By Melanie Johnson
Most people approaching retirement have spent years thinking carefully about their investments, their income strategy, and their tax picture. Healthcare planning rarely gets the same attention, and that gap is expensive.
Healthcare costs are consistently one of the largest expenditures in retirement, and one of the least predictable. A healthy couple retiring today at 65 can expect to spend several hundred thousand dollars on healthcare over the course of their retirement, and that figure often excludes long-term care. As we have explored in our article on retirement planning mistakes, failing to plan for healthcare is one of the most common and costly oversights we see among otherwise well-prepared investors.
For high earners specifically, there are additional layers of complexity that most retirement planning conversations overlook entirely. Medicare surcharges tied to income, enrollment penalties that compound for life, and coverage decisions that cannot easily be reversed all deserve deliberate attention. Our retirement planning process addresses these decisions as core components of the financial plan, not afterthoughts.
Here is what every high earner needs to understand before Medicare enrollment becomes relevant.
1. IRMAA Surcharges: The Medicare Tax Most High Earners Do Not See Coming
Medicare is not a flat cost. For high earners, the monthly premium for Part B (which covers doctor visits and outpatient care) and Part D (which covers prescription drugs) includes an income-related surcharge that can add thousands of dollars per year to your Medicare costs.
This surcharge is known as IRMAA, the Income-Related Monthly Adjustment Amount. It is determined by your Modified Adjusted Gross Income (MAGI) from two years prior. That two-year lookback is the detail most people miss. Your Medicare premiums in retirement are not based on your retirement income. They are based on what you earned two years ago, which for many people means the final high-income years of their career.
How the Surcharges Work
IRMAA applies in tiers. As income crosses each threshold, the surcharge increases. The highest tier can push monthly Part B and Part D premiums to more than twice the standard amount. For a couple, this can translate to a difference of several thousand dollars per year in Medicare costs compared to someone at the standard premium level.
The thresholds are adjusted annually by CMS, so specific dollar figures should be verified for the current year. What does not change is the underlying structure: income above the standard threshold triggers progressively higher premiums, and the surcharge applies to both spouses independently.
The Planning Window That Most People Miss
Because IRMAA is based on income from two years prior, meaningful planning needs to begin before retirement, not after. Strategies worth evaluating with your advisor include managing the timing and structure of Roth conversions, coordinating capital gains realizations, deferring income where possible, and structuring retirement account withdrawals to stay below IRMAA thresholds. Our article on year-end tax strategies for high earners covers several of the underlying techniques that apply here.
There is also an important appeals process worth knowing. If your income has dropped significantly due to a life event, such as retirement itself, divorce, or the death of a spouse, you can request that Medicare use a more recent year’s income rather than the two-year lookback. This can meaningfully reduce surcharges in the transition years immediately following retirement.
The Fix: Build IRMAA modeling into your retirement income plan at least two to three years before your Medicare enrollment date. The goal is not necessarily to eliminate the surcharge entirely, but to avoid crossing thresholds unnecessarily due to poorly timed income events. A coordinated financial planning strategy that accounts for Medicare premiums as a retirement expense line item is far more effective than adjusting after the fact.
2. Medicare Enrollment Timing: The Mistakes That Follow You for Life
Medicare enrollment may be automatic if you are already receiving Social Security benefits before age 65. Otherwise, you generally need to enroll yourself, and the timing rules are more complex than they appear. Missing key enrollment windows can delay your coverage and result in late-enrollment penalties that may permanently increase your Medicare premiums.
Your Initial Enrollment Period
Your Initial Enrollment Period (IEP) 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 the first three months of this window ensures your coverage starts without gaps. Waiting until your birthday month or after can delay your start date and create a period of no coverage.
The Late Enrollment Penalties
If you miss your IEP without a qualifying reason, the penalties are significant and permanent.
Part B: The premium increases by 10% for each full 12-month period you were eligible but did not enroll. If you delayed enrollment by three years, for example, your Part B premium is 30% higher for the rest of your life.
Part D: A separate late-enrollment penalty applies for Part D based on how long you went without creditable prescription drug coverage. The penalty is added to your monthly Part D premium and is also permanent. The rules governing what counts as creditable coverage differ from Part B, which is another reason to review both separately.
