Healthcare Cost Planning in Retirement: Medicare, Medigap, and HSAs

Why this matters

Healthcare costs are one of the largest and most variable expenses in retirement. Even with Medicare, retirees face premiums, deductibles, copays, prescription costs, and services Medicare does not cover (for example, many long‑term care services). A coordinated approach — understanding Medicare parts, whether a Medigap policy or Medicare Advantage plan fits, and how to use an HSA before and after Medicare — reduces unexpected losses to your nest egg.

In my 15+ years advising clients, small timing or enrollment mistakes create large, lasting financial consequences. I’ve helped clients avoid lifetime penalties, choose supplements that match their utilization patterns, and use HSAs as tax‑efficient funds for future medical spending.

How Medicare, Medigap, and HSAs work together

• Medicare: Federal program with Parts A (hospital), B (medical/outpatient), D (prescription drugs), and C (Medicare Advantage — private plans that bundle A/B and often D). Rules, covered services, and appeals are governed by the Centers for Medicare & Medicaid Services (CMS) (see CMS Medicare Overview).
• Medigap (Medicare Supplement): Sold by private insurers to cover Medicare‑cost sharing (copays, coinsurance, Part A/B deductibles). Medigap plans are standardized by letter (Plan A, G, N, etc.) in most states; benefits are the same for a given letter but premiums differ by insurer and region (NAIC).
• HSA (Health Savings Account): A triple‑tax‑advantaged account (tax‑deductible contributions, tax‑free growth, tax‑free withdrawals for qualified medical expenses) available to people covered by a qualified high‑deductible health plan (HDHP). You cannot contribute to an HSA once enrolled in Medicare, but funds can be used tax‑free for qualifying expenses at any time, including in retirement (IRS HSA guidance; IRS Publication 502 for qualified medical expenses).

(For a practical enrollment checklist, see our Medicare Enrollment Checklist: Avoiding Penalties and Coverage Gaps.)

Key planning steps and timing

1. Master your enrollment windows

• Initial Enrollment Period (IEP): Generally a 7‑month window around your 65th birthday (3 months before, month of, 3 months after). Missing this window can trigger late‑enrollment penalties for Part B and Part D unless you qualify for a Special Enrollment Period (SEP) (Social Security/CMS guidance).
• Special Enrollment Periods: If you keep employer coverage past 65, you usually have an SEP to sign up for Part B without penalty when that coverage ends.

Practical tip: I always recommend clients start the Part B decision process 6–9 months before 65 so they can verify employer coverage coordination, IRMAA risk (see below), and whether they want to delay Part B temporarily.

2. Evaluate Medigap versus Medicare Advantage

• Medigap: Best for people who prefer predictable access to providers that accept Original Medicare, predictable out‑of‑pocket costs (depending on plan letter), and fewer network restrictions.
• Medicare Advantage (Part C): Often lower premiums and additional benefits (dental, vision), but network rules, prior authorization, and out‑of‑pocket maximums vary. Advantage plans may be cost‑effective for lower‑utilization retirees but can become expensive for high users.

Use our step‑by‑step guide How to Compare Medicare Supplement Plans to compare premiums, plan letters, and insurer ratings.

3. Use HSAs strategically before Medicare

• Maximize contributions while eligible: Contribute to your HSA while you still have an HDHP. Contributions reduce taxable income; invested balances can grow tax‑free.
• Invest, don’t hoard: Treat an HSA like a retirement account for medical costs — invest amounts beyond your short‑term needs so growth compounds.
• Keep records: Save receipts for any medical expense you plan to reimburse tax‑free in the future. You can reimburse yourself years later for qualified expenses incurred after the HSA was established.

See our guide How to Use an HSA Strategically Before and During Retirement for advanced tactics and examples.

4. Coordinate income and Medicare premiums

• IRMAA (Income‑related Monthly Adjustment Amount): Medicare Part B and Part D premiums can be higher if your modified adjusted gross income exceeds IRS thresholds. Plan Roth conversions, required minimum distributions (RMDs), and capital gains timing to reduce IRMAA exposure in the years before Medicare enrollment. For complex income strategies, consult a tax‑aware advisor.

4. Bridge to Medicare if you retire early

• If you retire before 65, plan for coverage between employer insurance and Medicare: COBRA, ACA marketplace plans, or part‑time employment that provides HDHP/HSA access. Model costs carefully: marketplace subsidies, COBRA premiums, and HSA eligibility rules differ.

