Retirement planning is not just about income and investments. It is also about protecting yourself from health-related expenses that could derail your plan. In my last post, I covered the basic types of insurance and which ones may no longer apply once you stop working.
Today, let’s focus on one of the most important topics for retirees: healthcare coverage before and during Medicare.
As with most financial topics, entire books have been written on this subject. The goal of this post is not to give you every detail or determine what is best for your specific situation. Instead, I want to give you a clear overview so you can approach this topic with more confidence and clarity.
Health Insurance Before Medicare (Before Age 65)
If you retire before age 65, planning for health insurance is a critical part of your retirement plan. Most early retirees find their coverage through one of the following:
- COBRA
- The ACA Marketplace (healthcare.gov or a state exchange)
- A spouse’s employer plan
- Employer-provided retiree health insurance
COBRA allows you to extend your employer-provided coverage for up to 18 months after leaving your job. In some cases, coverage can extend even longer. This can be a good option if you’re close to age 65 and want to keep your current plan. However, premiums often rise substantially because the employer no longer subsidizes the cost.
The ACA Marketplace offers private plans to millions of Americans. You can compare options at healthcare.gov or your state’s health insurance exchange. These plans can be expensive, but subsidies may be available based on income. Tax planning during early retirement, such as deciding which investment accounts to draw from, can help you qualify for premium subsidies and reduce overall costs.
Note: At the time of writing, enhanced premium subsidies that expanded eligibility above 400 percent of the Federal Poverty Level are set to expire. Be sure to check current rates using healthcare.gov, your state exchange, or by working with a licensed health insurance broker. Some online calculators may no longer reflect accurate costs.
If your spouse is still working, you may be eligible to join their employer plan. This can be a cost-effective way to bridge the gap until you qualify for Medicare. Some retirees also choose to work a lower-stress, part-time job that offers health insurance to maintain coverage during this time.
In some cases, your former employer may offer retiree health insurance. For example, federal employees can continue their Federal Employees Health Benefits (FEHB) coverage after separating from service. This type of benefit is rare, but it is worth exploring if available.
The key takeaway: there is no one-size-fits-all solution. What matters is that you plan ahead and secure the right option for your needs before age 65.
Enrolling in Medicare
When you turn 65, you become eligible for Medicare. The Initial Enrollment Period begins three months before your 65th birthday and ends three months after.
If you plan to keep working past age 65, you may be able to delay enrolling in Medicare without penalty. However, your existing health insurance must be considered creditable coverage. Some employers require you to enroll in Medicare Part A or Part B even if you are still working. Be sure to check with your employer’s benefits department.
Understanding the Parts of Medicare
Medicare has several components. Understanding what each one does can help reduce confusion.
- Part A covers hospital care, skilled nursing facilities, hospice, and some home health care. Most people do not pay a premium for Part A if they or their spouse worked and paid Medicare taxes for at least 10 years. Part A does not replace long-term care insurance. Coverage for nursing homes is typically short-term and limited to medically necessary care.
- Part B covers doctor visits, outpatient care, preventive services, and some medical equipment. The standard premium in 2025 is $185 per month. However, higher-income households will pay more due to IRMAA (Income-Related Monthly Adjustment Amounts). Strategic tax planning can help you manage these surcharges by controlling income through account withdrawals and Roth conversions.
- Part C, or Medicare Advantage, is an all-in-one plan offered by private companies. These bundled plans typically include Part A, Part B, and often Part D (prescription drug coverage). Medicare Advantage plans usually have lower premiums, but often come with restricted networks and higher out-of-pocket costs. It is often difficult to switch from Medicare Advantage back to Original Medicare with a Medigap policy. Because of these limitations, I generally do not recommend Medicare Advantage unless there is no other affordable option.
- Part D covers prescription drugs. These plans are administered by private insurance companies that follow Medicare rules. You must enroll separately in a Part D plan unless you choose a Medicare Advantage plan that includes drug coverage.
Medigap vs Medicare Advantage
If you choose Original Medicare (Parts A and B), you should add a Medigap plan to fill in the coverage gaps. Medigap plans reduce your out-of-pocket exposure by covering costs like deductibles, copays, and coinsurance.
Here is a simple comparison:
Medigap:
- Higher monthly premiums
- Nationwide access to providers who accept Medicare
- Lower and more predictable out-of-pocket costs
- No need for referrals or networks
Medicare Advantage (Part C):
- Lower monthly premiums
- Restricted provider networks
- Higher cost-sharing
- Difficult to switch back to Medigap later on
If you can afford the premiums, I strongly recommend choosing a Medigap plan over a Medicare Advantage plan. Medigap offers better protection and more flexibility, which can make a big difference in retirement.
Budgeting for Healthcare in Retirement
A 65-year-old couple can expect to spend several hundred thousand dollars on medical costs throughout retirement. This estimate does not include long-term care expenses.
Your total cost will likely include:
- Medicare Part B and Part D premiums
- Medigap premiums (or Medicare Advantage if you choose it)
- Deductibles and coinsurance
- Out-of-pocket costs for dental, vision, and hearing care
Be sure to include these costs in your retirement budget. While Medicare covers a large portion of healthcare costs, it does not cover everything. The right combination of Medicare and supplemental insurance can help you limit surprises.
Final Thoughts
Healthcare is one of the most important and most expensive parts of retirement. The good news is that with a bit of planning, you can make informed choices and protect your financial plan.
To review:
- Find coverage for the years before Medicare begins if you retire early
- Understand the components of Medicare and how to enroll
- Choose between Medigap and Medicare Advantage with care
- Budget realistically for ongoing healthcare expenses
In the next post, I will cover long-term care planning, including how to evaluate your options and decide whether insurance is right for you.
Stay tuned.
Together Planning is a registered investment advisor. The information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Together Planning has a reasonable belief that this marketing does not include any false or material misleading information statements or omissions of facts regarding services, investments, or client experiences. Together Planning has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.