The Working Exception
If you are still working at 65 and covered by an employer-sponsored health plan based on your current employment, or your spouse’s current employment, you may be able to delay Medicare enrollment without a late-enrollment penalty. COBRA, retiree health coverage, and marketplace plans generally do not qualify in the same way.
It is also important to note that Part B and Part D have different Special Enrollment Period and late-enrollment rules. The timing of each should be reviewed carefully with your advisor when employer or spousal coverage ends, as the windows and conditions are not identical.
Medicare and the HSA Conflict
One of the most overlooked enrollment timing issues for high earners involves Health Savings Accounts. Once you enroll in any part of Medicare, including Part A, you can no longer make contributions to an HSA. This creates a specific planning risk for people who claim Social Security before or at 65, because Social Security enrollment automatically triggers Medicare Part A enrollment.
If you intend to continue HSA contributions as long as possible, you may need to delay both Social Security and active Medicare enrollment. This interplay between Social Security, Medicare, and HSA strategy is exactly the kind of coordination covered in our Beckonomics podcast, where Victor and Hunter Beck explore how these decisions interact in real planning scenarios.
The Fix: Create an enrollment calendar at least 12 months before your 65th birthday that maps your specific situation: employer coverage status, Social Security timing intentions, and HSA contribution goals. The decisions compound, and the order in which you make them matters. Our retirement planning team builds this sequencing into every pre-retirement planning engagement.
3. Medigap vs. Medicare Advantage: Which Structure Fits a High-Net-Worth Situation
Original Medicare (Parts A and B) covers the majority of hospital and medical costs, but it does not cover everything. It leaves patients responsible for deductibles, copays, and coinsurance that can add up quickly during a serious illness or extended hospitalization. To fill those gaps, retirees have two primary options: a Medigap supplemental policy or a Medicare Advantage plan.
The choice between them is one of the most important coverage decisions in retirement, and for high-net-worth individuals, the considerations are somewhat different than they are for the general population.
Medigap (Medicare Supplement)
Medigap policies are sold by private insurers and are designed to fill in the cost-sharing gaps left by Original Medicare. Depending on the plan type, they may cover some or all of the deductibles, copays, and coinsurance that Medicare does not pay.
Key advantages for high earners include:
- Predictable out-of-pocket costs, which supports accurate retirement income planning
- Broad access to providers who accept Medicare, generally without the network restrictions associated with many Medicare Advantage plans
- Particularly well-suited for people who travel frequently or spend time in multiple states
The tradeoff is a higher monthly premium compared to Medicare Advantage. However, for most high-net-worth retirees, the premium is a manageable and predictable expense, and the flexibility and cost certainty that come with Medigap tend to align well with their priorities.
One critical timing note: Medigap plans have a guaranteed issue right during your Medigap Open Enrollment Period, which begins the month you are 65 and enrolled in Part B. During this window, insurers cannot deny coverage or charge more due to pre-existing conditions. After this window closes, insurers in most states can apply medical underwriting, meaning you could be denied coverage or charged significantly higher premiums. Enrolling at the right time matters enormously.
Medicare Advantage (Part C)
Medicare Advantage plans are offered by private insurers that contract with Medicare to provide all of your Part A and Part B benefits, and typically Part D as well. They generally have lower monthly premiums than Medigap, but come with network restrictions, prior authorization requirements, and variable out-of-pocket maximums.
Medicare Advantage can be a reasonable choice in specific situations, particularly for individuals in excellent health with local provider preferences who are comfortable with the managed care model. However, the prior authorization process, which requires insurer approval before certain treatments or specialist visits, can be a meaningful friction point for people accustomed to direct access to high-quality care.
The High-Net-Worth Calculus
For retirees who value broad provider access, flexibility when traveling, and more predictable healthcare costs, Medigap may be an attractive option. Medicare Advantage may be appropriate for others depending on individual healthcare needs and preferences. The right choice depends on your specific situation, and it should be evaluated as part of your broader financial plan rather than in isolation.
The Fix: Evaluate both options during your Medicare planning window, not after enrollment. Consult with a Medicare specialist alongside your financial advisor to model the premium differences, out-of-pocket scenarios, and coverage implications in the context of your income, health history, and travel patterns.
4. HSA Drawdown Strategy: Using Your Healthcare Reserve in Retirement
For high earners who have been maximizing their Health Savings Account contributions during their working years, the HSA can be one of the most powerful assets in a retirement healthcare plan. The challenge is knowing how to use it effectively once Medicare enrollment begins and new contributions are no longer permitted.
