Healthcare Costs in Retirement: What Australians Forget to Plan For

The Budget Line Nobody Wants to Think About

When people picture retirement, they tend to budget for the good stuff. Travel. Grandchildren. Long lunches. The boat they’ve been promising themselves since 1998.

What they consistently underbudget — or ignore entirely — is healthcare.

It’s understandable. Nobody wants to sit down with a spreadsheet and calculate how much their declining health might cost. It’s uncomfortable, it feels like bad luck to plan for, and it’s genuinely hard to predict.

But here’s the thing: healthcare is one of the most significant and most certain costs of a long retirement. The question isn’t whether you’ll spend more on health as you age. The question is whether you’ve planned for it or whether it’ll arrive as a series of unpleasant surprises.

What the Numbers Actually Look Like

Australian retirees consistently underestimate health spending. A couple retiring at 65 today can expect healthcare to represent a significant and growing share of their spending as they move through their 70s and 80s.

The costs are both predictable and unpredictable. The predictable ones are easier to plan for:

• Private health insurance premiums, which increase annually at rates well above general inflation — often 3–5% per year
• Dental costs, which Medicare doesn’t cover and which become more frequent and more expensive with age
• Optical and audiology costs — glasses, hearing aids, and ongoing appointments
• Pharmacy costs for ongoing medications, particularly for chronic conditions that develop in your 60s and 70s
• Allied health — physio, chiro, podiatry, psychology — which many retirees access more frequently than they expect

The unpredictable costs are harder, but not impossible to plan for:

• A major surgical procedure not fully covered by your health fund
• A period of rehabilitation or home care following an illness or injury
• Aged care costs if you or your partner need residential care in later retirement

The Private Health Insurance Decision

One of the most common financial questions from Inner West pre-retirees is whether to keep private health insurance in retirement, or whether the combination of Medicare plus out-of-pocket payments makes more financial sense.

There’s no single right answer, but a few things are worth understanding:

The Lifetime Health Cover loading. If you don’t have private hospital cover by age 31, you pay a 2% loading on your premiums for every year you’re without it, up to a maximum of 70%. If you’ve had private health cover for most of your adult life, dropping it now means potentially facing this loading if you want to re-enter. Most people in their 50s and 60s are better off retaining cover than cancelling and later regretting it.

The Medicare Levy Surcharge. Singles earning over $93,000 and couples earning over $186,000 pay the MLS if they don’t have private hospital cover. In your pre-retirement years when income is still high, private health cover is often financially sensible on this basis alone. In retirement, when taxable income may drop, this calculation changes.

The premium trajectory. Private health premiums have risen faster than CPI for many years. Over a 25-year retirement, the cumulative cost of maintaining top-tier cover is substantial. Many retirees review their level of cover at retirement — downgrading from the comprehensive policy they held while working to something more targeted to their actual likely needs.

The right answer depends on your health history, your assets, your income in retirement, and your risk tolerance. It’s worth modelling explicitly rather than just defaulting to what you’ve always had.

Aged Care: The Cost Nobody Plans For

The single largest potential healthcare cost in retirement — and the one most consistently absent from retirement plans — is aged care.

Australia’s aged care system has changed significantly in recent years, and the costs of accessing quality care are real and growing. The key concepts to understand:

Home care. Most Australians want to stay in their own home for as long as possible, and government support packages can help with this. But there are means-tested fees, waiting lists, and costs for services beyond what your package covers. Having the financial capacity to top up government support with private funding materially improves the quality and speed of care available.

Residential aged care. If residential care becomes necessary, there are three main cost components: a basic daily fee, a means-tested care fee, and an accommodation payment (either a lump sum refundable deposit or a daily accommodation payment). These costs are means-tested based on your income and assets — which means your retirement assets directly affect what you’ll pay.

Planning for aged care doesn’t mean assuming the worst. It means ensuring your retirement income architecture can absorb these costs without forcing you to sell assets at the wrong time or compromise the lifestyle of the partner who remains at home.

Building Healthcare Into Your Retirement Budget

The practical approach is to treat healthcare as a category in your retirement income plan, not an afterthought.

For most Inner West couples, a realistic healthcare budget in early retirement (65–75) might run to $5,000–$8,000 per year including health insurance, dental, optical, and routine pharmacy. In later retirement (75+), that figure typically rises, sometimes significantly.

A few planning principles that help:

• Build a healthcare buffer into your income target from the start — it’s much easier to have it and not need it than to need it and not have it
• Review your private health cover level at retirement and annually thereafter — your needs at 65 are different from your needs at 75
• Understand how your assets will be assessed if aged care becomes relevant — the family home is partially exempt for residential aged care assessment, but the rules are complex
• Consider whether your super income stream is structured to allow flexibility for one-off large healthcare expenses — a drawdown facility can be valuable if you need to access capital for a major procedure or care cost

The Income You’ll Need Has a Healthcare Component

This is one of the reasons the 2 Cows Strategy focuses on building genuine income rather than just a lump sum target. A retirement income that covers your lifestyle, your travel, your grandchildren, and your healthcare — reliably, without running out — needs to be sized to cover all of those things, including the ones you’d rather not think about.

Healthcare is not optional. Planning for it is.

Is Healthcare in Your Retirement Income Plan?

The One Page Financial Plan builds a realistic retirement income target based on your actual life — including the parts that don’t make it onto the vision board. Healthcare included.

One session. One page. Real numbers.

Book Your One Page Financial Plan — $660 inc GST

adam@suncow.com.au  |  0418 785 200

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