Healthcare Costs in Retirement: Pre-Medicare Gap, ACA 2026, and Medicare Planning

Healthcare is the second-largest expense for most retired households — and the most volatile. The gap between leaving employer insurance and reaching Medicare at 65 is where retirement income plans often break. For 2026, it got harder: the enhanced premium tax credits that kept ACA premiums manageable from 2021–2025 expired. If you're retiring before 65, your numbers changed significantly.

The pre-Medicare gap: ages 55–64

When you leave an employer plan, you have three realistic options to bridge the gap to Medicare. Each has a different cost and risk profile.

ACA Marketplace 2026: the cliff is back

From 2021 through 2025, the American Rescue Plan Act and the Inflation Reduction Act provided "enhanced" premium tax credits that capped premiums for all income levels and eliminated the income ceiling for subsidies. Those enhanced credits expired December 31, 2025 and were not renewed.¹

For 2026 coverage, the original ACA subsidy structure is back:

• Subsidies end at 400% of the Federal Poverty Level (FPL). For a single person, 400% FPL in 2026 = $62,600.²
• Above $62,600, you pay the full unsubsidized benchmark premium — no credit, no cap.
• The benchmark Silver plan for a 60-year-old averages $15,914/year ($1,326/month) nationally in 2026 — a 26% jump from 2025, the largest increase in eight years.³

Estimated annual cost by income level (single filer, age 60)

Benchmark Silver premium for age 60, national average. Required contribution percentages reflect original ACA structure (2026). Actual subsidy depends on state and specific plan.²

ACA income management for early retirees

Your ACA MAGI is identical to your regular tax MAGI — your AGI plus tax-exempt interest. What counts, and what doesn't, determines whether you fall above or below the subsidy cliff.

What counts toward ACA MAGI (pushes you toward the cliff)

• Traditional IRA and 401(k) withdrawals — every dollar counts
• Capital gains and qualified dividends
• Pension and annuity income
• Interest and rental income
• Taxable Social Security income
• Tax-exempt municipal bond interest (added back into MAGI)

What does NOT count toward ACA MAGI (the key levers)

• Roth IRA distributions (qualified, after age 59½ and 5-year rule) — this is the most powerful income-management tool for early retirees
• HSA withdrawals for qualified medical expenses
• Life insurance proceeds and inheritances

Worked example: Roth distributions protect ACA eligibility

David retires at 62 with $1.8M in a traditional IRA and $400K in a Roth IRA. He needs $72,000/year for expenses. Two options:

• Option A — draw entirely from traditional IRA: $72,000 in IRA withdrawals = $72,000 MAGI. Above the $62,600 cliff. Full benchmark premium: $15,914/year at age 60.
• Option B — draw $50,000 from IRA + $22,000 from Roth: ACA MAGI = $50,000 (Roth distributions excluded). Below the cliff. Estimated premium: ~$4,200/year.

The difference is $11,700/year in healthcare premiums. Over a 3-year pre-Medicare bridge (ages 62–64), that's $35,100 in savings — purely from income sequencing. The Roth conversions done before retirement didn't just reduce future RMDs and taxes; they funded a lower ACA premium for every year before Medicare. See our Roth Conversion Window Guide for how to build that Roth balance before you need it.

Entering Medicare at 65

Medicare is federal health insurance for Americans 65 and older. The structure — Parts A, B, C, and D — covers most costs but leaves gaps that can be significant without supplemental coverage. Here's what you actually pay in 2026.⁴

Part A — Hospital Insurance

Most people pay nothing for Part A if they (or a spouse) paid Medicare taxes for at least 40 quarters (10 years).

• Inpatient deductible: $1,736 per benefit period in 2026 — a "benefit period" starts with admission and ends 60 days after discharge, so multiple hospitalizations in a year can each trigger this deductible
• Days 1–60: $0 coinsurance after deductible
• Days 61–90: $433/day coinsurance in 2026
• Part A covers skilled nursing, hospice, and some home health in addition to hospital stays

Part B — Medical Insurance

Part B covers physician services, outpatient care, and durable medical equipment. It's optional — you can delay if you have creditable employer coverage — but late enrollment triggers a permanent penalty.

