Medicare & Healthcare
Cost Planning
What you need to know before age 65 — and the decisions that cost people thousands when they get it wrong.
Educational Use Only. This guide does not constitute personalized financial, legal, or insurance advice. Medicare rules, premiums, and income thresholds change annually. Consult a Medicare specialist or licensed insurance professional for guidance specific to your situation.
Healthcare is the most expensive unknown in retirement planning. The average 65-year-old couple is projected to spend over $300,000 in out-of-pocket healthcare costs in retirement — not including long-term care. Unlike most retirement expenses, you can't simply spend less if costs run high.
The mistakes that cost people the most money usually aren't about the costs themselves. They're about the decisions made in the years surrounding age 65 — decisions that lock in premium rates, affect subsidy eligibility, and determine coverage for the rest of your life.
The Coverage Gap (Ages 55–64)
If you plan to retire before 65, you face a gap between your employer coverage ending and Medicare eligibility beginning. This gap needs a specific plan.
COBRA
COBRA lets you continue your employer's health plan for up to 18 months (sometimes 36 months in special circumstances) after leaving your job. The catch: you pay the full premium — both the employee and employer portions — plus a 2% administrative fee.
Typical COBRA Cost: $600–$1,500+/month for individual; $1,800–$2,500+/month for family coverage.
COBRA makes sense if your employer plan is significantly better than marketplace alternatives, you have ongoing medical needs requiring specific providers, or you're very close to 65 and need a short-term bridge.
ACA Marketplace Plans
The Affordable Care Act marketplace offers individual health insurance plans with income-based subsidies (Premium Tax Credits). This is often the most cost-effective option for early retirees — but only if you manage your income correctly.
| Household Size | Income Limit for Subsidy (approx.) |
|---|---|
| 1 person | Up to ~$60,240 (400% FPL) |
| 2 people | Up to ~$81,760 (400% FPL) |
Enhanced subsidies have no hard upper income cutoff — the subsidy phases out as income rises. A tax advisor can model your specific situation.
ACA subsidies are based on your Modified Adjusted Gross Income in the year you receive coverage. A large IRA withdrawal or Roth conversion in a bridge year could push you above subsidy thresholds — and you may owe back subsidies received, or simply pay much higher premiums.
This is a coordination problem. The income you withdraw in early retirement simultaneously affects your tax bill and your healthcare cost.
Spouse's Employer Plan
If your spouse is still working and covered by employer insurance, joining their plan is often the simplest and most cost-effective option. Make sure to enroll within the Special Enrollment Period triggered by losing your own coverage.
Medicare Basics
Medicare eligibility begins at age 65. It is divided into four parts:
| Part | Covers | How You Get It | Cost (2026) |
|---|---|---|---|
| Part A | Hospital inpatient, skilled nursing, hospice | Automatic if you paid Medicare taxes for 10+ years | Usually $0 premium |
| Part B | Doctor visits, outpatient care, preventive services | Must enroll actively | $202.90/month (standard) |
| Part C | Medicare Advantage (bundles A+B+D) | Choose a private plan | Varies by plan |
| Part D | Prescription drugs | Choose a private plan | Typically $20–$100/month |
The Standard Enrollment Sequence
Initial Enrollment Period (IEP)
7-month window — 3 months before your 65th birthday, your birthday month, and 3 months after. Missing this without qualifying for a Special Enrollment Period results in permanent premium surcharges.
Special Enrollment Period (SEP)
If you're still on employer coverage at 65, you have an 8-month SEP to enroll in Medicare when that coverage ends. Important: COBRA does not count as employer coverage for this purpose.
Open Enrollment Period
October 15 – December 7 each year. Use this to switch Medicare Advantage plans or Part D plans.
Common Enrollment Mistakes
Assuming COBRA qualifies as employer coverage. If you retire at 63, take COBRA, and reach 65 while on COBRA — you still need to enroll in Medicare during your IEP. Missing it results in a permanent 10% Part B premium penalty per year late.
Skipping Part B because you feel healthy. Part B carries a permanent 10% surcharge for every 12-month period you were eligible but not enrolled (without a valid SEP). A 2-year delay means a permanent 20% increase for life.
Ignoring Part D enrollment. Even if you take no prescription drugs currently, enrolling in a low-cost Part D plan protects against a similar late enrollment penalty if you need drugs later.
