Retirement planning often focuses on accumulating a substantial nest egg, but a critical and frequently underestimated factor can unravel even the most carefully constructed financial strategies: the relentless rise of healthcare costs. While gross income and Social Security benefits provide a foundational view of financial security, they fail to capture the complete picture of a retiree’s economic reality. The true measure of financial well-being in the golden years is not the total income received, but the actual purchasing power that remains after paying for unavoidable medical expenses. This analysis delves into the financial precarity faced by American retirees by quantifying the substantial burden of out-of-pocket (OOP) medical spending. These non-discretionary costs—which encompass insurance premiums, deductibles, copayments, and crucial services not covered by Medicare such as most dental, vision, and hearing care—represent a significant and continuous drain on resources, revealing a starkly different and more challenging portrait of retirement affordability. Examining the period between 2018 and 2022, a time of significant countervailing forces in the healthcare landscape, provides critical insight. The rapid expansion of Medicare Advantage plans and federal policies aimed at reducing prescription drug costs were met with sharply rising Medicare Part B premiums and soaring inflation, creating a complex economic environment for retirees. Understanding how these dynamics collectively impacted the disposable income of retired Americans is essential for assessing their genuine financial stability and for shaping future policies designed to protect their economic security.
The Financial Reality Measuring the Bite of Healthcare Costs
A Stark Picture for the Median Retiree
The data paints a clear and sobering picture of healthcare’s profound impact on the financial lives of retired Americans. For the typical retiree in 2022, out-of-pocket health spending consumed a substantial portion of their primary income source, fundamentally altering their budget and spending capacity. After all medical costs were accounted for, the median individual had only 71% of their Social Security benefits remaining to cover every other essential life expense, from housing and food to taxes and transportation. This single statistic dramatically reframes the value of Social Security, illustrating that for many, nearly a third of this vital income stream is immediately diverted to the healthcare system before it can be used for any other purpose. When the lens is widened to consider total personal income—a more comprehensive measure that includes pensions, investment returns, and withdrawals from retirement accounts—the erosion of purchasing power is still significant. The median retiree was left with just 88% of their total income after settling their annual medical bills. This finding underscores a critical flaw in traditional retirement planning models that often fail to adequately account for this non-discretionary spending, leading to a potentially dangerous overestimation of financial preparedness. The reality is that healthcare costs function as a heavy, non-negotiable tax on retirement income, leaving many with far less financial flexibility than their gross income figures would suggest.
The financial burden becomes even more acute for those on the economic margins, where the impact of healthcare spending can be devastating. The analysis reveals a dire situation for a significant minority of retirees, with 5% left with almost none of their Social Security benefits after covering their medical expenses. At the same time, those at the 10th percentile of the financial spectrum retained a mere quarter of their benefits, a scenario that pushes individuals toward severe financial distress. In nominal terms, the median retiree spent a total of $5,444 on out-of-pocket medical costs in 2022. For the majority of retirees, the largest and most predictable share of this spending was composed of insurance premiums for Medicare and supplemental plans. However, a different story emerges for the highest-spending retirees. For this group, the primary cost drivers were not the fixed premiums but rather significant and often unpredictable outlays for cost-sharing on medical services, such as high deductibles and coinsurance, as well as the full cost of care not covered by their insurance plans. This distinction is crucial because it highlights two different types of financial strain: the steady, ongoing pressure of premiums for the average retiree and the risk of catastrophic, budget-shattering expenses for those with significant health needs.
A Surprisingly Stable Burden
One of the most remarkable findings from the analysis covering the period from 2018 to 2022 is the striking stability of this financial burden. Despite the unprecedented upheaval caused by the COVID-19 pandemic, historically high inflation, and major policy and market shifts within the Medicare landscape, the real (inflation-adjusted) out-of-pocket spending and the share of income remaining after costs for the median retiree held remarkably constant. This consistency suggests that while nominal healthcare costs certainly rose during this turbulent period, they largely tracked the overall rate of inflation. As a result, the average burden did not significantly worsen, preventing a further erosion of retirees’ financial standing. However, this stability should not be mistaken for an improvement in conditions. Instead, it indicates that the substantial, underlying financial pressure on retirees did not ease in any meaningful way. The significant portion of income consumed by healthcare remained a fixed and formidable challenge, solidifying its role as a persistent obstacle to financial security in retirement. This steadiness, in a sense, institutionalized the financial strain, making it a predictable and unavoidable feature of the retirement landscape for millions of Americans.
The persistence of this financial burden through such a volatile period underscores its deeply embedded nature within the U.S. healthcare and retirement systems. The fact that a global health crisis, which disproportionately affected older adults, did not dramatically increase the median financial burden might seem counterintuitive. It could reflect several factors, including a temporary reduction in non-essential medical care during lockdowns, offset by new costs related to the pandemic. Similarly, while policy changes like the expansion of certain Medicare Advantage benefits aimed to reduce costs, these were balanced by other escalating expenses, such as rising Part B premiums. The net effect was a state of equilibrium where the financial pressure remained intense but did not escalate further for the median individual. This finding delivers a powerful message: the erosion of retirement income by healthcare costs is not a temporary or crisis-driven phenomenon but a structural one. It serves as a constant and non-negotiable drain on the resources of older Americans, fundamentally shaping their economic well-being regardless of broader economic or social disruptions. This enduring challenge highlights the need for systemic solutions rather than temporary fixes to address the affordability of healthcare in retirement.
