Why planning for healthcare costs before Medicare matters

Many people assume Medicare solves all retirement health‑care problems at 65. It does not. Medicare Parts A and B, and optional Part D and Medicare Advantage, cover many services but leave gaps — premiums, deductibles, coinsurance, dental, vision, hearing, and long‑term custodial care are often excluded or only partially covered (Medicare.gov, CMS). The Inflation Reduction Act and other recent laws have changed some drug‑cost rules (for example, a $2,000 annual Part D out‑of‑pocket cap is scheduled for 2025), but coverage gaps remain (CMS; HHS announcements).

In my practice I’ve seen retirement savings eroded quickly by unplanned medical care and long‑term care needs. Starting a targeted plan years ahead of age 65 reduces the risk that medical expenses will force asset liquidation or derail retirement timing.

Key decisions and a practical timeline

  • 10+ years before 65: assess long‑term care risk and whether long‑term care (LTC) insurance or hybrid life/LTC products make sense. LTC premiums are lower and underwriting easier at younger ages.
  • 5–10 years before 65: maximize tax‑efficient health savings (if eligible), estimate likely out‑of‑pocket medical spending, and review employer retiree‑health offerings.
  • 1–5 years before 65: finalize the bridge strategy for coverage between retirement and Medicare (COBRA, marketplace, spouse’s plan, retiree plan) and confirm Medicare enrollment windows.

Coverage options between early retirement and Medicare

  • Employer retiree coverage: If available, compare premiums, benefits, and longevity of the plan. Some retiree plans are excellent; others are costly and may be discontinued.
  • Spouse or family plans: Joining a spouse’s employer plan can be the most cost‑effective bridge for many couples.
  • COBRA: Allows continuation of employer coverage for a limited time (typically 18 months, sometimes up to 36) but often at full premium cost — use only if it’s cost‑effective.
  • ACA (Marketplace) plans: Can be a viable and often lower‑cost option for early retirees, particularly if subsidies apply based on household income (HealthCare.gov). Marketplace coverage also protects preexisting condition access and offers multiple metal levels.
  • Short‑term or limited benefit plans: Generally risky — limited protections and may exclude preexisting conditions.

When weighing options, compare premiums, deductibles, network access, prescription coverage, and whether the plan’s benefits will coordinate with future Medicare needs (e.g., will the plan cover services that Medicare won’t?).

Funding strategies: how to pay for medical costs before Medicare

1) Health Savings Account (HSA)

  • If you’re enrolled in a qualified high‑deductible health plan (HDHP), an HSA is one of the most efficient tools for pre‑Medicare health savings: contributions are tax‑deductible (or pre‑tax via payroll), grow tax‑deferred, and qualified medical withdrawals are tax‑free. After age 65 you can use HSA funds for non‑medical withdrawals without penalty (but ordinary income tax applies) and you can use HSA funds to pay certain Medicare premiums (for example, Part B and Part D) (IRS Publication 969; Medicare.gov).
  • Important rules: you cannot contribute to an HSA once you are enrolled in Medicare. So stop contributions before enrolling in Part A or B. Also plan when to claim Social Security and Medicare to avoid contribution conflicts.
  • For additional reading on tactic and coordination strategies, see FinHelp’s guides: “How to Use an HSA Strategically Before and During Retirement” and “Strategic Use of HSAs and Medicare Coordination.” (internal links)

2) Dedicated medical savings and cash reserves

If you are not HSA‑eligible, keep a dedicated savings bucket sized to your expected out‑of‑pocket annual costs and initial bridge years. Estimate conservatively: premiums (COBRA or marketplace), deductibles, copays, and a buffer for unexpected procedures.

3) Roth vs. Traditional tax planning

Roth conversions and withdrawals add tax flexibility later in retirement. Because Medicare Part B/D premiums and eligibility‑related surcharges (IRMAA) are based on reported income from prior tax years, conversion timing can affect Medicare premiums. Work with a planner to time conversions so they don’t bump you into higher IRMAA brackets in the years that set Medicare premiums.

