Health Care Costs in Retirement: Budget for Healthy, Average, or Unhealthy

Most retirement plans start with super balance, investment returns, and Age Pension eligibility. They often skip over one of the biggest wildcards: health care costs. The difference between a healthy retirement and an unhealthy one isn't just quality of life. It's tens of thousands of dollars in out-of-pocket medical expenses, prescriptions, and aged care.

The tricky part is that health doesn't work the way most people think. A healthy retiree spends less on medical costs each year. But they live longer. So their lifetime health spending can end up higher than someone who is unhealthy and dies sooner. That's the real planning problem: you don't know how long you'll live, and you don't know how much you'll spend.

Here's how to think about it. And how to budget.

The Three Health States

Actuaries and retirement researchers typically split retirees into three groups based on health status at retirement:

Healthy

No chronic conditions, or just one well-managed one. Non-smoker. Good functional status. This group spends significantly less on medical costs each year compared to average retirees. But they tend to live longer, accumulating more years of spending, including a higher likelihood of entering residential aged care later in life.

Average

One or two manageable chronic conditions such as hypertension or mild type 2 diabetes. This matches the population average. Most retirees fall here. Baseline out-of-pocket spending applies.

Unhealthy

Multiple chronic conditions or significant functional limitations. This group spends considerably more on medical costs each year than average retirees. But they typically live shorter lives, so lifetime costs don't always exceed those of healthy retirees.

What Australian Retirees Actually Spend

Australian data on retiree out-of-pocket spending is more limited than comparable US research, but national surveys and health expenditure data provide a reasonable picture. The figures below have been updated to approximate 2025 dollars, using a conservative annual health inflation rate of around 3.5 percent. Note that actual health cost inflation in Australia has periodically exceeded this, particularly for specialist fees and dental costs, which have been rising faster than general inflation.

Note: These figures represent out-of-pocket costs only and exclude private health insurance premiums. Individual experience varies significantly by state, health fund status, and personal health profile. Dental and allied health costs are major drivers of the higher ranges.

A useful benchmark: a couple in average health can reasonably expect to spend $5,000 to $7,000 per year out-of-pocket on medical costs before insurance premiums are added. Add a combined hospital and extras policy and that figure rises substantially. As of 2025, the average gross annual premium for a combined hospital and extras couples policy is around $4,300 to $5,500 per year depending on age and level of cover. Premiums rose 3.73 percent in April 2025 and are expected to continue rising at 3 to 4 percent or more annually.

The real pressure point is in the unhealthy group. A significant minority of retirees with four or more chronic conditions face medical costs exceeding 10 percent of their annual income, which researchers consider a serious financial burden. For context, healthy retirees rarely face this level of exposure.

What Drives the Difference

It's not just the number of conditions. It's what happens when you have them.

Medications. Since January 2025, the government has frozen PBS co-payments for general patients at $31.60 per script and for concession card holders at $7.70 per script. From January 2026, the general co-payment will reduce further to $25.00 per script, with concession rates remaining at $7.70 until 2029. This is significant cost-of-living relief. But retirees with multiple conditions taking multiple medications can still accumulate substantial annual costs before reaching the PBS safety net threshold, after which scripts are free or heavily subsidised for the rest of the calendar year.

Dental. Medicare does not cover routine dental for adults. A healthy retiree might need a clean and an occasional filling. An unhealthy retiree may need crowns, extractions, or implants, which can run thousands of dollars per episode. Waiting lists for public dental in Australia are long, often years, making private dental unavoidable for many.

Specialists. Medicare covers 85 percent of the schedule fee for specialist consultations, but specialists routinely charge above schedule. Out-of-pocket specialist costs typically run $80 to over $200 per visit, and the gap has been growing faster than inflation.

Equipment. Walking frames, hearing aids, mobility aids, and CPAP machines can run thousands. Hearing aids alone are not covered by Medicare for most adults and can cost $3,000 to $10,000 per pair. Allied health such as physiotherapy, podiatry, and dietetics is partially subsidised through Medicare's chronic disease management plans (up to five subsidised visits per year), but costs above the rebate fall on the patient.

