Medicare

The Medicare system is a federal health insurance program available to people age 65 and older, as well as some younger people with disabilities or end-stage renal disease. It is funded through payroll taxes (part of FICA) and provides coverage for hospital care, medical services, and prescription drugs.

Medicare Parts

Part A: Hospital Insurance. Covers inpatient hospital care, skilled nursing facility care, hospice, and home health care. Most people get Part A automatically at 65 (funded through payroll taxes); there is typically no premium.

Part B: Medical Insurance. Covers doctor visits, outpatient care, preventive services, and medical equipment. There is a premium (currently ~$175/month, indexed to income). You must enroll during your Initial Enrollment Period or pay a late penalty.

Part D: Prescription Drug Coverage. Covers prescription medications. Offered by private insurance companies; premiums vary. You must enroll by your Initial Enrollment Period or pay a late penalty.

Part C: Medicare Advantage. An alternative to Original Medicare (A+B). Private insurance companies contract with Medicare to offer bundled coverage (often including Part D). Usually lower premiums but network restrictions.

Original Medicare vs. Medicare Advantage

Original Medicare (A+B+D): Traditional fee-for-service. You can see any Medicare-accepted provider. You pay premiums (Part B, Part D) plus deductibles and copayments. You may want supplemental insurance (Medigap) to cover gaps.

Medicare Advantage (Part C): Private insurance providing A+B+D in a single plan. Usually lower or zero premiums but network restrictions (HMO or PPO). Out-of-pocket limits are capped (good for high medical spenders).

For healthy people with low medical costs, Original Medicare + Medigap may be cheaper. For people with high medical costs, Medicare Advantage’s capped out-of-pocket can save money.

Supplemental insurance (Medigap)

Original Medicare has gaps: Part A has deductibles, Part B requires 20% copay for many services, Part D has gaps. Medigap policies (sold by private insurers) cover these gaps.

Medigap policies are standardized (Plan A, B, C, etc.). Plan C is popular because it covers Part A and B deductibles; Plan G is also common. Premium varies by plan, insurer, and location (typically $100–$300/month).

Enrollment and penalties

You enroll during your Initial Enrollment Period (IEP): 3 months before your 65th birthday, the month you turn 65, and 3 months after. If you enroll late, you may pay penalties for the rest of your life:

• Part B: 10% per year late
• Part D: 1% per month late
• Medigap: May face premium loading or be denied coverage

Important: if you are still working and covered by an employer plan, you may be able to delay Part B without penalty (ask your employer or Medicare).

Costs

Typical 2024 costs (rough):

• Part A: $0 premium (deductible: $1,632 per hospital stay)
• Part B: $175/month (~$2,100/year); income-based surcharge may apply
• Part D: $30–$100/month depending on plan
• Medigap: $100–$300/month depending on plan
• Medicare Advantage: $0–$200/month (varies; often zero or low premium)

Total annual cost: Original Medicare + Medigap ranges $3,000–$5,000+; Medicare Advantage ranges $500–$2,000 depending on plan and usage.

Impact on retirement planning

Medicare costs are a major retirement expense. Many people underestimate; budget at least $3,000/year for someone in Original Medicare + Medigap, more if you have health needs.

An HSA before retirement can be withdrawn (tax-free for medical expenses) to cover Medicare costs, making it a valuable pre-65 tool.

Interactions with other programs

Social Security and IRMAA. If your income is high, your Medicare premiums are surcharge (“IRMAA” — Income-Related Monthly Adjustment Amount). Modified Adjusted Gross Income above $97,000 (single) or $194,000 (married) triggers surcharge.

This is why Roth conversions and backdoor Roth strategies matter in retirement: traditional IRA withdrawals count toward IRMAA, while Roth withdrawals do not.

See also