4) Long‑term care insurance or hybrid policies

Traditional LTC insurance purchased in your 50s or early 60s typically costs less and has better underwriting outcomes. Hybrid life/LTC products can be more palatable for those concerned about premium increases or benefit exhaustion. Evaluate inflation protection, elimination periods, benefit triggers, and financial strength of the insurer.

Insurance products at or near Medicare age

  • Medicare Parts A & B: Part A is usually premium‑free if you have sufficient work credits; Part B has a premium that varies by income and signs you up at or near age 65 (Medicare.gov).
  • Medicare Advantage vs. Original Medicare + Medigap: Medicare Advantage (Part C) bundles services and can have lower premiums but different networks and prior‑authorization rules. Original Medicare plus Medigap (supplemental) and a Part D drug plan offers more predictable cost sharing and broader provider access. Decide based on your health needs, drug coverage, and willingness to accept provider networks.
  • Part D and drug costs: Recent federal changes affect Part D cost sharing. Review formulary coverage and out‑of‑pocket protections for your drugs.

Practical checklist and example

  1. Inventory: list current prescriptions, chronic conditions, anticipated surgeries, hearing/dental/vision needs.
  2. Estimate costs: get quotes for COBRA, spouse employer plans, and 2–3 ACA plans for your area and age. Add likely annual out‑of‑pocket and premium totals.
  3. HSA strategy: if eligible, maximize contributions while you can; invest balances for growth if you don’t need them for near‑term expenses.
  4. LTC planning: get quotes and compare buying at age 50 vs. 60 to see premium differences.
  5. Tax planning: review planned Roth conversions, pension start dates, and Social Security timing for IRMAA effects.
  6. Revisit annually: health status, laws, and plan costs change — review at least once a year.

Example: A 60‑year‑old planning to retire at 62 anticipates 3 years of marketplace premiums plus two years of significant medical costs before Medicare enrollment. They maximize HSA contributions for the next 3 years, maintain a separate cash buffer for premiums and deductibles, and purchase a modest LTC policy to cover potential custodial needs. This mix reduced their projected out‑of‑pocket exposure compared with relying on savings alone.

Common mistakes to avoid

  • Assuming Medicare covers dental, vision, hearing, or long‑term custodial care.
  • Continuing HSA contributions after enrolling in Medicare (contributions are not allowed once enrolled).
  • Ignoring IRMAA: large Roth conversions or one‑time income spikes can increase Medicare premiums for multiple years.
  • Delaying LTC insurance purchase until underwriting becomes difficult or prohibitively expensive.

Tools and reliable resources

  • Medicare.gov — official information on Parts A/B/C/D and enrollment rules (https://www.medicare.gov/).
  • Centers for Medicare & Medicaid Services (CMS) — policy updates and program details (https://www.cms.gov/).
  • IRS Publication 969 — rules for HSAs and other tax‑favored health accounts (https://www.irs.gov/pub/irs‑pdf/p969.pdf).
  • For cost estimates and planning data, reputable private resources like Fidelity and AARP provide calculators and research on expected retiree health costs.

Further reading on FinHelp:

Final thoughts

Planning for healthcare costs before Medicare is both a coverage and a funding problem. The most durable plans combine a reliable bridge to coverage (spouse, retiree plan, ACA, or COBRA), tax‑efficient savings (HSAs where available), and insurance products (LTC, Medigap where appropriate) sized to your risk tolerance and financial plan. Start early, review annually, and coordinate with your tax and financial advisor to avoid costly timing mistakes.

Professional disclaimer: This article is educational and not personalized financial, tax, or medical advice. Rules for Medicare, HSAs, and tax treatment change periodically. Consult a qualified financial planner, tax professional, or Medicare counselor for guidance tailored to your situation.