The Triple Tax Advantage
The HSA offers a tax structure that no other account type matches: contributions are tax-deductible, growth inside the account is tax-free, and withdrawals for qualified medical expenses are also tax-free. This makes every dollar in an HSA worth more, in after-tax terms, than a dollar in a traditional IRA or 401(k).
The Contribution Window
Contributions to an HSA require enrollment in a High-Deductible Health Plan (HDHP). Once you enroll in Medicare, contributions stop. This creates a defined window for HSA accumulation, and maximizing contributions during that window, including the catch-up contribution available to those 55 and older, is a meaningful opportunity most high earners underutilize.
One specific planning hazard: if you intend to delay Medicare but plan to claim Social Security at 65, Social Security enrollment automatically triggers Medicare Part A enrollment with a retroactive effective date of up to six months. This can inadvertently create excess HSA contributions for the months covered by that retroactive enrollment. Coordinating these two decisions carefully is critical.
Using the HSA in Retirement
Once you are on Medicare, your existing HSA balance can still be used tax-free for qualified medical expenses, which include Medicare premiums (Parts B, D, and Medicare Advantage), deductibles, copays, dental, vision, and hearing expenses. This makes the HSA an ideal vehicle for covering the out-of-pocket costs that Medicare does not address.
After age 65, HSA funds can also be withdrawn for non-medical purposes and are taxed as ordinary income, functioning like a traditional IRA in that respect. This provides a useful safety valve, though using the account for healthcare remains the most tax-efficient approach.
One important exception: HSA funds generally cannot be used tax-free to pay Medigap premiums. If you are enrolled in a Medigap plan, those premiums are paid out of pocket or from other account sources, not from your HSA.
The Fix: Build your HSA drawdown sequence into your broader retirement income plan. In general, it makes sense to use taxable account assets or retirement account distributions to cover living expenses in early retirement while preserving the HSA for healthcare costs. The longer the HSA compounds tax-free, the more value it delivers. Your advisor should model this sequencing in the context of your overall withdrawal strategy.
5. Long-Term Care: The Healthcare Risk Medicare Does Not Cover
Of all the healthcare planning gaps retirees face, long-term care is the largest and the most commonly ignored. Medicare does not cover custodial care, the kind of assistance with daily activities like bathing, dressing, eating, and mobility that is typically provided in nursing homes, assisted living facilities, or through home health aides.
The numbers are significant. The average annual cost of a private room in a nursing home in the United States has exceeded $100,000, and assisted living facilities typically run from $50,000 to $80,000 per year depending on location and level of care. In Austin and other higher-cost metropolitan areas, these figures can be meaningfully higher. A two-to-three year long-term care need, which is not uncommon, can easily consume $200,000 to $300,000 in after-tax assets.
Without a plan, that cost comes directly from the portfolio. Medicaid can cover long-term care costs, but requires spending assets down to very low levels first. That is not a realistic planning strategy for high-net-worth individuals. The three primary options worth evaluating are:
Option 1: Self-Insuring
Setting aside a dedicated pool of capital specifically for potential long-term care costs. This approach gives you complete control and flexibility, and any unused funds remain in the estate. The challenge is that it requires reserving substantial capital, often $300,000 to $500,000 or more per person, that would otherwise be invested. For households with significant assets, self-insuring may be entirely appropriate as part of a coordinated plan.
Option 2: Traditional Long-Term Care Insurance
Traditional LTC policies provide a defined daily benefit for care costs over a defined benefit period. The concern with traditional LTC insurance is that the market has contracted significantly as insurers have raised premiums substantially, sometimes dramatically, over the years. Many insurers have exited the market entirely. For people already in their mid-to-late 60s, premiums can be prohibitively expensive and insurability is not guaranteed.
Option 3: Asset-Based or Hybrid Long-Term Care Insurance
Asset-based LTC products, sometimes called hybrid policies, combine a long-term care benefit with a life insurance policy or annuity. If long-term care is needed, the policy pays benefits toward that care. If care is never needed, the policy pays a death benefit to beneficiaries. This structure addresses the most common objection to traditional LTC insurance, which is the concern about paying premiums for decades and never using the benefit.
