Medicare 101: What It Covers, What It Costs, and What Most People Get Wrong
For most Americans, Medicare is one of those things they know they'll need eventually but haven't thought much about until it's almost time to sign up. Then suddenly it's six months before their 65th birthday and they're staring at a maze of parts, plans, premiums, and deadlines that nobody warned them about.
The good news is that Medicare is not as complicated as it first appears. The bad news is that the mistakes people make when enrolling — or when planning around it — can be surprisingly costly and in some cases permanent. Understanding the basics before you get there is one of the most valuable things you can do in the years leading up to retirement.
What Medicare Actually Is
Medicare is a federal health insurance program primarily for Americans age 65 and older, as well as certain younger individuals with disabilities or specific medical conditions. It is not free, it does not cover everything, and it does not automatically begin when you retire. Those three points alone separate the people who plan well for Medicare from those who get caught off guard.
The program is divided into distinct parts, each covering a different category of healthcare services.
The Parts of Medicare
Part A — Hospital Coverage
Part A covers inpatient hospital care, skilled nursing facility care following a qualifying hospital stay, hospice care, and some home health services. For most people, Part A comes with no monthly premium, provided they or their spouse paid Medicare taxes for at least 10 years while working. If you don't meet that threshold, premiums can be substantial.
While Part A is often described as "free," it is not without costs. Hospital stays come with a deductible and, for extended stays, daily coinsurance charges that can add up quickly.
Part B — Medical Coverage
Part B covers outpatient services — doctor visits, preventive care, lab work, durable medical equipment, and certain home health services. Unlike Part A, Part B always carries a monthly premium. In 2025 the standard Part B premium is $185 per month, though higher-income beneficiaries pay significantly more through a surcharge called IRMAA, which we'll address shortly.
Part B also has an annual deductible and a 20% coinsurance on most services once that deductible is met. That 20% with no out-of-pocket maximum is one of the most important things to understand about Original Medicare — without supplemental coverage, a serious illness could expose you to substantial costs.
Part C — Medicare Advantage
Medicare Advantage is an alternative to Original Medicare offered through private insurance companies that contract with Medicare. These plans bundle Part A and Part B coverage together and typically include Part D prescription drug coverage and often additional benefits such as dental, vision, and hearing — areas Original Medicare does not cover.
Medicare Advantage plans may have lower premiums than carrying Original Medicare with a supplement, but they operate within networks and often require referrals and prior authorizations. The tradeoff between plan flexibility and cost is a genuine planning decision that deserves careful consideration rather than a default choice.
Part D — Prescription Drug Coverage
Part D provides prescription drug coverage through private plans approved by Medicare. Plans vary widely in terms of premiums, deductibles, and the specific medications covered — called a formulary. Reviewing your plan annually during open enrollment is important, as formularies and costs change from year to year and the plan that worked well last year may not be the best fit going forward.
Higher-income beneficiaries also pay an IRMAA surcharge on Part D premiums, in addition to Part B.
Medigap — Medicare Supplement Insurance
Medigap plans are private insurance policies designed to fill the gaps that Original Medicare leaves behind — the deductibles, coinsurance, and copayments that can otherwise create significant out-of-pocket exposure. Medigap plans are standardized by the federal government, meaning a Plan G from one insurer covers exactly the same benefits as a Plan G from another, though premiums vary.
Medigap is only available alongside Original Medicare, not Medicare Advantage. If you choose Original Medicare and want predictable, capped healthcare costs in retirement, a Medigap plan is typically how you achieve that.
What Medicare Doesn't Cover
This is the part that surprises many people. Medicare does not cover routine dental care, vision exams and glasses, hearing aids, or long-term custodial care — the kind of ongoing personal care assistance that becomes relevant as people age. These are meaningful gaps that require separate planning, whether through standalone insurance, dedicated savings, or another approach suited to your situation.
Long-term care in particular deserves attention. The cost of assisted living or nursing home care can easily run into six figures annually and can deplete retirement savings faster than almost any other expense. It is not a comfortable topic, but it is one worth addressing in a retirement income plan before the need arises rather than after.
