMDs are timed and sized appropriately, not only to meet regulatory requirements but also to support anticipated healthcare spending.

c. Sequencing withdrawals across account types

Most retirees hold a mix of tax-deferred (e.g., 401(k), traditional IRA) and tax-free (e.g., Roth IRA, HSA) accounts. Advisors guide clients in determining the optimal sequence for drawing down assets. In many cases, using tax-deferred accounts for high-expense years and preserving tax-free accounts for future growth can result in lower overall tax liability and greater flexibility.

To conclude

Healthcare financial advisors help clients mitigate the risks associated with rising healthcare costs through personalized strategies and expert advice. They ensure their clients are financially prepared for both routine and unexpected healthcare needs.

Whether it’s selecting the right insurance plan, timing withdrawals from retirement accounts, or budgeting for future care, the right guidance can lead to better outcomes and greater peace of mind. Consider seeking the help of a financial advisor in healthcare who can guide you on how to manage your healthcare expenses with confidence.