Ask most people what their biggest expenses will be in retirement, and you’ll hear the usual answers.

Housing. Travel. Helping the kids or grandkids. Maybe a hobby or two.

Healthcare rarely makes the top of the list — even though for most retirees, it probably should. The assumption tends to be that Medicare takes care of it, and whatever Medicare doesn’t cover can’t be that significant.

The reality is a little more complicated. And for retirees who haven’t thought through the healthcare piece of their budget carefully, the gap between expectation and reality can be one of the more jarring financial surprises retirement brings.

Medicare Is Not Free

This is the starting point that catches people off guard more than almost anything else.

Medicare significantly reduces your healthcare costs compared to private insurance — but it does not eliminate them. Between premiums, deductibles, copayments, and the things Medicare simply doesn’t cover, out-of-pocket healthcare spending in retirement can be substantial.

According to a 2023 report by Fidelity Investments, the average couple retiring at 65 may need approximately $315,000 to cover healthcare costs throughout retirement. That number includes Medicare premiums and out-of-pocket costs but excludes long-term care — which is its own significant conversation.

That figure isn’t meant to be alarming. It’s meant to be clarifying. Because a cost that is understood and planned for is manageable. A cost that arrives as a surprise is something else entirely.

The Moving Parts of Your Medicare Budget

Medicare costs aren’t a single line item — they’re a collection of moving parts that interact with your broader financial picture in ways worth understanding.

Part B premiums are the most visible ongoing cost. The standard premium in 2024 was $174.70 per month per person, which adds up to over $4,000 per year for a couple before accounting for anything else. And that’s the standard premium — higher-income retirees pay more through IRMAA surcharges, which we’ll come back to.

Supplemental coverage adds another layer. Whether you choose a Medicare Supplement plan to fill the gaps in Original Medicare or a Medicare Advantage plan that bundles everything together, there are additional costs involved. The right choice depends on your health needs, your preferred doctors, and how you want to manage out-of-pocket risk.

Part D prescription drug coverage carries its own premiums and cost-sharing that vary significantly depending on the plan and the medications you take. Choosing the wrong Part D plan for your specific prescriptions can mean paying meaningfully more than necessary — a comparison worth doing carefully each year during open enrollment.

The IRMAA Factor

One of the more surprising ways Medicare and your retirement finances interact is through IRMAA — the Income Related Monthly Adjustment Amount.

If your income exceeds certain thresholds, your Medicare Part B and Part D premiums increase. The thresholds are based on your income from two years prior, which means a large taxable event today can unexpectedly raise your Medicare costs two years from now.

A significant IRA withdrawal, a large Roth conversion, or the sale of a major asset can all push you into a higher IRMAA tier without any warning — unless your retirement plan is specifically accounting for it. This is one of the clearest examples of why Medicare planning and financial planning need to happen in the same conversation rather than separately.

The Long-Term Care Gap

Original Medicare does not cover long-term care. This is worth saying clearly because many people assume it does.

Custodial care — the ongoing personal assistance you might need if you’re unable to manage daily activities on your own — is largely not covered by Medicare. Medicaid may cover it under certain circumstances, but qualifying typically requires spending down most of your assets first.

Long-term care represents one of the most significant unplanned financial risks in retirement. The U.S. Department of Health and Human Services estimates that someone turning 65 today has nearly a 70% chance of needing some form of long-term care during their lifetime. Having a strategy for that possibility — whether through insurance, self-funding, or a combination — is an important part of a complete retirement budget.

Healthcare as a Budget Line Item

Here is the mindset shift that makes the biggest practical difference: treating healthcare not as an unpredictable wildcard but as a real, plannable line item in your retirement budget.

That means estimating your annual Medicare costs — premiums, supplemental coverage, prescriptions, and typical out-of-pocket expenses — and building them into your income plan from the start. It means understanding how your income level affects your premiums. It means having a plan for long-term care that doesn’t rely on hope as a strategy.

None of this requires a crystal ball. It requires a retirement plan that takes healthcare seriously rather than treating it as an afterthought.

When These Two Conversations Become One

The retirees who manage healthcare costs most successfully aren’t necessarily the healthiest ones. They’re the ones whose financial plan and healthcare plan were built together rather than in parallel.

That means thinking about how your withdrawal strategy affects your IRMAA exposure. It means understanding how your Medicare coverage choice affects your out-of-pocket risk and your monthly budget. It means having the long-term care conversation before you need care rather than after.

At True Financial Partners, healthcare costs are part of the retirement planning conversation — because a retirement budget that doesn’t account for healthcare isn’t really a complete budget at all.

Want to make sure healthcare is properly built into your retirement plan? Schedule a complimentary first visit with the team at True Financial Partners and let’s make sure the full picture is covered.

Summary:
Healthcare is one of the largest expenses in retirement — and one of the least planned for. Most people think about Medicare and retirement finances as two separate conversations. They’re not. This post explains how Medicare costs fit into your retirement budget, what surprises to watch out for, and why healthcare planning belongs at the center of your retirement income strategy.

Frequently Asked Questions

How much should I budget for healthcare in retirement?
It varies by individual, but research suggests a couple retiring at 65 may need significant savings set aside for healthcare costs alone. Building a specific healthcare estimate into your retirement budget — rather than leaving it as a wildcard — is one of the most important planning steps you can take.

Does Medicare cover everything?
No. Medicare covers a broad range of medical services but comes with premiums, deductibles, and copayments. It does not cover routine dental, vision, hearing, or long-term care.

What is IRMAA and how does it affect my budget?
IRMAA is a surcharge added to Medicare Part B and Part D premiums for higher-income beneficiaries. Because it is based on income from two years prior, large taxable events can unexpectedly increase your Medicare costs without advance planning.

Does Medicare cover long-term care?
No. Original Medicare does not cover custodial long-term care. Having a separate strategy for this possibility is an important part of a complete retirement plan.

How does my retirement income affect my Medicare premiums?
Higher income triggers IRMAA surcharges that increase your premiums. This means how you structure your retirement withdrawals and taxable income directly affects what you pay for Medicare coverage each year.

When should I start planning for healthcare costs in retirement?
As early as possible — ideally five to ten years before retirement. The earlier healthcare is built into your plan, the more options you have for managing costs and coverage effectively.