Rising healthcare costs impact 401(k) accounts

By Donnell Stidhum

For decades, the 401(k) was a single-purpose vehicle: Money goes in during working years, stays untouched and comes out during retirement. That compact has quietly broken down.

Medical bills are one of the leading reasons Americans raid their retirement accounts early. And the people doing it aren't reckless spenders; they are ordinary workers who simply cannot make the math work anymore.

What healthcare actually costs in retirement

Most people dramatically underestimate this number. Here is what the data shows.

A 65-year-old retired in 2025 will need an average of $172,500 just for healthcare, a 4% jump from 2024, and more than double Fidelity's $80,000 estimate from 2002.
For a couple, that figure climbs to roughly $345,000, up 41% from $245,000 in 2015.
None of these numbers includes long-term care, dental, vision or hearing, which Medicare largely doesn't cover.

Actuarial firm Milliman puts individual costs even higher, depending on the plan type.

$275,000 is what a healthy 65-year-old man may need under Original Medicare + Medigap Plan G + Part D.
$313,000 is the same projection for a woman, reflecting a longer average life expectancy.

And these aren't lump sums people pay upfront. They accumulate slowly, which is exactly why people underestimate them.

According to HealthView Services, an average healthy 65-year-old couple's annual healthcare costs are projected to rise from $17,003 in their first year of retirement to $55,513 by age 85. Over a full retirement, the same couple faces total expected costs of $661,812 in current dollars or $955,411 in future value.

The planning gap is enormous

The above projections would be manageable if people were preparing for them. Most aren't.

Fidelity's own research found:

1 in 5 Americans has never once considered healthcare when thinking about retirement
That number rises to 1 in 4 among Generation X, the generation closest to retirement age after the baby boomers.
17% have taken zero action to plan for health expenses in retirement.

Jackson National Life, in partnership with the Center for Retirement Research at Boston College, dug further into the knowledge gap:

Nearly two-thirds of preretired investors are underestimating their expected healthcare expenses.
They're coming in at least $1,220 below the $8,600 annual per-person estimate
Only 27% believe they'll ever need long-term care, even though 70% of people turning 65 will likely need some form of it.

That gap between what people expect and what retirement healthcare actually costs is precisely where the 401(k) comes into play.

Hardship withdrawals are at record highs

The IRS permits workers to pull money from their 401(k) before age 59½ without the standard 10% early withdrawal penalty under specific hardship situations. Medical expenses are explicitly on that list. What has changed is how often people use that door.

According to Vanguard's 2026 data:

6% of 401(k) participants took hardship withdrawals in 2025, up from 4.8% in 2024.
That's more than triple the pre-pandemic rate of roughly 2%.
Hardship withdrawals have now climbed for six consecutive years.
The median withdrawal in 2025 was $1,900.
Medical expenses, foreclosures and evictions were the top three cited reasons for taking hardship withdrawals.

The 10% penalty still applies unless the withdrawal qualifies as an IRS exception, and even when it does, the withdrawn amount is taxed as ordinary income. So a $5,000 medical withdrawal can end up costing $6,500 or more once taxes are factored in.

The long-term math is brutal. A $5,400 withdrawal at age 30, assuming a 7% annual return, would have grown to roughly $41,000 by age 65. Workers aren't just covering one bill; they're permanently reducing the money available to cover the far larger healthcare costs that come later.

Medicare covers less than most people think

The assumption that Medicare will absorb the bulk of retirement healthcare costs is one of the most common and expensive planning mistakes people make.

Here's what Medicare doesn't cover:

Long-term care (nursing homes, assisted living, in-home aides)
Dental, vision and hearing in most cases
20% of outpatient costs under Part B, with no out-of-pocket cap under original Medicare
Prescription drug costs above plan limits until caps kick in

And Medicare itself is getting more expensive every year.

The standard Medicare Part B premium rose 9.7% in 2026 from $185 per month in 2025 to $202.90 per month. This is the third straight year that Part B increases have outpaced Social Security's cost-of-living adjustment.

The numbers on that mismatch are striking.

The 2026 Social Security COLA added roughly $50 per month to the average retiree's check.
Medicare Part B immediately claimed $18 of that through the premium increase.
Healthcare cost inflation is projected at 5.8% long-term, while the Social Security COLA for 2027 is estimated at 2.4%.

For the median retiree, after covering all out-of-pocket medical costs, only about 71 cents of every Social Security dollar is left for everything else: housing, food, transportation. For those at the lower end of the income distribution, that figure drops to 52 cents, according to the Center for Retirement Research at Boston College.

Where does the 401(k) come in?

The 401(k) is filling two gaps it was never designed to fill.

Gap 1: Emergency medical spending. Workers facing large, immediate medical bills are treating their 401(k) as a last-resort savings account. The hardship withdrawal data makes this clear.

Gap 2: Retirement healthcare funding. A D.A. Davidson survey found that 35% of Americans plan to use retirement accounts like 401(k)s or IRAs specifically to pay for healthcare costs in retirement, the second-most-cited strategy after Medicare Advantage coverage. If costs run higher than projected, those accounts drain faster than planned.

What's missing from most of these plans: professional guidance. Only 23% of Americans have ever discussed retirement healthcare costs with a financial advisor. Most people are making high-stakes estimates in the dark.

The HSA: A better tool that most people ignore

Health savings accounts exist specifically to bridge the gap between healthcare costs and retirement savings, but they remain dramatically underused.

How an HSA works:

Contributions are tax-deductible.
The balance grows tax-free.
Withdrawals for qualified medical expenses are tax-free.
After age 65, funds can be used for any purpose (taxed like a traditional IRA for non-medical use).

The numbers on HSA adoption tell a frustrating story:

Fidelity reported 43% growth in total HSA assets and a 23% increase in accounts in 2024.
Yet only 23% of Americans contribute to an HSA to prepare for retirement healthcare.
Just 3 in 10 are investing their HSA funds rather than spending them down immediately.
Only 15% of people aged 55–64 have an HSA at all.
Of those who do, more than half don't know it can serve as a retirement savings vehicle.

For 2026, the contribution limits are $4,400 for individuals and $8,750 for families, with a $1,000 catch-up for those 55 and older who aren't yet on Medicare. Money deposited today and left to grow can become a substantial, dedicated healthcare reserve by retirement, reducing the pressure on the 401(k) to absorb costs it wasn't designed to do.

The bigger picture

Medical services, insurance, drugs and equipment combined have increased by more than 120% since 2000. That trajectory has not slowed. The structural gap between what Medicare provides and what healthcare actually costs keeps widening each year.

The 401(k) was built on a simple premise: Accumulate money over a career, leave it largely untouched and draw it down steadily in retirement. Rising healthcare costs are disrupting that premise from both ends.

Workers are withdrawing early to manage current medical expenses. And retirees are discovering that the balances they spent decades building aren't as large as they need to be because no one told them to budget for a six-figure healthcare bill on top of everything else.

The people most exposed to this aren't necessarily the least financially aware. They're facing a system where wages haven't kept pace with medical costs, Social Security adjustments haven't kept pace with healthcare inflation, and the primary retirement savings vehicle available to most Americans wasn't designed with any of this in mind.

Planning around that reality deliberately, with specific numbers, not vague intentions, is the difference between a retirement that holds and one that quietly falls apart.