Medicare and Retirement: Budgeting for Healthcare After 65

Correction (31 July 2026): an earlier version of this page gave the Part B premium as $164.90/month (the 2023 figure) and the Part B deductible as $240 (the 2024 figure), and described the Part D "donut hole" as a current feature. The 2026 figures are $202.90 and $283, and the coverage gap was eliminated on 1 January 2025 by the Inflation Reduction Act and replaced with a hard annual out-of-pocket cap — $2,100 for 2026. Every downstream cost projection on this page has been recomputed. If you budgeted from the old figures, you understated Medicare premiums by about $456/year per person.

Medicare Basics in 2026

Medicare is available at age 65. It has four parts:

Total estimated cost for 65-year-old in 2026:

• Part B premium: $203/month
• Part D (drugs): $50/month
• Medigap supplement: $150/month
• Total premium: $403/month

Plus deductibles and copays:

• Part B deductible: $283/year (2026)
• Part B coinsurance: 20% of costs after deductible, with no out-of-pocket maximum — this is the single biggest reason to carry Medigap or Advantage
• Part D out-of-pocket: capped at $2,100 for 2026 across all covered drugs

Healthcare Cost Inflation in Retirement

Healthcare costs increase faster than general inflation:

• General inflation (2026): ~3% per year
• Healthcare inflation: ~5–6% per year

Cost projection (age 65–85). Starting from the 2026 premium total of $403/month ($4,836/year) and inflating at 5%/year:

Over 20 years (age 65–85), Medicare premiums alone cost roughly $173,000 per person. Add out-of-pocket (deductibles, coinsurance, non-covered services) and total healthcare cost is $300,000–$500,000 in retirement.

IRMAA: The Surcharge That Doubles Your Premium

The $202.90 standard Part B premium is only the standard. Above an income threshold, Medicare adds an Income-Related Monthly Adjustment Amount, and it is a cliff, not a taper — one dollar over the line moves you to the full next tier.

Two features make this the most expensive planning mistake in the first years of Medicare. First, the two-year lookback: your 2026 premium is set by the modified AGI on your 2024 tax return, so the damage is done long before the bill arrives. A large Roth conversion, a capital gain from selling a rental, or the last big salary year before retiring all land squarely in the lookback window. Second, the step at $109,000 costs $81.20 a month on Part B plus $14.50 on Part D — $1,148 across the year for a single filer who went one dollar over.

Check your headroom below the next tier with the IRMAA calculator before you trigger income you control. And if the surcharge came from a one-off life event — retirement, reduced work hours, the death of a spouse, loss of a pension — file Form SSA-44 to have the tier redetermined against your current income rather than a two-year-old return. That form is the single most under-used piece of Medicare paperwork.

Medicare Enrollment Timeline

You must enroll at age 65. Missing the deadline results in permanent penalties.

Enrollment periods:

• Initial Enrollment Period (IEP): Starts 3 months before you turn 65, ends 3 months after
• Annual Enrollment Period (AEP): October 15 – December 7 (change plans once per year)
• Late enrollment penalties (both permanent, and they work differently):
  • Part B: 10% added for each full 12-month period you were eligible and did not enrol
  • Part D: 1% of the national base beneficiary premium for each month without creditable drug coverage — so a 3-year gap is about a 36% surcharge, not 30%

Action required:

1. Go to Medicare.gov 3 months before turning 65
2. Enroll in Part A (automatic if on Social Security) and Part B (must enroll)
3. Choose Part D plan (drug coverage)
4. Choose Medigap supplement or Medicare Advantage plan
5. Confirm enrollment 1 month before birthday

Don't miss this deadline. The penalty is permanent.

Medicare Plans in 2026

Original Medicare + Medigap (Recommended for Most)

Original Medicare: Government plan (Part A + Part B)

Medigap: Private supplemental insurance fills the gaps

Example costs:

• Part B: $203/month
• Medigap (Plan G, best coverage): $180/month
• Part D (drugs): $50/month
• Total: $433/month

Out-of-pocket annual:

• Part B deductible: $283 (Plan G leaves this to you; Plan F covered it but is closed to anyone newly eligible after 1 January 2020)
• Medigap copays: $0–$200 (depends on plan)
• Part D out-of-pocket: capped at $2,100 for 2026
• Total OOP in a typical year: $300–$500

Total annual healthcare cost: $5,496–$5,696 ($433 × 12 = $5,196 in premiums, plus out-of-pocket)

Medicare Advantage (HMO/PPO)

Alternative plan: Instead of Original Medicare, enroll in Medicare Advantage (Part C)

Example costs:

