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.
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).
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.
Since ACA subsidies are MAGI-based, every dollar of income affects your healthcare costs:
The balancing act: You want to do Roth conversions during gap years (see Roth Conversion Strategy) 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:
| Part | Coverage | Cost (2026 approximate) | Enrollment |
|---|---|---|---|
| Part A | Hospital insurance | $0 for most (paid via payroll taxes) | Automatic at 65 |
| Part B | Outpatient, doctor visits | ~$185/month base premium | Must enroll — penalty for delay |
| Part C | Medicare Advantage (private plans combining A+B+D) | Varies by plan | Optional alternative to Original Medicare |
| Part D | Prescription drugs | ~$35-55/month | Must enroll — penalty for delay |
| Medigap | Supplemental insurance for Original Medicare gaps | $100-300/month depending on plan and age | Best selection at 65; medical underwriting later |
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.
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.
| MAGI (from 2024 tax return) | Part B Monthly (per person) | Part D Monthly (per person) | Annual Extra Cost (couple) |
|---|---|---|---|
| Up to $206,000 | $185 (base) | $35 (base) | $0 |
| $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 |
IRMAA is based on income from two years ago. This creates a planning trap:
The interplay between Roth conversions and IRMAA creates a key planning constraint:
See Roth Conversion Strategy for how to size conversions around IRMAA thresholds.
If you had a High-Deductible Health Plan (HDHP) before Medicare, you may have an HSA. HSAs are uniquely powerful for retirement healthcare:
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 for fundamentals.
Important: You cannot contribute to an HSA once you're enrolled in any part of Medicare.
| Age Range | Healthy | Average | Chronic Conditions |
|---|---|---|---|
| 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.
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:
There is no good answer here — only trade-offs. The important thing is to acknowledge the risk rather than ignore it.