Key Takeaways

• Medicare doesn’t eliminate healthcare expenses in retirement; you still face premiums, deductibles, copayments, and out-of-pocket limits.

• Failing to account for these costs in your retirement budget could lead to unexpected financial strain, especially if you rely solely on Medicare.

Medicare Is Not Free, Even After You Retire

Medicare might be federally funded, but it does not cover all your healthcare costs. As you plan your retirement budget in 2025, it’s essential to understand that enrolling in Medicare comes with its own set of financial obligations. You will still need to account for premiums, cost-sharing, and services that aren’t covered at all.

Medicare consists of several parts:

• Part A (Hospital Insurance) generally doesn’t require a premium if you paid Medicare taxes for at least 40 quarters, but it does come with deductibles and coinsurance.

• Part B (Medical Insurance) carries a standard monthly premium, an annual deductible, and 20% coinsurance for most services.

• Part D (Prescription Drug Coverage) also includes premiums, deductibles, and coinsurance that vary by plan.

• Medicare Advantage (Part C) must cover everything Original Medicare covers, but costs and networks vary widely.

In 2025, the standard Part B premium is $185 per month, and the Part B deductible is $257. That’s just the starting point. Depending on your income, you may also pay an Income-Related Monthly Adjustment Amount (IRMAA), which can significantly increase your costs.

Budgeting for Out-of-Pocket Costs Is Critical

One of the most common misconceptions is that Medicare covers everything. It doesn’t. And if you’re not planning ahead for those gaps, your retirement budget could take a hit.

Here are some of the key out-of-pocket costs you should prepare for:

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

• Coinsurance: After day 60 in the hospital, daily coinsurance charges begin, starting at $419 per day in 2025.

• Prescription Drug Costs: Under Part D, the maximum deductible is $590, and you may still owe a portion of drug costs until you reach the new $2,000 annual out-of-pocket cap.

• Dental, Vision, and Hearing: These are not covered by Original Medicare. If you want coverage, you’ll need to purchase separate insurance or pay out of pocket.

• Long-Term Care: Medicare does not cover custodial long-term care. This often surprises retirees, as assisted living or nursing home stays are a major expense.

Timing Your Enrollment Matters More Than You Think

If you don’t enroll in Medicare at the right time, you could face late enrollment penalties that stick with you for life.

• Initial Enrollment Period (IEP): Starts three months before you turn 65, includes your birthday month, and ends three months after. Missing this window without qualifying coverage could result in permanent penalties.

• General Enrollment Period (GEP): Runs from January 1 to March 31. Coverage begins July 1, and you may owe a late penalty.

• Special Enrollment Periods (SEP): These apply if you’re covered by a group health plan past age 65. You have 8 months to enroll after losing that coverage.

Late enrollment in Part B results in a 10% increase in your premium for every 12-month period you were eligible but didn’t enroll. That could cost you hundreds of dollars more annually, every year for the rest of your life.

Don’t Forget About the Part D Late Enrollment Penalty

Just like with Part B, there’s a penalty for signing up late for Part D unless you have other creditable drug coverage.

The Part D late enrollment penalty is calculated as 1% of the national base beneficiary premium ($34.70 in 2025) times the number of full months you went without coverage. This amount gets added to your monthly premium for as long as you have Part D.

Even if you don’t take many prescriptions today, skipping Part D when first eligible can cost you more later. It’s better to have drug coverage and not need it than to need it and face a lifetime penalty.

Annual Changes Can Impact Your Budget

Medicare costs change each year. Premiums, deductibles, copayments, and out-of-pocket limits typically increase. If you’re building a retirement plan that spans 20 or 30 years, you must account for these rising costs.

For example:

• The Part A deductible has increased almost every year for the past decade.

• The Part D out-of-pocket maximum in 2025 is $2,000. While this is a significant improvement for many, your spending may still approach that cap if you have multiple or expensive medications.

• The Medicare Part B premium has grown steadily, and while it may fluctuate up or down slightly from year to year, the long-term trend is upward.

This is why static budgets won’t cut it. A retirement plan that assumes flat Medicare costs could leave you underprepared as expenses grow over time.

Supplemental Coverage Is Not Optional for Many

Even with Medicare, most retirees find that they need extra protection from out-of-pocket costs. This might include:

• Medicare Supplement (Medigap) Insurance to help cover deductibles, coinsurance, and copayments. However, these policies come with monthly premiums and don’t include prescription drug coverage.

• Prescription Drug Plans (Part D) which vary in cost and coverage.

• Additional insurance for dental, vision, and hearing.

Each of these adds to your monthly expenses. Failing to plan for these add-ons could result in either high unexpected bills or reduced access to needed care.

Healthcare Inflation Is Faster Than Regular Inflation

Healthcare costs have consistently risen faster than general inflation. According to historical data, medical costs often increase 5% to 7% annually. This means that what you pay for Medicare and related expenses today could double in 10 to 15 years.

If your retirement plan doesn’t account for this rate of growth, you may run short on funds in your later years, just when your health costs are likely to be highest.

Medicare Doesn’t Cover Everything You Might Expect

Beyond the common exclusions like dental or vision care, many retirees are surprised to learn that Medicare does not cover services such as:

• Long-term custodial care (such as help with dressing or bathing)

• Routine foot care

• Over-the-counter drugs or supplements

• Alternative therapies like acupuncture (except in limited cases)

This often results in either:

• Paying for these services entirely out of pocket

• Seeking supplemental plans that help cover these gaps

But again, those supplemental plans require monthly premiums and may still leave you with out-of-pocket costs.

Your Income in Retirement Can Affect Medicare Premiums

Medicare uses your modified adjusted gross income (MAGI) from two years prior to determine whether you’ll pay IRMAA on Part B and Part D premiums.

In 2025, if your 2023 income exceeds $106,000 (individual) or $212,000 (joint), you’ll pay more. These higher premiums can be hundreds of dollars more per month, per person.

Even if you expect to have a modest income in retirement, one-time events like:

• Capital gains from selling a house

• Large IRA distributions

• Business income from consulting or side jobs

can push you above the IRMAA threshold and increase your Medicare costs for the following year.

Healthcare Is Often the Largest Expense in Retirement

According to recent projections, the average couple retiring at age 65 in 2025 can expect to spend more than $350,000 on healthcare expenses throughout retirement.

This includes:

• Medicare premiums

• Deductibles and copayments

• Prescription drugs

• Supplemental insurance premiums

• Services not covered by Medicare

If you assume Medicare will handle it all, you could underestimate your expenses by tens of thousands of dollars.

What You Can Do Right Now to Protect Yourself

If you’re planning to retire soon, or already have, take these steps to help control and plan for Medicare-related costs:

• Enroll on time to avoid permanent penalties.

• Budget for rising premiums and deductibles, not just current-year rates.

• Consider supplemental coverage like Medigap and Part D.

• Account for inflation, especially in healthcare.

• Factor in your retirement income when planning for IRMAA brackets.

• Use preventive services covered by Medicare to catch health issues early and avoid higher treatment costs later.

Being proactive instead of reactive can make a huge difference in your financial security over time.

Planning With Medicare in Mind Helps You Avoid Surprises

Medicare is a crucial piece of your retirement puzzle, but it’s not the whole picture. The more clearly you understand what it covers, what it doesn’t, and how much you’ll owe each year, the better prepared you’ll be to manage your budget in retirement.

To make sure you’re covering all your bases, speak with a licensed agent listed on this website. They can help you review your plan options, assess potential costs, and make informed decisions that support a more secure retirement.