• Standard monthly premium: $202.90 in 2026
• Annual deductible: $283 in 2026
• After deductible: you pay 20% of Medicare-approved amounts with no annual out-of-pocket maximum — this unlimited coinsurance exposure is the coverage gap that makes Medigap valuable
• IRMAA surcharges apply if your income exceeds $109,000 single / $218,000 MFJ — Part B can reach $689.90/month at the top tier. See our IRMAA Planning Guide for the full bracket table.

Part D — Prescription Drug Coverage

Part D covers prescription drugs through private plans. Standard premiums average $30–$50/month in 2026; higher-income enrollees pay IRMAA surcharges (an extra $14.50–$91.00/month). Starting in 2025, the Inflation Reduction Act capped annual out-of-pocket Part D costs at $2,000 — a meaningful change for anyone with expensive medications.

Late enrollment penalty: 1% of the national base beneficiary premium per month without coverage. It compounds indefinitely.

Covering Medicare's gaps: Medigap vs Medicare Advantage

Original Medicare (Parts A + B) leaves you exposed to the $1,736 Part A deductible, the 20% Part B coinsurance with no cap, and no foreign travel coverage. Two paths to close those gaps:

Medigap (Medicare Supplement) insurance

Medigap policies fill Original Medicare's holes. The most comprehensive widely available plan is Plan G: it covers the Part A deductible, all hospital and skilled nursing coinsurance, Part B excess charges, and foreign travel. The only gap is the $283 annual Part B deductible — you pay that once a year and Medigap covers everything else.⁵

• Plan G monthly premiums: $100–$200/month depending on age, state, and insurer — lower when you first enroll at 65; premiums increase annually with age and inflation
• High-Deductible Plan G: lower monthly premium in exchange for a $2,950 annual deductible — makes sense for healthy retirees, especially if paired with an HSA to cover the deductible
• Guaranteed issue window: the 6-month open enrollment period starting when you turn 65 and enroll in Part B. During this window, insurers cannot deny coverage or charge higher premiums based on health status. After it closes, you typically must qualify medically — and pre-existing conditions can lead to denial or higher rates.

Medicare Advantage (Part C)

Medicare Advantage bundles Parts A, B, and usually D into a single plan. Many plans have $0 monthly premiums, but you use the plan's network and pay copays, with annual out-of-pocket maximums typically ranging $4,000–$8,000+.

• Pros: low monthly cost, often includes dental/vision/hearing, annual OOP cap limits catastrophic exposure
• Cons: network restrictions, prior authorization requirements, and you can lose access to specific hospitals and specialists — including major academic medical centers

The core tradeoff: Medigap gives you unlimited provider choice with predictable, near-total cost coverage. Medicare Advantage trades flexibility and predictability for lower monthly premiums. For retirees with significant ongoing care needs or who travel frequently, Medigap's predictability is often worth the premium.

HSA strategy in retirement

An HSA is the most tax-efficient savings vehicle in the tax code — contributions are pre-tax, growth is tax-free, and qualified withdrawals are tax-free. In retirement the rules shift, but the value increases.

What you can and can't use HSA funds for after 65

• Can pay: Medicare Part B premiums, Part D premiums, Medicare Advantage premiums — effectively getting those premiums pre-tax via HSA
• Cannot pay: Medigap (Medicare supplement) premiums. This is a specific IRC § 223 exclusion — Medigap supplements are not qualified medical expenses for HSA purposes
• After 65, HSA funds can be withdrawn for any purpose without the 20% penalty — non-medical withdrawals are ordinary income, like a traditional IRA. This makes the HSA a flexible secondary retirement account.
• You must stop contributing to your HSA when you enroll in any part of Medicare. If you delay Medicare Part B because you have employer coverage, you can keep contributing — but stop 6 months before applying for Social Security, because Social Security automatically retroactively enrolls you in Part A up to 6 months back, which would disqualify prior HSA contributions.

