Key Takeaways

• Medicare isn’t free, and many retirees underestimate how much they’ll pay in premiums, deductibles, and other out-of-pocket costs.

• Planning for Medicare as part of your overall retirement strategy can help avoid financial surprises and ensure better coverage decisions.

Medicare and Retirement Planning: The Overlooked Expense

When you’re preparing for retirement, it’s easy to focus on obvious concerns—housing, income, and lifestyle. But the cost of healthcare, particularly Medicare, is often underestimated or pushed aside. That oversight can significantly impact your retirement finances. While Medicare offers essential coverage, it still involves regular expenses that require budgeting, and those costs increase over time.

Understanding what you’ll pay—and when—is essential if you want to avoid a retirement budget shortfall.

The Components of Medicare You’ll Need to Budget For

Medicare has multiple parts, and each part brings different types of costs. It’s important to understand these components so you can factor them into your retirement planning.

Medicare Part A: Hospital Coverage

• Premiums: Part A is usually premium-free if you worked at least 40 quarters (10 years). If you didn’t, you may have to pay a monthly premium.

• Deductibles: In 2025, the Part A inpatient hospital deductible is $1,676 per benefit period.

• Coinsurance: After 60 days in the hospital, you’ll pay $419 per day. If you stay past 90 days, lifetime reserve days cost $838 per day.

These costs can add up quickly if you’re hospitalized more than once in a year.

Medicare Part B: Medical Coverage

• Premiums: The standard premium for 2025 is $185 per month. Higher-income individuals pay more based on their modified adjusted gross income (MAGI).

• Deductible: The annual deductible is $257.

• Coinsurance: After meeting the deductible, you usually pay 20% of the Medicare-approved amount for most doctor services.

Part B covers outpatient care, preventive services, and durable medical equipment, making it a critical part of your coverage.

Medicare Part D: Prescription Drug Coverage

• Premiums: Vary by plan and income level. Premiums are adjusted for high earners.

• Deductible: The maximum deductible in 2025 is $590.

• Out-of-Pocket Cap: New in 2025, there’s a $2,000 cap on out-of-pocket drug costs.

Despite the cap, you may still pay for premiums, copays, and costs for non-covered drugs.

Medicare Supplement Plans: More Costs to Consider

While Medicare helps cover many expenses, it doesn’t cover everything. Many people consider additional insurance to cover what Original Medicare doesn’t pay, such as:

• Coinsurance and copayments

• Foreign travel emergencies

• Excess charges from providers who don’t accept Medicare assignment

These supplemental plans often involve monthly premiums. You must budget accordingly if you opt for this added layer of protection.

Medicare Advantage Plans: Another Path with Tradeoffs

Some retirees choose to get their Medicare coverage through a Medicare Advantage plan (Part C), which combines Parts A and B, and often Part D, into a single plan. While the premiums may be lower in some cases, these plans can involve:

• Network restrictions (in-network vs. out-of-network care)

• Prior authorizations for services

• Copayments for specialist visits or diagnostic services

The costs of these tradeoffs aren’t always financial—access to care and provider choice can be limited.

IRMAA: The Income-Related Monthly Adjustment Amount

One of the most surprising Medicare costs hits higher-income retirees through IRMAA. If your annual income exceeds certain thresholds, you’ll pay more for Part B and Part D premiums.

2025 IRMAA Thresholds

• For individuals: $106,000

• For couples filing jointly: $212,000

These amounts are based on your tax return from two years prior. That means your 2023 income affects your 2025 premiums.

If you’re close to the threshold, managing your income through retirement withdrawals and tax planning may help you avoid IRMAA charges.

The Timing of Enrollment Affects Your Costs

Missing Medicare enrollment deadlines can result in penalties that last for life.

Part B Late Enrollment Penalty

• If you don’t sign up when you’re first eligible and don’t qualify for a Special Enrollment Period, you’ll pay a 10% increase in premiums for every 12-month period you delayed enrollment.

Part D Late Enrollment Penalty

• If you go without creditable drug coverage for 63 days or more, you’ll pay a penalty calculated as 1% of the national base premium times the number of months without coverage. This penalty is added to your monthly Part D premium.

Penalties add up over time and can significantly increase your healthcare expenses in retirement.

Cost Trends: What You Should Expect Moving Forward

Medicare costs typically rise every year due to inflation, changes in federal policy, and healthcare system adjustments. In 2025:

• Part B premiums and deductibles have increased from 2024.

• Part D introduces a $2,000 out-of-pocket cap, improving predictability for drug expenses.

Still, you should anticipate annual increases when projecting your long-term budget. A conservative rule of thumb is to plan for a 5% annual increase in healthcare spending during retirement.

Long-Term Health Risks Mean Higher Medicare Costs

Your health status significantly influences your Medicare spending. Chronic conditions, hospitalizations, specialist visits, and prescription needs all raise your annual costs.

Don’t Ignore These Cost Drivers:

• Frequent specialist care

• High-cost prescription drugs

• Multiple hospital admissions

• Home health or skilled nursing needs not fully covered

Maintaining your health with preventive care and smart lifestyle choices can reduce these risks, but it’s still wise to budget for the unexpected.

Medicare Doesn’t Cover Everything

Many people assume Medicare is comprehensive, but several essential services aren’t covered:

• Long-term custodial care

• Dental services

• Vision and hearing exams and aids

• Most foot care

You’ll need to plan separately for these expenses or explore private coverage where available.

Budgeting for Medicare in Retirement

To prepare your retirement budget, consider the following categories:

• Monthly premiums: Include Parts B, D, and any supplemental or Advantage plans.

• Annual deductibles: Based on plan benefits.

• Copays and coinsurance: For doctor visits, tests, hospital stays, and prescriptions.

• Non-covered services: Dental, vision, hearing, and long-term care.

• IRMAA adjustments: For higher-income retirees.

• Inflation growth: Adjust your projections annually by at least 5%.

Using a retirement planning tool or working with a financial advisor can help build a more realistic cost estimate.

Don’t Let Medicare Costs Derail Your Retirement

Medicare offers vital health coverage, but it comes with financial responsibilities that shouldn’t be ignored. As you plan for retirement, make sure you:

• Understand your projected Medicare costs in today’s dollars

• Adjust for annual increases

• Avoid penalties by enrolling on time

• Consider your health risks and potential care needs

• Evaluate whether a supplemental or Advantage plan fits your budget and access needs

Getting the details right now can protect you from big surprises later—and help you retire with more peace of mind.

Make Medicare Part of Your Retirement Strategy

Including Medicare in your retirement planning isn’t optional—it’s essential. If you overlook it, your savings may not last as long as you expect. Healthcare is one of the largest expenses in retirement, and Medicare costs are a key part of that.

Take time now to:

• Review your expected premiums, deductibles, and copays

• Compare options for supplemental coverage

• Understand IRMAA and how your income affects costs

Need personalized help? Contact a licensed agent listed on this website who can help you walk through your Medicare options and make sure your retirement plan includes everything it should.