• Premium: $0–$50/month (many $0)
• Copays: $20–$50 per visit
• Deductible: $0–$500
• Drug coverage included (Part D)
• Total: $200–$300/month

Trade-off: Lower premiums, but must use in-network doctors (restricted network)

Best for: Healthy seniors with few doctors, prefer low premiums

Worst for: Seniors with multiple conditions seeing many specialists

What Medicare Doesn't Cover

Significant costs not covered by Medicare:

Budget impact:

• Dental: $1,000–$2,000/year
• Vision: $200–$400/year
• Hearing aids: $2,000–$3,000 one-time, then $500/year for batteries/repairs
• Long-term care: $8,000–$15,000/month if needed

Most retirees set aside $3,000–$5,000/year for these non-Medicare-covered costs.

Realistic Retirement Healthcare Budget

Age 65–75 (Early Retirement, Generally Healthy)

Monthly budget:

• Medicare premiums (B+D+Medigap): $433
• OOP deductibles/copays: $40/month average
• Non-covered (dental, vision, hearing): $100/month
• Total: $573/month

Annual: $6,876

Age 75–85 (Late Retirement, More Issues)

Monthly budget:

• Medicare premiums: $450 (increased with age/cost)
• OOP deductibles/copays: $100/month
• Prescription drugs (increased): $150/month (chronic conditions)
• Non-covered (dental, vision): $150/month
• Potential long-term care (50% probability): $500/month (partial cost, insurance pays partial)
• Total: $1,350/month

Annual: $16,200

Age 85+ (Advanced Age, Complex Care)

Monthly budget:

• Medicare premiums: $500
• OOP costs: $200/month
• Prescription drugs: $200/month
• Long-term care or home health aide: $2,000–$8,000/month
• Total: $2,900–$8,900/month

Annual: $35,000–$107,000

Note: Age 85+, most people are on fixed income (Social Security). Long-term care typically covered by Medicaid if savings below certain threshold.

Long-Term Care Insurance Decision

Long-term care (nursing home, assisted living, home health aide) costs $8,000–$15,000/month. Medicare doesn't cover it.

Option 1: Medicaid covers it

• Spend down to $2,000 in assets
• Medicaid pays for care (poor quality homes, limited choice)
• Not ideal but available

Option 2: Long-term care insurance

• Age 55–60: Buy LTC insurance
• Cost: $1,000–$2,500/year depending on coverage
• Covers 3–5 years of care (100% or 75% depending on policy)
• If never need care, money wasted
• If do need care, insurance covers $200,000–$500,000

Option 3: Self-insure

• Save enough money to pay for care ($100,000–$500,000)
• Hope you don't need extensive care
• If you do, use savings for care

For most people: Don't buy LTC insurance. Self-insure by having savings. At 85, if you need care and can't afford it, Medicaid takes over.

Budgeting Healthcare Into Your Retirement Plan

Work backwards from retirement date:

Scenario: Retire at 65 with $800,000 in savings

Annual expenses: $50,000 (living expenses)
Healthcare costs: $6,900 (ages 65–75)
Total annual spend: $56,900

Safe withdrawal rate (4%): $800,000 × 4% = $32,000/year
Shortfall: $56,900 – $32,000 = $24,900/year
Must use: Social Security + other income to cover gap

Social Security at 65: about $24,000/year. The SSA puts the average retired-worker benefit at $2,072 a month ($24,864 a year) after the 2.8% COLA effective with January 2026 payments — but that average includes people who waited. Claiming at 65 when your full retirement age is 67 is a permanent reduction of about 13.3%, which is why $24,000 rather than $24,864 is the more honest planning figure for someone retiring at 65.

Complete picture:

• Social Security: $24,000/year
• Portfolio withdrawal (4%): $32,000/year
• Total income: $56,000/year
• Living expenses: $50,000
• Healthcare: $6,900
• Roughly $900/year short — close enough to break-even that a single bad year of health costs tips it negative

This scenario works. But if healthcare is higher (chronic disease), you'd go negative. Two things are worth testing before you rely on it. Run the whole plan — savings, withdrawal rate, longevity — through the retirement calculator rather than a single 4% rule of thumb. Then separate what must be paid from what can flex: Medicare premiums, Medigap and drug costs are fixed monthly obligations, and the retirement income floor calculator shows whether guaranteed income (Social Security, any pension, any annuity) covers those non-negotiables without touching the portfolio. A portfolio that funds groceries can be cut in a bad market; one that funds a Part B premium cannot.

Because the claiming age drives both the income figure and, indirectly, the IRMAA lookback, it is worth pricing the delay explicitly. Each year you defer past full retirement age adds roughly 8% to the benefit for life; the Social Security breakeven calculator shows the age at which waiting overtakes claiming early for your own numbers.