The long-game strategy: Contribute the maximum every working year ($4,400/individual, $8,750/family in 2026⁶), invest in index funds, and don't touch it. Pay current medical bills from other income and keep receipts — you can reimburse yourself tax-free at any point in the future for past qualified expenses. Let the HSA compound for 20+ years, then use the balance to pay Medicare premiums tax-free in retirement. A couple who each maximized HSA contributions for 15 years with moderate investment returns could have $200,000+ to fund tax-free Medicare coverage.

Healthcare cost estimator

Select your situation to see a rough annual healthcare cost estimate.

Healthcare as a budget line in your retirement income plan

Healthcare inflation runs at roughly 4.5–5% annually — well above general CPI. A couple spending $18,000/year on healthcare in 2026 will need $32,000–$38,000/year in 15 years (2041) at 4.5% annual healthcare inflation. That's a doubling.

Rule of thumb: budget $7,000–$10,000 per person per year for Medicare-era healthcare (Part B + D + Medigap Plan G + routine costs). IRMAA, dental, vision, hearing aids, and over-the-counter costs layer on top. A couple at IRMAA Tier 1 with full Medigap coverage can realistically budget $28,000–$35,000/year combined — before any major health events.

The interactions that drive total lifetime cost:

• RMDs feed IRMAA: A growing traditional IRA generates larger RMDs over time, which push income up, which can push Medicare premiums higher. See our RMD Planning Guide for the specific cascade math.
• Roth conversions reduce future healthcare costs: Every dollar converted in the pre-RMD window shrinks future RMDs, which reduces long-term IRMAA exposure. The tax savings from Roth conversions are often cited — the Medicare savings are just as real. See our Roth Conversion Window Guide.
• Social Security timing interacts with ACA eligibility: Claiming SS early increases MAGI, which pushes you toward the ACA cliff if you retire before 65. Delaying SS while using Roth distributions to fund pre-Medicare spending can save $10,000+ in annual ACA premiums.
• Tax-efficient withdrawal order matters here too: The sequence in which you draw from taxable, traditional, and Roth accounts determines your ACA MAGI in the pre-65 years and your IRMAA tier in the Medicare years. See our Tax-Efficient Withdrawal Order Guide.

Sources

1. ASTHO — ACA Enhanced Premium Tax Credits: Legislative Developments in 2025 and 2026. Enhanced ACA credits expired December 31, 2025; 400% FPL subsidy cliff reinstated for 2026 Marketplace coverage; legislative extension efforts failed.
2. Health Reform Beyond the Basics — 2026 Coverage Year Guidelines & Thresholds. FPL thresholds for 2026 Marketplace eligibility: 100% FPL = $15,650 individual; 400% FPL = $62,600 individual. Required contribution percentages for original ACA structure.
3. KFF — How Will the Loss of Enhanced Premium Tax Credits Affect Older Adults?. National average unsubsidized benchmark Silver plan premium for age 60 = $15,914/year in 2026; 26% average premium increase, largest since 2018.
4. CMS — 2026 Medicare Parts A & B Premiums and Deductibles. Part B standard premium $202.90/month; Part B deductible $283; Part A inpatient deductible $1,736/benefit period; Part A days 61–90 coinsurance $433/day.
5. Medicare.gov — Compare Medigap Plan Benefits. Plan G benefit structure: covers Part A deductible, Part B excess charges, all coinsurance; only gap is $283 Part B annual deductible. High-Deductible Plan G deductible $2,950 in 2026.
6. IRS Publication 969 — Health Savings Accounts and Other Tax-Favored Health Plans. 2026 HSA contribution limits: $4,400 individual / $8,750 family. Qualified medical expenses include Medicare Part B, D, and Advantage premiums; Medigap premiums excluded. Post-65 non-medical withdrawals treated as ordinary income.

ACA and Medicare values verified against 2026 CMS publications, KFF research, and ASTHO legislative tracking. ACA premium structure reflects original pre-enhanced rules in effect for 2026 Marketplace coverage. Confirm current-year subsidy eligibility at healthcare.gov and Medicare costs at medicare.gov before planning.