IRMAA — The Hidden Surcharge
IRMAA (Income-Related Monthly Adjustment Amount) is a surcharge on Medicare Part B and Part D premiums paid by higher-income enrollees. What catches people off guard is the two-year lookback: your 2026 Medicare premium is based on your 2024 income.
| MAGI (Single) | MAGI (Married Filing Jointly) | Monthly Part B Premium |
|---|---|---|
| ≤ $109,000 | ≤ $218,000 | $202.90 |
| $109,001 – $137,000 | $218,001 – $274,000 | $284.10 |
| $137,001 – $171,000 | $274,001 – $342,000 | $405.80 |
| $171,001 – $205,000 | $342,001 – $410,000 | $527.50 |
| $205,001 – $500,000 | $410,001 – $750,000 | $608.90 |
| Over $500,000 | Over $750,000 | $689.90 |
Based on 2024 MAGI for 2026 premiums. Thresholds are updated annually by CMS.
The Planning Implication: A Roth conversion, large IRA withdrawal, or business sale in year one or two of retirement can spike your income — and two years later, spike your Medicare premiums. A couple who takes a $200,000 IRA distribution at age 63 may see their Medicare premiums jump by $7,000–$12,000/year at 65.
This isn't a reason to avoid Roth conversions. It's a reason to model the IRMAA impact before executing them.
IRMAA Can Be Appealed. If your income dropped significantly due to a life-changing event (retirement, divorce, death of spouse), you can appeal to Social Security for a reduction in your IRMAA surcharge. Document the event and contact Social Security directly.
The Medicare Plan Decision
At 65, you choose between two coverage structures. The right answer depends on your health status, provider preferences, financial flexibility, and tolerance for unpredictable costs.
Original Medicare + Medigap + Part D
Original Medicare (Parts A + B) covers roughly 80% of costs. A Medigap (Medicare Supplement) plan covers most or all of the remaining 20%, plus some deductibles and copays. A standalone Part D plan covers prescriptions.
Pros
- Predictable out-of-pocket costs
- Any Medicare-accepting doctor nationwide
- No referrals needed
Cons
- Higher combined premiums
- Medigap requires underwriting if enrolled outside initial window (most states)
Medicare Advantage (Part C)
Private insurance plans that bundle Parts A, B, and often D together. Often have lower or $0 premiums — but include copays, deductibles, and network restrictions.
Pros
- Lower upfront premium (often $0)
- May include dental, vision, hearing
Cons
- Network restrictions
- Prior authorization requirements
- Higher costs if you use a lot of care
- Limited ability to change plans later
The HSA Advantage
If you have access to a Health Savings Account before retirement, it's one of the most powerful planning tools available — offering a triple tax advantage available nowhere else in the tax code.
Triple Tax Advantage: Contributions are pre-tax. Growth is tax-free. Withdrawals for qualified medical expenses are tax-free at any age. After age 65, withdrawals for non-medical expenses are taxed like a traditional IRA — with no penalty.
2026 Rule Change (One Big Beautiful Bill): Starting January 1, 2026, ACA Bronze and Catastrophic plans are now HSA-eligible — a significant expansion. If you're in a bridge year before Medicare and enrolled in one of these plans, you may now be able to contribute to an HSA for the first time. Telehealth coverage before the deductible is also permanently permitted without disqualifying HSA eligibility.
Strategic use: Fund your HSA aggressively in your 50s. Pay current medical expenses out of pocket where possible and save your receipts. In retirement, withdraw the accumulated balance tax-free to cover Medicare premiums, dental, vision, hearing aids, and long-term care premiums.
You cannot contribute to an HSA once you're enrolled in Medicare. Stop contributions the month your Medicare begins.
Your Healthcare Planning Timeline
Confirm you have access to an HSA and are maxing contributions
Project your income in early retirement years — model ACA subsidy eligibility
Identify your Medicare eligibility date (first day of birthday month in which you turn 65)
Evaluate COBRA vs. ACA marketplace — get quotes for both
Model income management for ACA subsidy optimization
Coordinate Roth conversions with ACA subsidy thresholds
Enroll in Medicare during your Initial Enrollment Period — do not miss this window
Compare Medigap vs. Medicare Advantage — get quotes from a licensed Medicare broker
Enroll in Part D even if you currently take no prescriptions
Plan IRMAA impact: review income from 2 years prior and appeal if eligible
Review Medicare plan during annual Open Enrollment (Oct 15 – Dec 7)
Track IRMAA thresholds — manage income-generating events accordingly
Use HSA balance strategically for eligible healthcare expenses
Questions? Let's Talk.
Healthcare planning intersects with tax planning, Social Security strategy, and your overall retirement income plan in ways that are hard to model in isolation.