Medicare is the single largest financial event of most people’s sixties, and almost nobody budgets for it correctly. The common assumption is that Medicare is free at 65 because you paid into it your whole working life. Part of that is true — Part A usually costs nothing — but the rest of the program runs on monthly premiums, annual deductibles, coinsurance, income-based surcharges, and a set of gaps that Medicare simply does not cover at all.
A realistic figure for a healthy 66-year-old on traditional Medicare with a supplement and a drug plan is somewhere between $250 and $450 a month, before dental, vision, or hearing. For a higher-income household, surcharges can push it past $700 a month per person. This guide breaks down what each part actually costs, how the income surcharge works, and how to plan for it before you enroll.
Disclosure: CreditMaze publishes educational information, not insurance or tax advice. Medicare premiums, deductibles, and income brackets change every year and vary by plan and state. Verify current figures at Medicare.gov or with a licensed counselor before making enrollment decisions.
The four parts, in plain English
Medicare is not one product. It is four separate coverages that combine in two main ways, and the labels are genuinely confusing because Part C is not an add-on — it is an alternative packaging of A and B.
| Part | What it covers | Typical cost driver |
|---|---|---|
| Part A | Inpatient hospital, skilled nursing, hospice | Usually $0 premium; large per-admission deductible |
| Part B | Doctors, outpatient care, labs, durable equipment | Standard monthly premium plus 20% coinsurance |
| Part C (Medicare Advantage) | Private plan bundling A, B and usually D | Low or $0 premium, but copays and network limits |
| Part D | Prescription drugs | Monthly premium, deductible, tiered copays |
| Medigap | Supplement that pays Original Medicare’s gaps | Age- and state-rated monthly premium |
You pick one of two paths. Path one is Original Medicare: Parts A and B, plus a standalone Part D drug plan, plus usually a Medigap supplement to cover the coinsurance. Path two is Medicare Advantage: a private plan that replaces A and B, typically bundles drugs, and often advertises a $0 premium — paid for with networks, prior authorizations, and copays at the point of care.
Part A: free, but the deductible is not small
If you or a spouse worked and paid Medicare taxes for at least 40 quarters (10 years), Part A costs nothing monthly. Fewer quarters means a monthly premium, which can run several hundred dollars — a real risk for people who spent most of their careers abroad or outside the payroll tax system.
The catch is the deductible. Part A charges a deductible per benefit period, not per year. A benefit period starts the day you are admitted and ends 60 days after you leave. Two unrelated hospitalizations eight months apart mean paying the deductible twice. Long stays add daily coinsurance after day 60, and skilled nursing coinsurance starts after day 20.
Pro tip: Ask whether you are admitted as an inpatient or held under observation. Observation status is billed under Part B, not Part A, and can disqualify you from Medicare-covered skilled nursing afterward. It is one of the most expensive words in a hospital chart, and you are allowed to ask about it directly.
Part B: the premium everyone pays
Part B has a standard monthly premium that is usually deducted straight from your Social Security check, plus an annual deductible, after which Medicare pays 80% of approved charges and you owe the other 20% — with no out-of-pocket maximum. That last detail is the single most important fact about Original Medicare. A serious illness with $200,000 in outpatient treatment leaves you owing $40,000 unless you have a supplement.
This is why most Original Medicare enrollees buy Medigap. Plan G, the most common choice for new enrollees, covers essentially everything except the Part B deductible. Plan N costs less with small copays at visits. Both are standardized by letter, meaning Plan G from a cheap insurer covers exactly what Plan G from an expensive one covers — the only differences are price, service, and how fast rates rise with age.
IRMAA: the surcharge that surprises high earners
If your modified adjusted gross income two years ago exceeded a threshold, you pay an Income-Related Monthly Adjustment Amount on top of both Part B and Part D. It is a cliff, not a phase-in: one dollar over a bracket moves you into the full surcharge for the year.
| Income situation | Effect |
|---|---|
| Under the first threshold | Standard Part B and Part D premiums |
| One dollar over a bracket | Full surcharge on both parts for 12 months |
| Large Roth conversion at 63 | Raises premiums at 65 (two-year lookback) |
| Retirement or loss of income | File Form SSA-44 for a life-changing-event redetermination |
The two-year lookback is what catches people. Income at 63 sets premiums at 65. Selling a rental property, exercising options, or doing an aggressive Roth conversion in your early sixties can quietly raise Medicare costs later. If the income spike was a one-time event tied to retirement, work stoppage, or a spouse’s death, Form SSA-44 lets you ask Social Security to use current income instead.
Part D and the drug math
Part D plans have their own premium, a deductible, and tiered copays. Formularies differ wildly, so the “cheapest” plan is meaningless in isolation — the right question is what your specific prescriptions cost under each plan’s formulary. Medicare’s Plan Finder lets you enter your drugs and pharmacy and see total annual cost, which is the only number that matters.
Skipping Part D because you take no medications is a trap. If you go without creditable drug coverage for 63 days or more after eligibility, you owe a late enrollment penalty — calculated as a percentage of the national base premium for every uncovered month — permanently, for as long as you have Part D. A very cheap plan is usually the better hedge.
