Key Takeaways

• Medicare does not cover all your healthcare needs, and the out-of-pocket expenses can be significant, especially if you’re unprepared.

• Budgeting for retirement should include realistic estimates of Medicare premiums, deductibles, and services that are not covered at all.

Your Retirement Budget Isn’t Complete Without Accounting for Medicare Costs

When you plan for retirement, one of the most overlooked categories in your budget is healthcare. It’s tempting to assume that Medicare will handle the bulk of your medical expenses once you turn 65. While Medicare provides essential coverage, it is far from free or all-encompassing. In fact, if you rely solely on Medicare without accounting for its various costs and limitations, you might find yourself facing financial gaps you didn’t plan for.

Let’s break down the areas where Medicare can surprise you—and why you need to build these into your retirement budget.

Monthly Premiums Add Up

Although Medicare Part A is premium-free for most people (if you worked and paid Medicare taxes for at least 40 quarters), other parts of Medicare come with monthly costs:

• Part B (Medical Insurance): In 2025, the standard monthly premium is $185. However, if your income is above certain thresholds, you’ll pay more through the Income-Related Monthly Adjustment Amount (IRMAA).

• Part D (Prescription Drug Coverage): The average premium in 2025 is about $46.50, and this also increases with income.

These premiums are recurring monthly costs that must be factored into your retirement budget. For a married couple, these premiums can exceed several thousand dollars annually.

Annual Deductibles Are Just the Beginning

Premiums are just the entry point. You’ll also face annual deductibles that must be met before Medicare starts paying:

• Part A: $1,676 per benefit period, not per year. This means you could pay it multiple times in a single year if you’re hospitalized more than once.

• Part B: $257 per year in 2025.

• Part D: Up to $590 for the deductible, depending on the plan.

Even if you have low medical usage, these deductibles are real costs you’ll need to budget for.

Coinsurance and Copayments Continue the Costs

Once you’ve met your deductibles, Medicare still requires you to share costs through coinsurance and copayments:

• Part A hospital stay: After day 60, you start paying a daily coinsurance ($419 per day for days 61-90).

• Skilled Nursing Facility: $209.50 per day from days 21-100.

• Part B services: Typically 20% coinsurance on approved services after the deductible is met.

There is no annual out-of-pocket maximum for Original Medicare. That means your share of costs could be uncapped depending on how much care you need.

Prescription Drugs Can Still Cost You Thousands

In 2025, a major change brings a $2,000 cap on out-of-pocket prescription drug costs under Part D. This is a significant improvement compared to the past, when the coverage gap (the “donut hole”) left many seniors with large medication bills.

However, you still need to account for:

• Monthly Part D premiums

• Plan-specific copayments and coinsurance

• The deductible phase

• And possibly the cost of brand-name drugs not fully covered under your plan

If you take multiple prescriptions, even with the new cap, your total annual drug costs may still surprise you.

Some Services Are Simply Not Covered

Medicare does not cover everything. Certain essential services are excluded entirely, including:

• Long-term care (custodial care): Nursing homes, assisted living, and home care not deemed medically necessary are not covered.

• Routine dental care: Cleanings, fillings, dentures, and extractions must be paid out of pocket.

• Vision and hearing: Glasses, contact lenses, hearing aids, and routine exams are not included.

• Overseas medical care: Medicare generally doesn’t pay for care outside the U.S.

These are often among the largest unexpected expenses during retirement. If you need help with daily activities or have chronic conditions requiring long-term support, the costs can be staggering.

Delaying Enrollment Can Trigger Penalties

Another financial surprise for many retirees involves late enrollment penalties:

• Part B: If you don’t enroll when first eligible and aren’t covered by other creditable insurance, your premium can go up 10% for each full 12-month period you delayed enrollment.

• Part D: A similar penalty applies if you go more than 63 days without creditable prescription drug coverage.

These penalties are permanent and increase the monthly premium you pay—potentially for the rest of your life.

Medicare Advantage Plans Come With Their Own Costs

Some retirees choose to enroll in Medicare Advantage (Part C), thinking it will shield them from high out-of-pocket costs. While these plans typically have an annual out-of-pocket maximum (unlike Original Medicare), they also have:

• Deductibles

• Copayments for every visit or service

• Restrictions on provider networks

• Prior authorization requirements for some procedures

The overall structure may reduce unpredictability in some cases, but it does not eliminate out-of-pocket costs. You’ll need to carefully review any plan’s Summary of Benefits to estimate realistic expenses.

IRMAA Can Inflate Your Medicare Budget

If your modified adjusted gross income (MAGI) is above $106,000 (individual) or $212,000 (couple), IRMAA will raise your Part B and Part D premiums.

These surcharges are based on your tax return from two years prior. So, in 2025, your 2023 income determines whether you pay IRMAA.

This can catch retirees off guard, especially if they experience a one-time income spike from selling property, receiving a bonus, or cashing out a retirement account.

Planning with a financial professional may help reduce IRMAA exposure, but you must be proactive.

Supplemental Coverage Isn’t Free

Many people turn to supplemental coverage to help with the gaps in Original Medicare. While these policies can reduce your share of coinsurance and deductibles, they come with their own monthly premiums.

If you choose to add supplemental coverage:

• You’ll pay an additional premium on top of Part B and Part D.

• Some plans also require annual deductibles and copayments.

This can offer valuable peace of mind—but it must be added to your retirement budget.

Health Changes Mean Cost Changes

Even if your healthcare costs are relatively low now, that doesn’t mean they’ll stay that way.

As you age, your need for specialist care, hospitalizations, outpatient services, therapies, and prescriptions is likely to increase. That means higher utilization of Medicare services—and more out-of-pocket costs.

A realistic budget must assume that your health needs and related expenses will grow over time. It’s not just a matter of budgeting for the year you turn 65—but for every year that follows.

Enrollment Timing and Plan Reviews Matter

You have multiple opportunities each year to evaluate and adjust your Medicare coverage:

• Initial Enrollment Period: Starts 3 months before the month you turn 65 and ends 3 months after.

• Annual Open Enrollment Period: From October 15 to December 7 each year, you can switch plans or adjust your coverage.

• General Enrollment Period: From January 1 to March 31, for those who missed their initial window.

Failing to review your plan during these periods can lead to unnecessary costs or missed opportunities to optimize your benefits.

Building Medicare into Your Retirement Strategy

When building a retirement budget, healthcare should be a top-tier priority, not an afterthought. A smart budget includes:

• All current and projected Medicare premiums

• Expected out-of-pocket costs for coinsurance and deductibles

• Emergency funds for uncovered services like dental, vision, and long-term care

• Inflation adjustments for healthcare costs year over year

• Allowances for increased usage of medical services with age

Work with a financial planner or licensed agent who understands Medicare to make these calculations more precise. The more informed you are now, the more control you’ll have over your financial stability in retirement.

Don’t Let Medicare Costs Derail Your Retirement

Medicare plays a vital role in your healthcare coverage after age 65—but it’s not an all-expenses-paid plan. If you don’t actively plan for premiums, deductibles, and services not covered, you could face financial stress in the years that should be your most peaceful.

Take the time now to build Medicare into your retirement budget with eyes wide open. And when you have questions, don’t guess. Reach out to a licensed agent listed on this website for expert help tailoring your Medicare strategy to your financial goals.