By the RetireGauge Editorial Team · Updated June 2026 · Researched from authoritative sources. General information, not professional advice.
Most retirement plans focus on income, but the expense that most often surprises people is healthcare. It tends to be large, it rises faster than general inflation, and it lands at exactly the stage of life when you have the least ability to earn it back. This guide walks through the coverage gap before age 65, how Medicare actually works, the enrollment deadlines that carry lifelong penalties, the income surcharges that catch higher-income retirees, what Medicare does not pay for, and the accounts you can use to prepare. Specific dollar figures here are illustrative; confirm current premiums and thresholds at Medicare.gov before you plan around them.
Retirees consistently underestimate medical spending for three reasons. First, while working, an employer typically pays most of the premium, so the true price is hidden. Second, healthcare inflation has historically outpaced the broader Consumer Price Index, so costs compound faster than the rest of the budget. Third, the biggest expense of all, long-term care, is the one people are least likely to budget for because they assume Medicare covers it. It largely does not.
A useful way to think about it is that healthcare is not a single line item but several: insurance premiums, out-of-pocket cost sharing (deductibles, copays, coinsurance), prescription drugs, the things insurance simply excludes, and the possibility of long-term care. A realistic plan accounts for all five.
Medicare eligibility begins at 65 for most people. Retire before then and you must bridge the gap yourself. The main options are:
This gap is one of the most expensive and least planned-for phases of early retirement. Budget for it explicitly rather than assuming you will simply wait for 65.
Original Medicare, run by the Centers for Medicare & Medicaid Services (CMS), comes in parts. Most people add either a Medicare Advantage plan (Part C) or a Medigap supplement plus a drug plan to fill the gaps.
| Part | What it covers | Typical cost responsibility |
|---|---|---|
| Part A (Hospital) | Inpatient hospital stays, skilled nursing (short-term), hospice, some home health. | Usually premium-free if you or a spouse paid enough Medicare payroll taxes; you still owe a per-stay deductible and later coinsurance. |
| Part B (Medical) | Doctor visits, outpatient care, lab tests, preventive services, durable equipment. | Monthly premium (income-adjusted), an annual deductible, then typically 20% coinsurance with no cap in original Medicare. |
| Part C (Medicare Advantage) | A private plan that bundles A and B, usually D, and often dental/vision extras, via networks. | You still pay the Part B premium plus any plan premium; costs come as copays with an annual out-of-pocket maximum. |
| Part D (Drugs) | Prescription drug coverage through private plans. | Monthly premium (income-adjusted), plus copays/coinsurance per the plan's formulary. |
| Medigap (Supplement) | Private policy that pays original Medicare's deductibles and coinsurance. | An extra monthly premium in exchange for far more predictable out-of-pocket costs. Not used alongside Part C. |
The basic decision most people face is one of two paths: original Medicare (A and B) plus a Medigap policy plus a standalone Part D plan, or a single Medicare Advantage (Part C) plan. The first tends to mean higher premiums but more predictable costs and broad provider access; the second often means lower premiums but networks and prior authorizations.
Medicare deadlines are unforgiving, and missing them can raise your premiums permanently. Enrollment is administered through the Social Security Administration. Key points:
The income-related monthly adjustment amount (IRMAA) is a surcharge on Part B and Part D premiums for higher-income beneficiaries. The Social Security Administration determines it from your modified adjusted gross income (MAGI), and it works on a two-year look-back, so the income that sets your premium is typically from your tax return two years earlier.
This is where the income tax plan and the healthcare plan collide. Large IRA or 401(k) withdrawals, capital gains, and Roth conversions all raise MAGI and can push you into a higher IRMAA bracket two years later. The brackets are cliffs, not gradual ramps, so a single dollar over a threshold can trigger the full surcharge for the year. Retirees who do Roth conversions often manage them carefully around these thresholds, and confirm the current brackets at Medicare.gov before acting.
Even good Medicare coverage leaves real gaps. The most important exclusions are:
Long-term care is the single largest healthcare risk in retirement, and because Medicare largely excludes it, it needs its own plan. The main approaches:
A Health Savings Account, paired with a qualifying high-deductible health plan, is the most tax-efficient way to save for future medical costs. As the IRS describes it, an HSA is triple-tax-advantaged: contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are tax-free. The catch for retirees is timing. Once you enroll in Medicare you can no longer contribute to an HSA, but you can keep the balance and spend it tax-free on qualified costs, including Medicare premiums and out-of-pocket care. Funding an HSA aggressively in your working years and leaving it invested is one of the strongest ways to pre-pay retiree healthcare.
Rather than a single guess, build the estimate in layers: expected premiums (Part B, Part D, and either Medigap or an Advantage plan), typical annual out-of-pocket costs, dental and vision you will self-pay, and a separate reserve for long-term care. Because healthcare inflation runs hot, inflate the figure each year and revisit it as your health and the rules change. Treating it as its own budget category, rather than folding it into general spending, keeps it from being the surprise that derails an otherwise solid plan.
No. Original Medicare leaves deductibles and coinsurance, and it excludes most long-term care plus routine dental, vision, and hearing. Many people add a Medigap or Medicare Advantage plan and a drug plan to fill the gaps. Confirm specifics at Medicare.gov.
Unless you qualify for an exception such as current-employer coverage, late enrollment in Part B or Part D can add a surcharge that generally lasts the rest of your life. Enrollment is handled through the Social Security Administration, so check the deadlines well before your 65th birthday.
Yes. Conversions and large withdrawals raise your MAGI, and the Social Security Administration uses MAGI from two years prior to set IRMAA surcharges on Part B and Part D. Because the brackets are cliffs, planning conversions around the thresholds can matter.
You cannot contribute to an HSA once enrolled in Medicare, but per IRS rules you can keep spending the balance tax-free on qualified medical costs, including many Medicare premiums and out-of-pocket expenses.
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