What Medicare Actually Costs: The IRMAA Factor
Most people are vaguely aware that Medicare has premiums. Far fewer understand that those premiums are not the same for everyone — and that decisions made years before retirement can directly affect what you pay.
IRMAA, or the Income-Related Monthly Adjustment Amount, is a surcharge added to Part B and Part D premiums for beneficiaries whose income exceeds certain thresholds. The critical detail is that IRMAA is based on your income from two years prior. That means your 2025 income determines your 2027 Medicare premiums.
For context, in 2025 the standard Part B premium is $185 per month. At the highest IRMAA tier, that premium rises to $628.90 per month — more than triple. Across both Part B and Part D, IRMAA surcharges can add thousands of dollars per year in costs that many retirees simply did not anticipate.
This is where Medicare planning and retirement income planning intersect directly. A large Roth conversion, a business sale, or a required minimum distribution in the wrong year can push income above an IRMAA threshold and trigger a premium increase two years later. Planning your income carefully in the years leading up to and through Medicare enrollment is one of the most effective ways to manage this risk — and one of the most commonly overlooked.
Enrollment: When and How to Sign Up
Medicare does not begin automatically for most people. You need to actively enroll, and the timing matters.
Your Initial Enrollment Period is a seven-month window that begins three months before the month you turn 65, includes your birthday month, and extends three months after. Enrolling during this window avoids late enrollment penalties.
If you miss your Initial Enrollment Period without a qualifying reason — such as continued coverage through an employer plan — the consequences can be permanent. The Part B late enrollment penalty adds 10% to your premium for every 12-month period you were eligible but did not enroll, and that penalty stays with you for life. The Part D penalty is similarly permanent and calculated based on the number of months without coverage.
For people who are still working and covered under an employer health plan at 65, different rules apply. You may be able to delay Medicare enrollment without penalty while employer coverage continues, but the specifics depend on the size of your employer and whether the coverage is considered primary or secondary. This is an area where getting the details right matters, because the wrong assumption can lead to a penalty you carry for the rest of your retirement.
Original Medicare vs. Medicare Advantage: The Key Question
One of the most significant decisions you'll make at enrollment is choosing between Original Medicare with a Medigap supplement and Part D plan, or a Medicare Advantage plan.
Original Medicare with a supplement offers broad provider access — you can see any doctor in the country who accepts Medicare, without referrals or network restrictions. Your costs are predictable because the Medigap plan caps your out-of-pocket exposure. The tradeoff is that combined premiums for Part B, a Medigap plan, and Part D can be meaningful.
Medicare Advantage often comes with lower premiums and bundled coverage including dental and vision. The tradeoff is that you are working within a network, and prior authorizations for procedures or specialist visits can create friction. Out-of-pocket maximums provide some cost protection, but those limits can still be substantial if you experience a serious health event.
Neither option is universally better. The right choice depends on your health, your preferred doctors, your financial situation, and how much predictability you want in your healthcare costs. What matters most is making the choice deliberately, with a clear understanding of what each path involves.
How Medicare Fits Into Your Retirement Income Plan
Medicare is not just a healthcare decision — it is a financial planning decision. The premiums you pay, the IRMAA thresholds you may or may not cross, the coverage gaps you need to account for, and the long-term care costs Medicare doesn't touch all have direct implications for your retirement income strategy.
The years immediately before and after Medicare enrollment are often some of the most consequential from a tax and income planning standpoint. Managing your income thoughtfully during that window — coordinating Roth conversions, RMDs, Social Security timing, and other income sources — can make a meaningful difference in what you pay for coverage and how long your assets last.
As your financial advisor, helping you think through how Medicare fits into the broader picture of your retirement plan is part of how I work with clients approaching and entering retirement.
The Bottom Line
Medicare is one of the most important financial planning topics for anyone within ten years of retirement, and it rewards early attention. The parts, the premiums, the enrollment deadlines, and the decisions you make at 65 can follow you for the rest of your life — in both directions.
If Medicare is on your horizon and you haven't walked through how it fits into your retirement income plan, that conversation is worth scheduling sooner rather than later.
