Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How to Plan Early Retirement Health Care Costs Beyond 65
Transcript
- Lucas: Luna, I want to talk about something that I think is the single biggest blind spot in most early retirement plans — and it's not sequence risk, it's not market returns, it's not even inflation. Luna: Okay, I'm intrigued. What is it? Lucas: Health care costs after age 65. Specifically, Medicare. A lot of people in the FIRE community assume that once they hit Medicare eligibility, their health care worries are over. But the numbers tell a very different story. Luna: I think I've heard that Medicare isn't free, but I don't think most people realize how much it actually costs. Lucas: Exactly. Let's start with the 2026 numbers. The standard Medicare Part B premium — that's outpatient coverage — is projected to be around $185 a month this year. That's about $2,200 a year. But for higher-income retirees, there's an income-related monthly adjustment amount — IRMAA — that can push that premium much higher. Luna: And by 'higher income', you mean what threshold? Lucas: For a single filer, IRMAA kicks in once your modified adjusted gross income exceeds $97,000. For married couples filing jointly, it's $194,000. And those brackets are not indexed to inflation in the same way Social Security is. So over a 30-year retirement, more and more of your withdrawals can get pulled into IRMAA territory. Luna: That's a nasty surprise. So someone who retired early with a decent-sized IRA and takes out say $80,000 a year might start out below the threshold, but as their RMDs kick in and Social Security starts, they could get bumped up. Lucas: Exactly. And the IRMAA surcharge can be substantial. At the first tier, it adds about $70 a month per person. At the highest tier, it can add over $400 a month per person. So a couple could be paying $800 a month just in IRMAA surcharges on top of the standard Part B premium. Luna: That's almost $10,000 a year just for Part B. And that doesn't include Part D for prescriptions, or Medigap, or dental, vision, hearing — which Medicare doesn't cover at all. Lucas: Right. And Part D has its own infamous coverage gap — the 'donut hole.' Even though the Affordable Care Act closed it partially, beneficiaries still pay 25 percent coinsurance for brand-name drugs in the gap. And for people with chronic conditions, that can add thousands a year. Luna: So what does this mean for someone planning an early retirement? Let's put some numbers to it. Lucas: Let's take a 55-year-old couple retiring today with a $1.5 million portfolio. They plan to withdraw $60,000 a year — a 4 percent withdrawal rate. They expect to pay about $20,000 a year for private health insurance from age 55 to 65, which is reasonable for a couple in good health. That's $200,000 over ten years. Luna: And then from 65 onward, they assume Medicare will be cheaper. Lucas: They assume that, but it's not necessarily true. Let's factor in Part B premiums, IRMAA, Part D, and Medigap. If their income stays modest, they might pay $6,000 a year per person in premiums and out-of-pocket costs. But if their income grows and they hit IRMAA tiers, that could be $10,000 per person or more. Luna: So $12,000 to $20,000 a year for the couple, depending on income. Over 30 years, that's $360,000 to $600,000 — not including inflation. Lucas: And that's just Medicare. Long-term care is a whole other beast. Medicare doesn't cover custodial care — the kind of help you need with daily activities. So if either spouse needs assisted living or nursing home care, that's $50,000 to $100,000 a year out of pocket. Luna: That could absolutely derail a portfolio. So what can early retirees do about this? Lucas: A few things. First, max out a health savings account if you have access to a high-deductible health plan before age 65. The HSA is the only triple tax-advantaged account — contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. And after 65, you can withdraw for any reason without penalty — you just pay income tax on non-medical withdrawals. Luna: So it basically becomes a stealth IRA if you don't use it for health care. Lucas: Exactly. And you can invest the HSA funds in low-cost index funds and let them grow for decades. The catch is you need to pay current medical expenses out of pocket and keep receipts, then reimburse yourself later. But it's a powerful strategy. Luna: What about Roth conversions? Could that help manage IRMAA? Lucas: Yes, but carefully. Roth conversions count as income for IRMAA purposes in the year you do them. So you want to do conversions in years when your income is low — say, between early retirement and when you start Social Security. That