Medicare Costs and Planning: Managing Healthcare in Retirement

Healthcare is often the largest expense in retirement—the average couple needs $315,000+ for healthcare costs in retirement. Understanding Medicare costs and planning strategies can save tens of thousands of dollars.

The Full Picture of Medicare Costs

Breakdown of Annual Medicare Costs (2024, Individual)

IRMAA: The High-Income Medicare Surcharge

What Is IRMAA?

Income-Related Monthly Adjustment Amount

Higher-income beneficiaries pay more for Part B and Part D.

2024 IRMAA Thresholds (Based on 2022 Income)

Key Points:

• Based on income from 2 years ago
• Applies to each person (double for couples)
• Includes all income (IRA distributions, capital gains, etc.)

IRMAA Planning Strategies

1. Manage Income in the 2 Years Before Medicare

• Reduce IRA distributions
• Defer income if possible
• Harvest capital gains earlier

2. Roth Conversions Before Medicare

• Convert traditional to Roth before 65
• Pay taxes now, avoid IRMAA later
• Roth distributions don't count toward MAGI

3. Life-Changing Event Appeals If income dropped due to:

• Work reduction or retirement
• Death of spouse
• Divorce
• Loss of pension File SSA-44 form to request IRMAA reduction.

4. Capital Gains Management

• Large capital gains can trigger IRMAA
• Consider installment sales
• Time asset sales strategically

Strategies to Reduce Medicare Costs

1. Choose the Right Coverage Path

Original Medicare + Medigap:

• Higher premiums, lower out-of-pocket
• Best for those with health issues
• Predictable annual costs

Medicare Advantage:

• Lower premiums, higher out-of-pocket risk
• Best for healthy individuals
• Cap on maximum spending

The Math:

2. Shop Part D Plans Annually

Drug costs vary wildly between plans:

• Same drug can cost $50/month or $200/month
• Formularies change every year
• Your pharmacy matters

Always use medicare.gov/plan-compare

3. Consider High-Deductible Medigap

Medigap Plan G with High Deductible:

• $2,800 deductible (2024)
• Much lower premium (~$50/month)
• Good for healthy individuals

Savings: $100-200/month vs. standard Plan G

4. Use Preventive Care (It's Free)

Medicare Covers at 100%:

• Annual wellness visit
• Many cancer screenings
• Flu shots and vaccines
• Diabetes screening
• Depression screening

Prevention saves money long-term.

5. Negotiate Medical Bills

Even with Medicare:

• Ask for itemized bills
• Dispute errors (common!)
• Negotiate payment plans
• Ask about financial assistance

6. HSA Strategy Before Medicare

Before 65:

• Max HSA contributions
• Pay medical expenses out-of-pocket
• Let HSA grow tax-free

After 65:

• Can use HSA for Medicare premiums (except Medigap)
• Tax-free qualified withdrawals
• Built-in healthcare fund

Planning for Dental, Vision, and Hearing

These Aren't Covered by Original Medicare

Typical Annual Costs:

Your Options

1. Medicare Advantage with Extras

• Many include dental/vision/hearing
• Usually basic coverage
• Check limitations carefully

2. Standalone Dental/Vision Insurance

• $15-50/month
• Often limited annual maximums
• May not be worth cost

3. Discount Plans

• Not insurance
• Negotiated rates
• $100-200/year

4. Pay Out-of-Pocket

• Often cheapest for routine care
• Use HSA if available
• Shop around

Long-Term Care: The Big Gap

Options for Long-Term Care

1. Long-Term Care Insurance

• Purchase before 65 (healthier = cheaper)
• Premiums can increase
• Provides daily benefit for care

2. Hybrid Life/LTC Policies

• life insurance with LTC rider
• Use benefit for care or death benefit
• More expensive but guaranteed benefits

3. Self-Insurance

• Save enough to pay out-of-pocket
• Need $500,000+ set aside
• Only for wealthy

4. Medicaid Planning

• Spend down assets to qualify
• Complex rules and look-back periods
• Consult elder law attorney

Medicare Timing and Social Security

Coordinating the Decisions

Premium Deduction from SS

• Medicare premiums can be deducted from Social Security
• Reduces check but automates payment
• IRMAA applies on top of standard premium

Healthcare in Retirement Budget

Tax-Advantaged Healthcare Spending

What Qualifies

Medicare Premiums (from HSA):

• Part A (if you pay)
• Part B
• Part D
• Medicare Advantage
• NOT Medigap

Other Medical Expenses:

• Copays and coinsurance
• Prescription drugs
• Dental and vision
• Long-term care (limited)
• Medical equipment

Using Your HSA in Retirement

If you saved in an HSA before 65:

• Use for all qualified expenses tax-free
• Use for Medicare premiums tax-free
• After 65, non-medical use just taxed (no penalty)

The Medicare and Retirement Timeline

5+ Years Before 65

• Max HSA contributions if eligible
• Consider Roth conversions
• Build dedicated healthcare fund
• Research long-term care options

2 Years Before 65

• Watch income (affects IRMAA)
• Complete major Roth conversions
• Plan capital gains carefully

6 Months Before 65

• Create Medicare.gov account
• Research coverage options
• Get Medigap quotes
• List medications for Part D comparison

At 65

• Enroll in Medicare
• Choose coverage path
• Stop HSA contributions
• Coordinate with Social Security

Ongoing

• Review coverage every Annual Enrollment
• Track IRMAA income levels
• Adjust budget as needed
• Plan for increasing costs with age

The Bottom Line

Medicare costs are significant and require planning. IRMAA can dramatically increase your premiums if you don't manage income carefully. The choice between Original Medicare and Advantage affects both your costs and flexibility. And Medicare's biggest gap—long-term care—requires separate planning entirely. Start budgeting for $6,000-12,000+ per person annually in healthcare costs, use tax-advantaged accounts strategically, and review your coverage every year.