Rules and common pitfalls to avoid

• Don’t contribute to an HSA after enrolling in Medicare: Contributions after Medicare enrollment are not allowed and can trigger taxes and penalties (IRS).
• Don’t skip Part B without checking SEP rules: Skipping Part B because you’re still covered by an employer plan may be fine, but confirm the employer plan qualifies for Special Enrollment to avoid Part B penalties later (Social Security Administration/CMS).
• Know Medigap underwriting exceptions: Outside of guaranteed‑issue periods (e.g., right after turning 65 in many states), insurers can underwrite Medigap and charge higher premiums or deny coverage based on health — compare options early.

Costs and what’s not covered

Medicare helps with many services, but notable gaps include routine dental, routine vision, hearing aids, and most long‑term custodial care. Even with a Medigap policy, those gaps may remain. Long‑term care planning is a separate consideration — use long‑term care insurance, hybrid life‑policy riders, or asset‑based strategies to address this risk.

HSA specifics retirees must know

• After enrolling in Medicare you may no longer contribute to an HSA, but you may use existing HSA funds tax‑free for qualified medical expenses at any time.
• At age 65, HSA funds can be withdrawn for non‑medical uses without the 20% penalty, but withdrawals used for non‑medical purposes are taxable as ordinary income (similar to traditional retirement accounts).
• Keep documentation: Receipts show that distributions were for qualified expenses. If audited, you must substantiate tax‑free withdrawals.

For forms and reporting: HSAs generate Form 5498‑SA (contributions) and Form 1099‑SA (distributions); see IRS HSA resources for details.

Typical client scenarios and decisions

• Low‑use retiree who wants predictability: Often chooses Original Medicare + Medigap Plan G (or another popular letter) to minimize surprise costs and avoid network issues.
• Cost‑conscious retiree with low routine needs: May prefer Medicare Advantage for lower premiums and added services, but should confirm provider access and drug coverage.
• Early retiree (age <65): Needs a bridging strategy (COBRA, ACA, or part‑time work), and should start funding an HSA where possible to build a tax‑efficient medical reserve.

Action checklist (practical next steps)

1. Audit employer coverage and determine if you have a SEP to delay Part B. 2. Compare Medigap letters and Medicare Advantage plans for your area and expected utilization. 3. Max out HSA contributions while eligible and invest balances for growth. 4. Plan taxable events and Roth conversion timing to manage IRMAA exposure. 5. Document medical expenses and HSA receipts for future reimbursements.

Resources and authoritative references

• CMS — Medicare Overview and enrollment resources (Centers for Medicare & Medicaid Services).
• IRS — Health Savings Accounts (HSA) rules and eligible expenses (Internal Revenue Service).
• IRS Publication 502 — Medical and Dental Expenses (qualified expenses).
• NAIC — Information on Medigap standardization and market practices (National Association of Insurance Commissioners).
• Fidelity — Retiree health‑care cost estimates (used for cost modeling and benchmarking).

For practical tools and related articles on FinHelp:

• Medicare Enrollment Checklist: Avoiding Penalties and Coverage Gaps — https://finhelp.io/glossary/medicare-enrollment-checklist-avoiding-penalties-and-coverage-gaps/
• How to Compare Medicare Supplement Plans — https://finhelp.io/glossary/how-to-compare-medicare-supplement-plans/
• How to Use an HSA Strategically Before and During Retirement — https://finhelp.io/glossary/how-to-use-an-hsa-strategically-before-and-during-retirement/

Common questions answered briefly

• Can I keep my HSA after Medicare? Yes — you can use the money tax‑free for qualified expenses; you just can’t contribute once enrolled in Medicare. (IRS)
• Is Medigap required? No — it’s optional but useful for people who want predictable out‑of‑pocket costs under Original Medicare. (NAIC)
• What happens if I miss IEP? You may pay penalties unless you qualify for an SEP; contact the Social Security Administration promptly for your options. (CMS/Social Security)

Professional disclaimer

This article is educational and not individualized financial, tax, or legal advice. Rules change; confirm limits, premiums, and eligibility with the Centers for Medicare & Medicaid Services and the Internal Revenue Service, and consult a qualified financial planner or tax advisor for personalized guidance.