way you can fill up the lower tax brackets and avoid pushing yourself into higher IRMAA tiers later. Luna: So it's a balancing act: convert enough to reduce future RMDs, but not so much that you trigger IRMAA early. Lucas: Exactly. And you need to model it. The Medicare IRMAA brackets are something like $97,000, $123,000, $153,000, and so on for singles. For couples, double those. If you can keep your MAGI below the first threshold, you avoid the surcharge entirely. Luna: That's a strong argument for keeping taxable income low in retirement, even if it means living on a mix of cash and Roth funds. Lucas: Absolutely. And there's a lesser-known strategy: using a qualified longevity annuity contract — a QLAC. That's a deferred income annuity you buy inside your IRA that starts paying at age 85. It reduces your RMDs from age 72 to 84, which can keep your income lower and help you avoid IRMAA. Luna: But QLACs have their own risks — inflation, insurance company solvency, and you're locking up money for decades. Lucas: Right, it's not for everyone. But the point is, there are tools. The worst thing you can do is assume Medicare will be cheap and not plan for it. Luna: I think a lot of people also underestimate the effect of inflation on health care costs. Medical inflation has historically run about 2 to 3 percent higher than general inflation. So over 30 years, that's a huge compounding effect. Lucas: That's a critical point. The Fidelity Retiree Health Care Cost Estimate says a 65-year-old couple retiring in 2026 will need about $315,000 after-tax just for medical expenses in retirement. And that's assuming they're in good health and have Medicare Parts B and D with a standard plan. If you add dental, vision, hearing, and potential long-term care, it can easily be $500,000 or more. Luna: And that's just for the Medicare years. For early retirees, you also have to fund the pre-65 years. So we're talking about potentially $700,000 to $1 million in total health care costs over a 40-year retirement. Lucas: That's a huge chunk of a $1.5 million portfolio. And it's one reason why the 4 percent rule can be dangerous — it doesn't account for lumpy, unpredictable expenses like health care. Sequence risk is bad enough, but if you have a health shock in the first decade of retirement, it can be devastating. Luna: So what's the takeaway for someone listening who's planning to retire early? Lucas: First, model health care costs explicitly. Don't just use a generic 10 or 15 percent buffer. Look up 2026 Medicare premiums, IRMAA brackets, and out-of-pocket maximums. Use the HSA aggressively. Consider Roth conversions to manage future income. And build a health care contingency into your withdrawal strategy — maybe a separate bucket of cash or bonds specifically for medical expenses. Luna: And if you're still working, check if your employer offers a retiree health plan. Some large companies still do, though it's becoming rarer. Lucas: Good point. Also, don't forget that the Affordable Care Act marketplace is an option for the pre-65 years, with subsidies based on income. So managing your MAGI in your 50s and early 60s can save you tens of thousands in premiums. Luna: You know, this episode is exactly the kind of concrete, numbers-driven conversation that we try to bring every week. And it's only possible because our listeners support the show. Lucas: That's right. If today was actually useful to you — if you're now thinking about your HSA differently, or you're going to check the IRMAA brackets — the way these stay ad-free is listener support. You can go to buy me a coffee dot com slash fexingo and help us keep doing this. Luna: We really appreciate it. And it lets us keep the conversation focused on what matters — no sponsors, no interruptions. Lucas: So back to that planning: another tool I'd mention is the Medicare Savings Program. If your income is below a certain threshold — about $1,700 a month for an individual in 2026 — the state will pay your Part B premiums and sometimes Part D costs. So it's worth checking eligibility. Luna: That's a great safety net. But most early retirees won't qualify because they'll have too much in assets or income. Lucas: True. But it's good to know it exists. Ultimately, the key is to not treat health care as an afterthought. It's probably the second biggest expense in retirement after housing, and it's the one most likely to surprise you. Luna: And the earlier you start planning for it, the more options you have. Thanks, Lucas — this was eye-opening. Lucas: Glad we could dig into it. Next episode, we'll look at how Social Security claiming strategies interact with health care costs — it's more connected than you'd think.