Medicare and Medicaid

You spent twenty years learning to manage a portfolio. Nobody spent twenty minutes teaching you how to enroll in Medicare. This is the second financial crisis of retirement, and it blindsides people who got everything else right. People who maxed their 401(k)s, optimized their tax-loss harvesting, and built seven-figure portfolios miss a Medicare enrollment window and pay a permanent penalty for the rest of their lives.

The accumulation phase has infinite content: books, blogs, podcasts, YouTube channels, Reddit threads, all telling you how to save. The drawdown phase has almost none. Medicare sits at the center of that gap. A system that affects every American over 65, costs thousands per year, and operates on rules that punish people who don’t know them.

Medicare is a full-time job that nobody trains you for. This article is the training.

Medicare vs. Medicaid: Two Different Programs

Most people use these names interchangeably. They are completely different programs.

Medicare is a federal program. You qualify based on age (65+) or disability. It doesn’t matter how much money you have. A retiree with $5 million in investments gets the same Medicare as someone with nothing. You earned it by paying Medicare taxes during your working years.

Medicaid is a state program. You qualify based on income and assets. Each state sets its own rules, income thresholds, and covered services. Medicaid covers things Medicare doesn’t, including long-term nursing home care for people who have exhausted their savings. A retired schoolteacher in Ohio and one in California face different Medicaid rules despite identical financial situations.

Some people qualify for both. A 68-year-old with Medicare who has limited income and assets (typically under $1,600/month for an individual, though thresholds vary by state) may also qualify for Medicaid. When that happens, Medicaid can cover Medicare premiums, deductibles, and copays. About 12 million Americans are dually eligible. Most don’t know it.

The Four Parts of Medicare

Medicare is split into four parts that were clearly named by someone who had never tried to explain anything to another human being.

Part	What It Covers	Monthly Cost (2025)	How You Get It
Part A	Hospital stays, skilled nursing, hospice	$0 for most people	Automatic at 65 if receiving Social Security
Part B	Doctors, outpatient care, preventive services	~$185/month	Must actively enroll
Part C	Bundles A + B + usually D (Medicare Advantage)	Varies by plan	Choose a private insurer
Part D	Prescription drugs	~$35/month average	Must actively enroll or get through Part C

Part A covers inpatient hospital care, skilled nursing facility stays (limited), hospice care, and some home health care. Most people pay $0 in premiums because they or their spouse paid Medicare taxes for at least 10 years (40 quarters). If you didn’t hit that threshold, you can buy Part A, but it’s expensive.

Part B covers everything outside the hospital. Doctor visits, outpatient procedures, lab tests, mental health services, durable medical equipment, preventive screenings. The standard premium in 2025 is about $185 per month. This is the part where higher earners get hit with surcharges, which we’ll cover in the costs section.

Part C, called Medicare Advantage, is not a separate benefit. It’s an alternative way to receive Parts A and B through a private insurance company. These plans often bundle prescription drug coverage (Part D) and add extras like dental, vision, and hearing. They usually have lower premiums. The trade-off is network restrictions. More on this below.

Part D covers prescription drugs. You buy it from a private insurer as a standalone plan (if you have Original Medicare) or get it bundled into a Medicare Advantage plan. The right plan depends entirely on which medications you take. Two retirees in the same zip code can face wildly different Part D costs.

What Medicare Costs

Part A is free for most people. Everything else costs money, and the amounts add up faster than you’d expect.

Part B runs about $185 per month per person in 2025, deducted directly from your Social Security check. That’s $2,220 per year. For a couple, $4,440 per year just for Part B.

Part D averages around $35 per month, but ranges from $0 to $100+ depending on the plan and your prescriptions.

Deductibles and copays apply to nearly everything. Part A has a $1,676 deductible per benefit period (a benefit period starts when you’re admitted and ends after you’ve been out of the hospital or skilled nursing facility for 60 consecutive days). Go back to the hospital before that 60-day clock resets and you pay the deductible again. Part B has a $257 annual deductible, after which you pay 20% of approved services with no out-of-pocket maximum. Read that again. Original Medicare has no cap on your out-of-pocket costs. A $500,000 hospital bill leaves you owing $100,000 of the Medicare-approved amount after your deductible.

IRMAA: The Surcharge for Higher Earners

IRMAA (Income-Related Monthly Adjustment Amount) is Medicare’s way of charging wealthier retirees more. If your modified adjusted gross income (MAGI) exceeds certain thresholds, your Part B and Part D premiums increase. The income used is from your tax return two years prior. Starting Medicare in 2025? They’re looking at your 2023 tax return.

For 2025, the thresholds start at $103,000 for individuals and $206,000 for married couples filing jointly. Above those levels, the surcharges climb in tiers.

A worked example: a retired couple reports $250,000 in MAGI (from a combination of Social Security, investment income, and Roth conversions). They’re in the second IRMAA tier. Instead of paying $185 per month each for Part B, they pay about $259 per month each. That’s an extra $1,776 per year as a couple, on top of the base premium, just for Part B. Part D premiums get their own surcharge on top of that.

This is one reason Roth conversions before age 65 are popular in the FIRE community. Converting traditional IRA money to Roth while your income is low keeps your MAGI down during the years when IRMAA looks at your tax returns.

The Enrollment Windows That Bite

This is the section that matters most. Read it twice if you’re within five years of 65.

Initial Enrollment Period

You get exactly seven months to enroll without penalty. Your Initial Enrollment Period (IEP) is centered on your 65th birthday: the three months before, your birthday month, and the three months after.

Miss it and the consequences are permanent.

