Demystifying Medicare for Retirement

An important aspect of retirement planning is knowing how you'll pay for health care, especially once you leave the workforce and are no longer covered by your employer-sponsored health insurance. Fortunately, Americans age 65 and older are eligible to enroll in Medicare, the federal government health insurance program established in 1965 to provide basic coverage for retirees.

Here we'll take a look at your Medicare options in retirement, including the different types of plans and policies you can purchase, as well as two strategies you can consider to help maximize coverage and manage out-of-pocket expenses.

Understanding what the different parts of Medicare offer in covered services can help ensure you have adequate health insurance in retirement.

Medicare was never intended to cover all health care expenses. Indeed, covered services under Original Medicare—comprising of Part A and Part B—is limited and based on federal and state laws as well as local coverage decisions based by claim processors. Generally, Part A covers inpatient hospital care whereas Part B covers outpatient medical care.

However, Original Medicare only pays a portion of those costs, and there's no out-of-pocket limit. Services outside its scope—including routine dental and vision care, prescription drugs taken at home, and long-term care—must be paid out of pocket or via a separate private insurance policy.

To fill the "gaps" in Original Medicare coverage, you can purchase Medigap from a private insurance company. This supplemental insurance plan will pay for at least some—if not many—of the out-of-pocket expenses Original Medicare covers, such as deductibles, copays, and coinsurance. Outside of Wisconsin, Minnesota, and Massachusetts, there are 10 standardized Medigap plans labeled Plan A through Plan N with varying degrees of coverage and costs to help fit your needs. You can use Medigap at any hospital or doctor that accepts Medicare.

Medicare Advantage, or Part C, is an alternative private insurance option that covers the same services as Original Medicare and may include prescription drug coverage. (Many plans offer additional benefits such as dental or vision insurance as well.) In exchange for centralized care for many of your health needs, these Medicare plans may limit the network of doctors and hospitals you can go to and may require prior authorization before you can receive specialized care.

Part D is private insurance for Medicare-approved prescription drugs, including many recommended shots or vaccines. You can purchase a Part D plan on its own in addition to Original Medicare, or the plan may be bundled with other services as part of a Medicare Advantage plan.

Choosing the right Medicare coverage is critical because it affects the doctors you'll see, the hospitals you'll go to, and the costs you'll pay out of pocket—often over the remainder of your life. We suggest focusing on two main options that can help maximize coverage and limit out-of-pocket Medicare costs.

• Part A typically has no premiums, so long as you or your spouse paid Medicare taxes for at least 10 years while working. There's a deductible for each hospital stay ($1,676 in 2025), along with a daily copay for stays of more than 60 days—starting at $419 per day and increasing to 100% of the bill for stays longer than 90 days. (You have access to an extra 60 lifetime reserves days at a reduced price, but once these days are used, they can't be renewed).
• Part B requires income-based premium payments, starting at $185 per month in 2025 but going as high as $628.90 for wealthy individuals. There's an annual deductible of $257 in 2025, after which you'll generally be responsible for 20% of outpatient bills—though certain care, including some preventive services, won't cost you anything.

Medigap premiums vary widely based on level of coverage, as well as age, health, location, sex, and whether your acceptance is guaranteed or subject to review (see "Option 1: Timing").

For example, a 65-year-old female nonsmoker living around Chicago who chooses a Medigap Plan G policy—which provides the most comprehensive coverage for newly eligible Medicare recipients—can expect to pay between $117 and $544 per month, whereas a 65-year-old female nonsmoker in Miami may pay between $239 and $442 for the same plan.¹ Be aware these premium estimates don't include the cost for Medicare Part B.

Medicare Part D has an average monthly cost of about $47—though, as with Original Medicare, retirees with higher incomes should expect to pay more. The good news is the Inflation Reduction Act capped out-of-pocket prescription drug costs at $2,000 starting in 2025. Also starting in 2025, rather than paying for your medications upfront, you'll have the option to make monthly payments over the calendar year under the Medicare Prescription Payment Plan.

The higher your income in 2023, the more Part B and Part D will cost you in 2025.