Planning Action Items

At age 55:

• Estimate healthcare costs in retirement (use $300–$500/month)
• Factor into retirement savings goal
• If retiring before 65, budget for private insurance ($400–$600/month) until Medicare

At age 62:

• Research Medicare plans (Original + Medigap vs. Advantage)
• Apply for Medicare at 65 (don't miss deadline)
• Decide on supplemental coverage

At age 65:

• Enroll in Medicare Part A, B, D
• Choose Medigap or Advantage plan
• Add healthcare costs to retirement budget

Throughout retirement:

• Review Medicare coverage annually (Oct 15 – Dec 7)
• Adjust for changing health needs
• Budget $3,000–$5,000/year for non-covered services

Your Healthcare Retirement Checklist

• Estimate annual healthcare costs (use $500–$800/month)
• Include in retirement savings goal
• Research Medicare plans at age 62
• Enroll at 65 (don't miss deadline)
• Choose Medigap (recommended) or Medicare Advantage
• Budget $3,000–$5,000/year for non-covered costs
• Review coverage annually
• Adjust retirement withdrawals for healthcare inflation

FAQ

I'm still working at 65 with employer coverage. Do I have to enroll in Medicare?

If your employer has 20 or more employees and you have active group coverage through that job, you can delay Part B and Part D without penalty and enroll later through a Special Enrollment Period — you get eight months from the month employment or the coverage ends, whichever comes first. If the employer has fewer than 20 employees, Medicare becomes the primary payer at 65 and you should enroll on time; the group plan may pay almost nothing otherwise. Two traps: COBRA and retiree coverage are not active employment coverage and do not protect you from the late penalty, and you cannot contribute to an HSA in any month you are enrolled in any part of Medicare.

How much is the late enrollment penalty, exactly?

Part B adds 10% to your premium for each full 12-month period you were eligible and did not enroll, and it is permanent. On the 2026 standard premium of $202.90, a two-year delay costs an extra $40.58 a month — about $487 a year, every year, rising as the premium rises. Part D works differently: 1% of the national base beneficiary premium for each month without creditable drug coverage, so a three-year gap is roughly a 36% surcharge, also permanent.

Does Medicare cover long-term care?

No, and this is the largest hole in retirement healthcare budgets. Medicare pays for up to 100 days of skilled nursing care following a qualifying hospital stay, and it pays in full only for the first 20 — it does not pay for custodial care, which is help with bathing, dressing, eating and moving around, and that is what most people actually need. At $8,000–$15,000 a month, long-term care is covered by Medicaid after you have spent down to roughly $2,000 in countable assets, by a long-term care insurance policy bought years earlier, or out of your own savings. There is no fourth option.

Original Medicare with Medigap, or Medicare Advantage?

The financial difference is where the risk sits. Original Medicare Part B has no out-of-pocket maximum — you owe 20% coinsurance with no ceiling — which is why Medigap exists and why Plan G at $150–$180 a month is the standard recommendation. Medicare Advantage caps your out-of-pocket exposure and often costs $0 in premium, but restricts you to a network and can require prior authorisation. The decision most people don't know they are making: you can switch from Advantage back to Original Medicare during open enrollment, but outside your one-time six-month Medigap open enrollment window at 65, insurers in most states can medically underwrite a Medigap policy and decline you. Choosing Advantage at 65 can therefore be a one-way door.

Sources

• Centers for Medicare & Medicaid Services. (2025). 2026 Medicare Parts A & B Premiums and Deductibles (fact sheet, 14 November 2025). https://www.cms.gov/newsroom/fact-sheets/2026-medicare-parts-b-premiums-deductibles
• Medicare.gov. (2026). 2026 Medicare Costs (fact sheet). https://www.medicare.gov/publications/11579-medicare-costs.pdf
• Medicare.gov. (2026). Medicare & You 2026 (official handbook). https://www.medicare.gov/publications/10050-medicare-and-you.pdf
• Centers for Medicare & Medicaid Services. Medicare Part D Improvements under the Inflation Reduction Act (elimination of the coverage gap; annual out-of-pocket cap). https://www.cms.gov/inflation-reduction-act-and-medicare/part-d-improvements
• Centers for Medicare & Medicaid Services. Final CY 2026 Part D Redesign Program Instructions. https://www.cms.gov/newsroom/fact-sheets/final-cy-2026-part-d-redesign-program-instructions
• U.S. Bureau of Labor Statistics. Consumer Price Index — medical care components. https://www.bls.gov/cpi/