The Part B Penalty

The Part B late enrollment penalty is permanent. For every 12-month period you could have had Part B but didn’t sign up (and didn’t have qualifying employer coverage), your premium goes up 10%. It never comes back down. Wait three years and your Part B premium is 30% higher for the rest of your life. At $185/month base, that’s an extra $55.50 per month, $666 per year, every year until you die.

Smart people fall into this trap. Someone retires at 63, buys an ACA marketplace plan, turns 65, and assumes their marketplace plan is fine. It isn’t. ACA coverage is not “creditable coverage” for Medicare purposes. The clock started ticking at 65.

The Part D Penalty

Part D has its own penalty: 1% of the national base beneficiary premium for every month you went without creditable prescription drug coverage. In 2025, the base premium is about $36.78, so 1% is roughly $0.37 per month of gap. Wait 24 months and that’s $0.37 times 24, or about $8.83 more per month, permanently. Smaller dollars than Part B, but it compounds over a long retirement.

The Exception: Employer Coverage

Active employer coverage is the one legitimate reason to delay Medicare. If you’re still working at 65 and covered through your employer (or your spouse’s employer, if the company has 20+ employees), you can skip Part B without penalty. When that employment or coverage ends, you get a Special Enrollment Period of eight months to sign up. COBRA coverage does not count. Retiree health plans do not count. Only active employer coverage at a company with 20+ employees qualifies.

Write this down. Put it on your calendar. Tell your parents. And if any of this feels overwhelming, every state has a free State Health Insurance Assistance Program (SHIP) with trained counselors who help people navigate Medicare enrollment. No sales pitch. Just answers.

Once you’re enrolled, the next question is what kind of Medicare you want.

Original Medicare vs. Medicare Advantage

After enrollment, you face the biggest decision in Medicare: Original Medicare or Medicare Advantage. Neither is universally better.

	Original Medicare (Parts A + B)	Medicare Advantage (Part C)
Provider choice	Any doctor who accepts Medicare (93% of physicians)	Network-restricted (HMO or PPO)
Referrals needed	No	Often yes (HMO plans)
Out-of-pocket max	None	Required by law (typically $5,000-$8,000/year)
Prescription drugs	Add standalone Part D plan	Usually included
Dental/Vision/Hearing	Not covered	Often included
Supplemental coverage	Buy a Medigap policy	Not eligible for Medigap
Monthly premiums	Part B + Part D + Medigap premiums	Often $0 beyond Part B premium
Works anywhere in U.S.	Yes	Usually no (regional networks)

The table tells the structural story. Here’s what it means in practice.

Most people on Original Medicare buy a Medigap (Medicare Supplement) policy to cover deductibles and coinsurance, plus a standalone Part D plan for prescriptions. A popular Medigap plan (Plan G) runs $150-$300 per month depending on your state and age. Add it all up: Part B ($185) + Medigap ($200 average) + Part D ($35) = roughly $420/month per person. Expensive, but you can see any doctor in the country and you’re protected from catastrophic costs.

Medicare Advantage looks cheaper. Premiums are often $0 beyond Part B. Dental, vision, hearing, and drugs are bundled in. Annual out-of-pocket costs are capped by law. The catch: you’re locked into a network. Need care while traveling? Out-of-network specialist? Prior authorization delays? These are real trade-offs, not fine print.

Healthy people who stay in one area and want lower monthly costs tend to choose Medicare Advantage. People who travel, have complex health needs, or want to see any doctor in the country tend to choose Original Medicare with Medigap. Not a TV commercial.

Where This Breaks

Medicare has gaps large enough to wreck a retirement plan. Knowing them matters as much as knowing what’s covered.

Long-term care is not covered. This is the biggest gap in the entire system, and it’s the one that can erase a lifetime of careful saving. Medicare pays for short-term skilled nursing (up to 100 days after a qualifying hospital stay, and you’re paying coinsurance after day 20). It does not pay for custodial care: help with bathing, dressing, eating, the daily reality of a nursing home. The median annual cost of a private nursing home room in 2025 is over $116,000. Three years of care costs more than most people’s entire retirement savings. People who need it either pay out of pocket, qualify for Medicaid by spending down their assets to near-zero, or rely on long-term care insurance they bought decades earlier. Medicare will not help.

Dental, vision, and hearing are barely covered. Original Medicare covers almost none of these. Medicare Advantage plans include some benefits, but coverage is limited. A single dental implant can run $5,000. Medicare won’t pay for it.

No international coverage. Original Medicare does not cover care outside the United States. Some Medigap policies cover foreign travel emergencies, but routine care abroad is on you. If your retirement plan includes winters in Mexico, factor this in.

The 20% with no cap. Original Medicare’s Part B coinsurance is 20% of approved charges with no annual out-of-pocket maximum. Without a Medigap policy, a serious illness can generate five-figure or six-figure bills. This is why Medigap exists.

One more thing: if you retire before 65, Medicare doesn’t start early. You’ll need to bridge the gap with ACA marketplace coverage, a spouse’s employer plan, or COBRA (up to 18 months). And if you’ve been contributing to an HSA, know that you must stop contributing once you enroll in any part of Medicare, including Part A. You can still spend existing HSA funds tax-free on medical expenses, but no new contributions.

What’s Next

Supplemental coverage fills the gaps that Medicare leaves open. Choosing the right combination of Medigap, Part D, dental, and vision plans is the next decision you’ll need to make.

That’s exactly what Supplemental Coverage covers: Medigap plans, standalone Part D, dental and vision options, and how to evaluate them without losing your mind.