Health care is one of the largest expenses you will face in retirement. In fact, Fidelity estimates a typical 65-year-old that is retiring today needs about $172,500 to cover medical costs. Fortunately, Medicare was built to offset this heavy burden, and it has anchored most Americans’ retirement plans since Congress established the program in 1965.
The bad news is, Medicare is complex. You face a series of choices, and the wrong one can trigger lasting penalties or leave you with thin coverage and high out-of-pocket costs. On the bright side, a little knowledge goes a long way. This guide walks you through the essentials – eligibility, enrollment, coverage, and costs – so you can make confident decisions.
The Basics of Medicare
Medicare is a national health insurance program that helps older and disabled Americans cover their medical costs. It is not a welfare program, and you shouldn’t confuse it with Medicaid, which provides health coverage for those in need. Tax dollars, monthly premiums, coinsurance, and deductibles all fund Medicare.
Original Medicare consists of Parts A and B, which cover some of the costs of inpatient and outpatient care. For additional protection, you can purchase a Medigap or Medicare Advantage plan, described in detail later in this article. To get a more complete picture of how the programs fits together, see our guide to what the different parts of Medicare cover.
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Medicare Eligibility and Enrollment
Medicare is available to Americans aged 65 or older and to those who have been disabled longer than 24 months. Unlike Medicaid, eligibility does not depend on your income or assets.
You will be enrolled automatically in Medicare Parts A and B if you are already receiving Social Security benefits when you turn 65. If you are retired but not yet receiving Social Security benefits at 65, you’ll need to enroll to avoid penalties. You may be able to delay enrollment if you are still working when you turn 65. Keep in mind that signing up for Medicare also affects your ability to fund a Health Savings Account, as we explain in how Medicare impacts HSA contributions.
You can enroll during one of three enrollment periods:
- Initial Enrollment Period – A 7-month window surrounding your 65th birthday.
- General Enrollment Period – January 1 through March 31 each year.
- Special Enrollment Period – An additional window for special circumstances.
In the past, a significant delay separated sign-up from the start of benefits. Fortunately, a 2023 change resolved this issue. Part B coverage now begins the first day of the month after you sign up, as long as you enroll during your Initial Enrollment Period or the General Enrollment Period.
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Medicare Coverage
Medicare does not cover every health care cost in retirement. Instead, Original Medicare helps with some of the costs tied to common health care needs. Original Medicare includes:
- Medicare Part A – Funded mainly by tax dollars, Part A covers inpatient hospital services, skilled nursing facilities, hospice, and home health care.
- Medicare Part B – Funded by monthly premiums, Part B covers outpatient care, doctor visits, preventive care, and durable medical equipment.
Once you’ve enrolled in Original Medicare and received your Medicare card, you can choose to purchase additional coverage. This makes health care coverage in retirement a two-step process that often takes at least two months.
The two main types of supplemental coverage are Medigap and Medicare Advantage. Our comparison of Medigap vs Medicare Advantage plans breaks down how each one works.
- Medigap – Medigap supplements Original Medicare by helping pay your share of costs. You can also add Medicare Part D, which helps pay for prescription drugs. Medigap premiums follow one of three pricing systems, and the difference matters over time – see our breakdown of attained-age, issue-age, and community-rated Medigap plans and a real-world case study on attained-age Medigap costs.
- Medicare Advantage – Medicare Advantage plans bundle the benefits of Parts A, B, and sometimes D with extra benefits a Medigap policy would typically provide. In most cases, you must use the doctors in the plan’s network.
Your Medicare coverage also interacts with any other insurance you hold. When more than one payer is involved, specific rules decide who pays first. If you travel internationally, Original Medicare rarely covers care abroad, so review Medicare coverage for overseas travel before a trip.
If you buy a supplement plan, you must choose between Medigap and Medicare Advantage. You cannot hold both, so this is a crucial choice in retirement planning. In fact, the wrong plan is one of the seven most common Medicare mistakes. To find the plan that fits your coverage and cost needs, consult an experienced financial advisor.
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Medicare Costs
Medicare Part A is available at no cost if you or your spouse worked at least 40 quarters at a covered job. If you worked fewer than 40 quarters, you can enroll in Part A voluntarily by paying a monthly premium. Even when you qualify for premium-free Part A, you could still owe deductibles and coinsurance when you receive care. Medicare Part A costs change each year as the cost of administering Medicare changes.
Medicare Part B carries a monthly premium, even if you worked at least 40 quarters. A deductible also applies before Medicare begins to share your costs. On top of that, Part B and Part D are subject to an Income-Related Monthly Adjustment Amount [IRMAA], which raises premiums for high earners.
Costs and coverage for Medicare supplement and Advantage plans can change every year. For that reason, you should review your policy annually with an experienced financial advisor to confirm it still meets your needs.
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Get Answers to Your Medicare Questions with Meld Financial
When our clients have questions about their Medicare options, they turn to our team of tax, legal, and investment professionals. Our decades of retirement planning experience help retirees find the Medicare coverage that fits their budget and needs.
Our comprehensive wealth management program, Financial Fingerprint®, includes a thorough review of Medicare and Social Security. This nimble plan is quick to assemble, easy to understand, and simple to modify as your circumstances change. With Financial Fingerprint® and the Meld Financial team behind you, you can transition to Medicare and enter retirement with confidence.
Contact us to get started.