The Aged Care Question

Then there's the low-probability, high-cost event: residential aged care. The probability of entering aged care at some point after age 65 is meaningful. Current actuarial estimates put it at approximately 43 percent for men and 59 percent for women.

Australia's aged care system underwent major reform in 2025. A new Aged Care Act took effect on 1 November 2025, restructuring how residents contribute to their care costs. The key changes:

• Basic daily fee: All residents pay this, set at 85 percent of the single age pension rate. As of early 2026 this is approximately $65.55 per day ($23,900 per year).
• Hotelling contribution: An additional means-tested contribution toward daily living services (meals, cleaning, laundry), capped at $12.55 per day for those above income and asset thresholds.
• Non-clinical care contribution (NCCC): Replaces the old means-tested care fee. Covers personal care such as bathing, mobility assistance, and lifestyle activities. The maximum daily rate is $101.61, with a lifetime cap of $130,000 or four years of residency (whichever comes first).
• Clinical care: Fully government-funded under the new arrangements.
• Accommodation: Agreed separately with each facility. Can be paid as a lump sum (Refundable Accommodation Deposit) or as a daily payment. From 2025, RADs are subject to a 2 percent annual retention fee, capped at 10 percent over five years.

Total resident costs vary considerably depending on means assessment and facility type. A self-funded retiree in a private facility can expect to contribute $35,000 to $60,000+ per year in fees and contributions, not including accommodation costs. The government subsidises care for those with lower means. The aged care reforms now provide clearer lifetime caps for the personal care component, giving more certainty than the previous system. But accommodation costs remain variable and are not capped.

How to Plan for It

Step 1: Estimate Your Health State

At retirement, or now if you're pre-retirement, be honest about your health. No chronic conditions and you exercise regularly. That's healthy. One or two managed conditions like blood pressure or early diabetes. That's average. Multiple conditions or mobility issues. That's unhealthy. Your GP can help you assess this realistically.

Step 2: Pick Your Annual Cost Scenario

Use the table above as a starting point. In 2025 dollars: healthy retirees might budget $1,800 to $2,500 per person per year in out-of-pocket medical costs. Average health retirees $2,500 to $3,500. Unhealthy retirees $4,000 to $6,000+. These are separate from private health insurance premiums. Apply annual health cost inflation of 3 to 5 percent when projecting forward.

Step 3: Factor in Private Health Insurance

If you hold private health cover, add the premium cost. A combined hospital and extras policy for a couple over 65 is now in the range of $5,000 to $7,000 per year depending on the level of cover, before any government rebate. The rebate reduces this depending on income. Review your cover annually; many retirees over-insure early in retirement and under-insure later.

Step 4: Add an Aged Care Contingency

With a roughly 50 percent chance of entering residential aged care at some point, this is not a small risk to ignore. Under the 2025 fee arrangements, the means-tested personal care component is capped at $130,000 lifetime. But basic daily fees and accommodation costs are separate. A practical planning approach is to model a two to four year stay in residential aged care at a middle-market facility and stress-test your retirement income against this scenario.

Step 5: Model Multiple Scenarios

Don't plug in a single medical cost number and call it done. Use a retirement calculator that lets you vary health status, longevity, and medical costs. Run at least three scenarios: healthy (longer life, moderate annual costs, higher aged care risk), average (moderate everything), and unhealthy (shorter life, higher annual costs upfront, lower aged care risk). See which scenario your super and income can sustain.

The Hard Truth

Health costs are one of the biggest unknowns in retirement. You can't control whether you'll be healthy or unhealthy at 75. You can't know how long you'll live. But you can plan for the range.

The mistake most retirees make is assuming average health and average longevity, then getting surprised when they're still alive at 90 with medical bills piling up, or when a single large health or aged care event drains savings fast. Australia's Medicare system and aged care subsidies provide a meaningful safety net, but out-of-pocket costs remain substantial, particularly for dental, specialist care, and private aged care accommodation.

Plan for multiple scenarios. Budget for health. Give yourself enough buffer in retirement to handle medical surprises. It's unsexy compared to investment returns, but it's where most retirement plans actually break.