Medicare Planning and Healthcare in Retirement

Healthcare is the most underestimated retirement expense. A 65-year-old couple retiring today can expect to spend $315,000 or more on healthcare through retirement (Fidelity, 2024 estimate) — and that excludes long-term care. For those retiring before 65, the pre-Medicare gap can cost $15,000-$25,000 per year.

More importantly, healthcare costs are not independent of your other retirement decisions. Your Roth conversion strategy, Social Security timing, and withdrawal sequencing all affect your healthcare costs through IRMAA surcharges and ACA subsidy calculations.

Before Medicare: The ACA Bridge (Ages 55-64)

If you retire before 65, you need health insurance. The Affordable Care Act marketplace is usually the best option, and the subsidies are based on your Modified Adjusted Gross Income (MAGI).

How ACA Subsidies Work

Premium Tax Credits reduce your monthly premiums based on income relative to the Federal Poverty Level (FPL). For 2026:

| Income (Couple) | % of FPL | Approximate Premium Subsidy |

|----------------|----------|----------------------------|

| $20,440 | 100% | Maximum — you may pay $50-100/month total |

| $40,880 | 200% | Substantial — premiums capped at ~4% of income |

| $55,000 | 270% | Moderate — premiums capped at ~6% of income |

| $81,760 | 400% | Cliff — above this, no subsidies (pre-2021 rules) |

**Current law (through 2025 extension)**: The "cliff" has been replaced with a cap of 8.5% of income for everyone. This may revert — check current rules.

Income Management for ACA Optimization

Since ACA subsidies are MAGI-based, every dollar of income affects your healthcare costs:

- **Roth withdrawals** do NOT count as MAGI — ideal for living expenses during the ACA bridge

- **Roth conversions** DO count as MAGI — must be balanced against subsidy loss

- **Capital gains** count as MAGI — harvesting gains may cost you subsidies

- **Social Security** counts as MAGI (partially) — another reason some people delay claiming

**The balancing act**: You want to do Roth conversions during gap years (see [Roth Conversion Strategy](RothConversionStrategy)) but each dollar converted reduces your ACA subsidy. The optimal strategy converts enough to fill low tax brackets while staying below the subsidy cliff (if it exists) or accepting a reasonable subsidy reduction.

**Example**: A couple with $60,000 in annual expenses can:

1. Withdraw $60,000 from Roth accounts for living expenses (no MAGI impact)

2. Convert $40,000 from Traditional to Roth (MAGI = $40,000)

3. Receive substantial ACA subsidies on that $40,000 income

4. Pay ~12% tax on the conversion

5. Net result: low healthcare costs, low conversion taxes, steady Roth pipeline

Medicare Enrollment: What You Need to Know

The Parts of Medicare

|------|----------|------------------------|------------|

Critical Enrollment Windows

1. **Initial Enrollment Period (IEP)**: 7 months around your 65th birthday (3 months before, birth month, 3 months after). **Do not miss this.**

2. **Special Enrollment Period (SEP)**: If you're still working and covered by employer insurance at 65, you can delay Part B without penalty. You get 8 months after employment ends to enroll.

3. **Late Enrollment Penalty**: If you miss your IEP and don't qualify for SEP, Part B premiums increase by 10% for each 12-month period you were eligible but didn't enroll. This penalty is permanent.

**Key mistake to avoid**: If you retire before 65 and go on COBRA or ACA coverage, that does NOT count as "employer coverage" for the SEP. You must enroll in Medicare during your IEP even if you have marketplace insurance.

IRMAA: The Income-Related Medicare Surcharge

Income-Related Monthly Adjustment Amounts (IRMAA) are surcharges on Medicare Part B and Part D premiums for higher-income beneficiaries. They are based on your MAGI from **two years prior**.

2026 IRMAA Brackets (Married Filing Jointly)

|----------------------------|---------------------------|---------------------------|---------------------------|

| $206,001 - $258,000 | $259 | $48 | $2,088 |

| $258,001 - $322,000 | $370 | $67 | $5,184 |

| $322,001 - $386,000 | $481 | $86 | $8,304 |

| $386,001 - $750,000 | $592 | $105 | $11,448 |

| Above $750,000 | $629 | $112 | $12,528 |

The Two-Year Lag Problem

IRMAA is based on income from two years ago. This creates a planning trap:

- A large Roth conversion in 2026 (age 63) increases your 2028 (age 65) Medicare premiums

- If you're doing conversions in your early 60s, you must model the IRMAA impact before you turn 65

- **Life-Changing Event Exception**: If your income dropped due to retirement, marriage/divorce, or death of spouse, you can file SSA-44 to use current-year income instead

IRMAA and Roth Conversion Coordination

The interplay between Roth conversions and IRMAA creates a key planning constraint:

1. **Before age 63**: Convert aggressively — no IRMAA impact since you won't be on Medicare for 2+ years

2. **Ages 63-64**: Be careful — conversions now will affect your first years on Medicare

3. **Age 65+**: Every conversion dollar above the IRMAA threshold costs an additional $1,000-$6,000 per couple in surcharges

See [Roth Conversion Strategy](RothConversionStrategy) for how to size conversions around IRMAA thresholds.

Health Savings Accounts: The Triple Tax Advantage

If you had a High-Deductible Health Plan (HDHP) before Medicare, you may have an HSA. HSAs are uniquely powerful for retirement healthcare:

1. **Contributions are tax-deductible** (pre-tax)

2. **Growth is tax-free**

3. **Withdrawals for qualified medical expenses are tax-free**

After age 65, you can withdraw HSA funds for *any* purpose without penalty (taxed as income, like a Traditional IRA). But for medical expenses, it remains completely tax-free.

**Strategy**: If you can afford to, pay medical expenses out-of-pocket during working years and let the HSA grow. In retirement, use HSA funds first for any medical costs. See [Health Savings Accounts](HealthSavingsAccounts) for fundamentals.

**Important**: You cannot contribute to an HSA once you're enrolled in any part of Medicare.

Estimating Healthcare Costs in Retirement

Annual Cost Ranges (2026 dollars, per person)

|-----------|---------|---------|--------------------|

| 55-64 (pre-Medicare) | $6,000-$8,000 | $8,000-$12,000 | $12,000-$20,000+ |

| 65-74 (Medicare) | $4,000-$6,000 | $6,000-$8,000 | $8,000-$15,000 |

| 75-84 (Medicare) | $5,000-$8,000 | $8,000-$12,000 | $12,000-$25,000 |

| 85+ (Medicare) | $8,000-$12,000 | $12,000-$20,000 | $20,000-$40,000+ |

These include premiums, deductibles, copays, dental, vision, and prescriptions. They exclude long-term care.

Long-Term Care: The Elephant in the Room

Medicare does not cover long-term care (nursing homes, assisted living, in-home care). The median annual cost of a private nursing home room is approximately $108,000 (2024). About 50% of people over 65 will need some form of long-term care.

Options:

- **Self-insure**: Plan for $200,000-$400,000 in potential long-term care costs

- **Long-term care insurance**: Expensive and premiums can increase; best purchased in your 50s

- **Hybrid life/LTC policies**: Provide death benefit if LTC is not needed

- **Medicaid**: Covers long-term care for those who have exhausted assets (complex eligibility rules)

There is no good answer here — only trade-offs. The important thing is to acknowledge the risk rather than ignore it.