Hybrid policies have become increasingly popular among high-net-worth retirees and align well with both the estate planning and healthcare planning components of a comprehensive financial plan. The right structure depends on your health, age, asset base, and family situation.
The Fix: Long-term care planning should begin in your 50s or early 60s, when premiums are lower, insurability is more likely, and all three options remain viable. Waiting until retirement narrows your choices and increases your costs. Our financial planning team integrates long-term care into the retirement planning conversation as a standard component, not an optional discussion.
The Bottom Line: Healthcare Is a Financial Planning Problem, Not Just a Medical One
Medicare, IRMAA surcharges, enrollment timing, coverage structure, HSA coordination, and long-term care are not healthcare decisions. They are financial decisions with healthcare consequences. Treated as such, they can be planned for, modeled, and managed. Left to chance, they become some of the most expensive surprises in retirement.
High earners approaching retirement have more tools available to them than most people realize, but those tools require coordination and time. The planning window for each of these decisions is specific, and many of them cannot be undone once they close. As we cover in our 5 Retirement Planning Moves New Retirees Should Consider, the years immediately before and after retirement are when these decisions matter most.
At Beck Capital Management, we work with high earners and retirees across Austin and nationwide to build retirement plans that treat healthcare as a financial variable, not a footnote. Our Beckonomics podcast also explores these topics regularly, offering practical perspective from the advisors who work through these decisions with real clients every day.
If you are within five years of retirement and have not had a thorough conversation about Medicare planning, IRMAA exposure, and long-term care, that conversation is overdue. Contact us online, call (512) 345-6789, or email information@beckcapitalmanagement.com.
Frequently Asked Questions
What is IRMAA and how does it affect Medicare costs for high earners?
IRMAA, or the Income-Related Monthly Adjustment Amount, is a surcharge added to Medicare Part B and Part D premiums for individuals whose income exceeds certain thresholds. It is calculated based on Modified Adjusted Gross Income from two years prior, meaning your Medicare premiums in retirement may reflect your pre-retirement income. For high earners, IRMAA can add several thousand dollars per year per person to Medicare costs. The surcharge is tiered, so even modest income management in the years before retirement can help reduce the exposure. Beck Capital Management builds IRMAA modeling into the retirement income planning process to help clients avoid unnecessary surcharges.
When should I enroll in Medicare if I am still working at 65?
If you are still working at 65 and covered by an employer-sponsored health plan based on your current employment or your spouse’s current employment, you may be able to delay Medicare enrollment without a late-enrollment penalty. COBRA, retiree health coverage, and marketplace plans generally do not qualify in the same way. It is also important to note that Part B and Part D have different Special Enrollment Period rules, so the timing of each should be reviewed carefully. Because these decisions also interact with HSA contributions and Social Security timing, it is important to review your specific situation with a financial advisor before making any enrollment decisions.
What is the difference between Medigap and Medicare Advantage for retirees?
Medigap (also called Medicare Supplement) and Medicare Advantage are two different ways to fill the coverage gaps left by Original Medicare. Medigap works alongside Original Medicare and covers much of the cost-sharing, giving you access to any Medicare-accepting provider nationwide with predictable out-of-pocket costs. Medicare Advantage replaces Original Medicare through a private insurer, typically with lower premiums but network restrictions and prior authorization requirements. For high-net-worth retirees who value provider flexibility, predictable costs, and broad access, Medigap is often the better fit. Beck Capital Management helps clients evaluate both options in the context of their income, health, travel patterns, and overall retirement plan.
About Melanie
Melanie Johnson is an Investment Advisor with Beck Capital Management and a Certified Divorce Financial Analyst (CDFA) with over 20 years of experience in the financial industry. She specializes in helping individuals navigate complex financial transitions, including divorce, retirement, and other major life changes.
In addition to her role at Beck Capital Management, Melanie is the owner of Divorce Financial Solutions and serves as the National Director for Second Saturday Divorce Workshops. She also hosts the Austin Second Saturday Divorce Workshop, where she provides financial education to individuals going through divorce.
Through her work, Melanie is committed to helping clients move through challenging financial transitions with greater clarity, confidence, and a stronger understanding of their financial future.
Melanie is a lifelong Austin resident who enjoys staying active, spending time with family and friends, and planning her next travel adventure.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. Medicare rules, premium amounts, and income thresholds are subject to change annually. Please verify current figures with Medicare or a qualified advisor. Beck Capital Management does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.