Advantage vs Original: the real tradeoff
| Factor | Original + Medigap | Medicare Advantage |
|---|---|---|
| Monthly cost | Higher and predictable | Often $0 premium, variable copays |
| Provider access | Any provider accepting Medicare | Network, referrals, prior authorization |
| Out-of-pocket max | None (Medigap absorbs it) | Capped by law, but the cap is high |
| Extras | None built in | Dental, vision, gym, OTC allowances |
| Travel | Works nationwide | Usually regional |
| Switching later | Medigap may require underwriting | Can change each open enrollment |
The asymmetry buried in that table deserves emphasis: during your six-month Medigap open enrollment window starting when Part B begins, insurers must sell you a policy regardless of health. Miss it, and in most states they can medically underwrite and decline you. So choosing Advantage at 65 because it is cheap can become a one-way door if your health changes and you later want to return to Original Medicare with a supplement.
Building a Medicare number into your retirement budget
Treat Medicare as a fixed monthly bill, not a surprise. A workable planning approach:
- Estimate the base: Part B premium + Part D premium + Medigap premium, per person.
- Add a deductible reserve: at least one Part A deductible and the Part B deductible per year.
- Add the uncovered categories: dental, vision, hearing aids, and most long-term custodial care are not Medicare benefits at all.
- Index it: assume the total rises faster than general inflation; healthcare historically does.
- Plan income around IRMAA brackets starting in your early sixties.
Because premiums come out of your Social Security deposit, the interaction matters. A larger benefit from delaying to 70 absorbs Medicare inflation more comfortably — one of the underrated arguments in the claiming decision. If you are still years away, keep funding an HSA and invest the balance: HSA dollars pay Part B, Part D, and Advantage premiums tax-free once you are enrolled, though not Medigap.
Enrollment timing and penalties
Your Initial Enrollment Period runs seven months: three before your 65th-birthday month, the month itself, and three after. Sign up late without qualifying coverage and Part B carries a lifetime penalty of 10% for each full 12-month period you delayed.
The main exception is active employment. If you or your spouse still work for an employer with 20 or more employees and you have group coverage, you can delay Part B and get a Special Enrollment Period when that job ends. COBRA and retiree coverage do not count as active employment coverage — a mistake that generates permanent penalties every year.
Pro tip: If you are contributing to an HSA, stop contributions at least six months before you file for Medicare or Social Security. Part A coverage is backdated up to six months, and any HSA contribution during a Medicare-covered month is an excess contribution subject to penalty.
A worked example: one year of Medicare costs
Consider Diane, 67, retired, moderate income below the first IRMAA threshold, on Original Medicare with Plan G and a low-cost drug plan. Her recurring costs are the Part B premium, the Medigap premium, and the Part D premium — three separate bills, only one of which is withheld from Social Security. On top of that she pays the Part B deductible early in the year and roughly $60 a month in drug copays.
Her total lands in the mid-$300s per month, or a bit over $4,000 for the year, and it barely moves whether she has a quiet year or a hospitalization — that predictability is what Plan G buys. Her neighbor Ray chose a $0-premium Advantage plan and pays far less in most months, but a knee replacement year brings copays for the hospital stay, the surgeon, imaging, and physical therapy that stack toward his plan’s out-of-pocket maximum. Over a decade, both approaches can total similar amounts; they differ in when the money leaves and how much variance you carry.
The practical implication: if a $6,000 year would force you to sell investments in a downturn or lean on a personal loan, the predictable-premium path protects your plan even if it looks more expensive on paper. If you have a deep emergency fund and stable providers in-network, Advantage can be a rational bet.
Frequently asked questions
Is Medicare really free at 65?
Only Part A is typically premium-free, and only if you have 40 quarters of Medicare-taxed work. Part B, Part D, and any supplement all carry monthly premiums, and every part has cost sharing.
Can I have Medicare and employer insurance at the same time?
Yes. With 20 or more employees, the employer plan usually pays first and Medicare second. With fewer than 20 employees, Medicare typically pays first, so enrolling in Part B on time matters.
Does Medicare cover dental, vision, or hearing?
Original Medicare generally does not. Many Advantage plans include limited benefits with annual caps that rarely cover a major dental procedure. Budget for these separately.
What is the Medicare Advantage open enrollment period?
Each fall’s annual election period lets you change plans, and there is an additional early-year window for Advantage enrollees to switch plans or return to Original Medicare — though returning does not guarantee a Medigap policy without underwriting.
Does Medicare cover long-term care?
No. Medicare pays for limited skilled nursing after a qualifying hospital stay, not ongoing custodial care. That risk belongs to long-term care insurance, personal assets, or eventually Medicaid — a core topic in estate planning.
How do I appeal a coverage denial?
Every part of Medicare has a formal multi-level appeals process with deadlines printed on the denial notice. The same discipline that works with private insurers applies here — see our guide to appealing a denied claim.
The bottom line
Medicare is excellent coverage with real costs and real gaps. Plan on a four-figure annual bill per person, decide the Original-plus-Medigap versus Advantage question during your one guaranteed-issue window rather than later, price Part D against your actual prescriptions, and watch the two-year income lookback that drives surcharges.
Do that work in the year before you turn 65 and Medicare becomes a predictable line item. Skip it, and it becomes the surprise that reshapes a retirement budget — the same way an unbudgeted medical bill reshapes a household one.