The Hidden Medicare Costs That Could Derail Your Retirement

Last week in my financial planning practice, I met with a couple I'll call Jackie and Wilson. They had meticulously saved $2.1 million for retirement and thought they had accounted for everything. But when we reviewed their projected retirement income, they discovered they'd be paying an extra $4,800 annually in Medicare premiums – a cost they never saw coming.

Their story isn't unique. As a Certified Financial Planner® professional, I regularly witness how Medicare's income-related monthly adjustment amount, known as IRMAA, blindsides even the most prepared retirees.

In the podcast, I mentioned a helpful worksheet for Medicare that can help you plan your healthcare expenses in retirement. Get it here:

GET THE WORKSHEET HERE

Listen to the podcast here:

How We Got Here

When President Lyndon B. Johnson signed Medicare into law in 1965, enrolling former President Harry Truman as its first beneficiary, the monthly premium was $3 – roughly equivalent to $30 today. By 2025, the base premium for Medicare Part B will be $185, with possible surcharges pushing it to $628.90 for higher-income beneficiaries.

This dramatic escalation reflects fundamental changes in American healthcare. UnitedHealth Group recently reported $100.8 billion in quarterly revenue, while healthcare inflation continues its relentless climb at 3.25%. For retirees, these aren't just numbers – they're budget-altering realities.

Understanding the IRMAA Cliff

I call IRMAA the stealth tax on retirement income. It functions like a series of cliffs: earn a dollar over certain thresholds, and you could owe thousands more annually in Medicare premiums. These charges apply to both Part B (medical insurance) and Part D (prescription drug coverage).

The system's two-year lookback period adds complexity: 2025 premiums are based on 2023 income. This delay creates both challenges and opportunities for strategic planning.

Take another client of mine, whom I'll call Mr. Anderson. He planned to sell his rental property this year. Once we realized the sale would trigger higher premiums for 2026-27, we restructured it as an installment sale, spreading the income over three years. This simple adjustment saved him $7,200 in Medicare premiums.

The HSA Solution

For those still working, I consistently recommend maximizing health savings accounts. They offer what I consider the holy grail of tax advantages: deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses. In 2025, families can contribute up to $8,550, with an additional $1,000 for those 55 and older.

Recently, I worked with a couple who maximized their HSA for just five years before retirement. Their $50,000 in contributions grew to $72,000 tax-free, creating a dedicated healthcare fund that now helps offset their Medicare expenses.

The Future of Healthcare Costs

Healthcare inflation typically runs about 5.5% annually, significantly outpacing general inflation. I advise my clients to plan for their healthcare budget to triple by year 20 of retirement. It's a sobering projection, but one that's crucial for realistic planning.

The decisions you make about Medicare will affect both your healthcare and your wallet for the rest of your life. This isn't just about numbers on a page – it's about preserving the retirement you've worked so hard to build.

Just last month, I met with three adult children trying to piece together their mother's healthcare after she had a stroke. They had no idea what her wishes were, where important documents were kept, or how to access necessary resources. Don't let this be your family's story.

For Jackie and Wilson, our early warning about IRMAA charges means we have time to restructure their retirement income to minimize those extra costs. For millions of other Americans approaching Medicare age, similar foresight could mean the difference between the retirement they planned and one constrained by unexpected healthcare costs.