If you begin Social Security benefits before age 65, you'll automatically be enrolled in Medicare Parts A and B when you turn 65. Otherwise, you must enroll during your initial enrollment period (IEP)—a seven-month period starting three months before you turn 65 and three months after your birthday month—during which you should also enroll in Part D and a Medigap plan.

If you have health insurance through your or your spouse's employer, you may be able to delay Medicare enrollment. The rules around this can be complicated, so it's best to speak with the human resource department about whether you should still sign up during your IEP. That said, once you lose your workplace coverage, don't delay Medicare enrollment to avoid any lapse in coverage.

While waiting to get Medicare may sound like a money-saving move, it can be costly in the long run:

• For every full year you delay enrolling in Part B, you'll pay 10% more for the same coverage—for life. And if you owe Part A premiums, you'll pay an extra 10% each month for twice the number of years you delay.
• Part D also has a late-enrollment penalty, which is calculated by multiplying 1% of the average national base premium—a figure released annually by Medicare ($36.78 for 2025)—by the number of months without creditable coverage. You'll pay this fee on top of your monthly premium for as long as you have prescription drug coverage, whether on its own or through Medicare Advantage.
• For Medigap, it's best to enroll within six months of signing up for Part B so you can avoid any coverage gaps and during which you have guaranteed acceptance to any Medigap policy you choose. Some states allow Medigap enrollment beyond the initial six-month window, so check with your State Insurance Department for specifics on enrollment periods and eligibility requirements where you reside. After your enrollment period, you can buy Medigap anytime without penalty, but you're likely to face higher premiums and could be denied coverage altogether—unless your situation qualifies as a special circumstance.

Opting into Original Medicare and purchasing Medigap and Part D is generally a good strategy if you have a preexisting condition, believe your health may deteriorate, or want greater predictability around your out-of-pocket costs and a wider choice of doctors and hospitals.

Medicare Advantage plans bundle Parts A, B, and often D, plus other services not covered by Original Medicare, such as routine dental and vision. The average beneficiary in 2025 has a choice of 34 Medicare Advantage prescription drug plans, according to the Kaiser Family Foundation. The 2025 premium average is about $17 per month on top of the Part B premium, but many Medicare Advantage plans can have premiums as low as $0.

Unlike with Option 1—whereby you pay higher premiums for benefits you may not need right away—you'll incur the bulk of Medicare Advantage costs when you use your coverage, via coinsurance and copays, up to the plan's annual maximum out-of-pocket limits.

If you opt for a Medicare Advantage plan from the start, you'll sign up for it along with Medicare Part A and Part B during your IEP. However, if you're still covered by your employer's health care insurance, speak with your human resource department about whether you should still enroll during your IEP.

You can opt in to Medicare Advantage later, but you may do so only during the Fall open enrollment period. That said, you won't pay a penalty for delaying enrollment in Medicare Advantage.

For someone who is generally healthy now and expects to remain so in the future, Medicare Advantage with a prescription drug plan may be a good way to go. But betting on your continued good health may or may not pay off in the long run.

When deciding among your health care options, consider your health history, the network of health care professionals you'd like to use, your financial situation, and your tolerance for paying unknown out-of-pocket costs.

You should also look beyond the here and now. Think of your needs on a continuum—from early to late retirement. For example, you may not need prescription coverage at the start of retirement, but if you wait to enroll until you need it, you could face a much steeper premium.

Even after you make your decision, it's wise to review your health plan each year. Costs can fluctuate, doctors can go in and out of network, and Medicare drug coverage can change. Be sure to review your Evidence of Coverage and Annual Notice of Change documents from your Medicare Advantage or Part D plans, which will tell you about your current plan and what will change in the coming year.

Explore coverage to help control your out-of-pocket health care costs.

State Health Insurance Assistance Programs can provide unbiased information about Medicare and help walk you through your Medicare options in your state. A health insurance broker can provide guidance on choosing the best type of Medicare Advantage plan or Part D coverage, as well as assist with dental and vision insurance.

All of these decisions will depend on your current and potential medical needs, the doctors you prefer, and your prescription drug regimen, so be sure to have that information at hand.