Unpacking the Disparities Who is Hit Hardest
The Regressive Nature of Healthcare Costs
As might be expected, the financial burden of healthcare is deeply regressive, disproportionately impacting households with the lowest incomes. The data clearly demonstrates that as income levels rise, the percentage of that income consumed by medical expenses falls sharply. Retirees in the highest income quintile, for instance, retained a comfortable 94% of their total income after covering all their out-of-pocket medical costs. In stark contrast, those in the lowest income quintile were left with only 82% of their already limited income. This 12-percentage-point gap illustrates that healthcare spending operates like a regressive tax, placing the heaviest relative burden on those who can least afford it. For a low-income retiree, losing nearly one-fifth of their income to medical bills can be the difference between stability and poverty, forcing difficult choices between paying for necessary care and affording other essentials like food, housing, and utilities. This disparity undermines the very concept of a secure retirement for millions of Americans, creating a system where financial vulnerability is exacerbated by the unavoidable need for medical care. The findings confirm that access to financial resources is a primary determinant of how severely healthcare costs will impact one’s quality of life in retirement.
The vulnerability of low-income retirees is thrown into even sharper relief when considering the role of public assistance programs. The analysis highlights the critical protective effect of Medicaid, the public health insurance program for individuals with very low income and limited assets. For retirees in the lowest income quintile who were enrolled in Medicaid, the financial burden was significantly mitigated, as the program covers most Medicare premiums and cost-sharing expenses. However, the situation is far more precarious for the “near-poor”—those who earn too much to qualify for Medicaid but still have very limited financial resources. This group is particularly exposed. For the segment of the lowest-income quintile not covered by Medicaid, the share of total income remaining after out-of-pocket costs plummeted to just 76%. This figure reveals the extreme financial distress faced by those who fall into the gap between public assistance and financial self-sufficiency. They bear the full weight of rising healthcare costs without a safety net, making them arguably one of the most financially fragile groups in the retired population. Their plight underscores a critical gap in the social safety net and highlights the urgent need for policies that address the healthcare affordability crisis for all low-income older adults, not just those who meet the stringent criteria for Medicaid.
The Critical Role of Supplemental Insurance
The type of health coverage a retiree possesses emerges as a major determinant of their financial burden, though the relationship between insurance choice and financial outcomes is complex and multifaceted. Retirees enrolled in Medicaid consistently fared the best. By covering most Medicare premiums and cost-sharing obligations, Medicaid effectively minimized their out-of-pocket expenses, allowing them to retain the highest share of both their Social Security benefits and their total income. Among other insurance types, however, the picture is more nuanced. When looking exclusively at the erosion of Social Security benefits, a counterintuitive finding appears: those with traditional Medicare alone, without any private supplemental coverage, seemed to do best. They retained a larger portion of their Social Security check compared to those with Medicare Advantage plans or employer-sponsored Retiree Health Insurance (RHI). This outcome is explained entirely by one factor: premiums. Since this group does not pay additional premiums for supplemental plans, their upfront, fixed costs are lower. However, this apparent advantage masks a significant risk, as these individuals face unlimited potential cost-sharing for medical services, leaving them highly exposed to catastrophic expenses in the event of a serious illness.
This seemingly paradoxical finding is resolved when the analysis shifts to consider the share of total income remaining after medical expenses. When this broader financial measure is used, the outcomes for those with Medicare Advantage, RHI, and traditional Medicare alone become much more similar. The reason for this convergence lies in the significant differences in the underlying income levels of these groups. For instance, individuals with employer-sponsored RHI tend to have much higher total incomes from pensions and other sources. Consequently, while their absolute out-of-pocket costs may be high, these costs represent a smaller percentage of their overall financial resources, bringing their post-OOP ratio to 87%, on par with other groups. This clarifies that while the choice of supplemental insurance is critical, its impact must be understood in the context of a retiree’s complete financial situation. A plan with higher premiums might be more affordable for someone with a larger income, while a plan with lower premiums but higher potential cost-sharing could be a risky gamble for someone with fewer assets. Ultimately, the data shows that no single private insurance pathway offers a perfect solution, and each comes with its own set of trade-offs between fixed costs and financial risk.
Navigating an Uncertain Future
The analysis concluded that out-of-pocket medical costs imposed a substantial and unavoidable financial burden on American retirees, rendering their financial situations more precarious than gross income figures alone would suggest. The stark reality that the median retiree had only 71 cents of every Social Security dollar left for non-medical needs was a powerful illustration of this ongoing challenge. While the stability of this burden between 2018 and 2022 provided a temporary reprieve from a worsening situation, it also cemented the significant, underlying financial pressure as a permanent feature of retirement.
Looking ahead, the landscape appeared mixed, with several developments poised to alter this dynamic. On one hand, provisions within the Inflation Reduction Act, such as the newly implemented $2,000 out-of-pocket cap on Medicare Part D prescription drugs that began in 2025, were expected to provide meaningful relief for retirees with high drug costs. On the other hand, this potential relief was set against a backdrop of considerable uncertainty. The unpredictable political environment could lead to major shifts in health policy, while the looming depletion of the Social Security trust fund threatened to further strain retiree finances. Ultimately, the research made a compelling case that any realistic assessment of retirement income adequacy must explicitly account for the non-discretionary and significant erosion of income caused by healthcare. With such a large portion of their limited income already consumed by medical needs, many retirees were left with little financial cushion to absorb other economic shocks, reinforcing why so many felt that making ends meet in retirement was an ongoing struggle.
