words Al Woods
Retirement is the time to enjoy the wealth you’ve spent a lifetime building, but rising healthcare costs can take a bigger bite out of your income than expected. If you don’t plan ahead, your Medicare premiums could increase due to something called IRMAA (Income-Related Monthly Adjustment Amount), and unexpected medical expenses could strain your savings.
The good news is that you can take control. By using smart tax strategies, planning withdrawals wisely, and understanding how Social Security timing affects Medicare costs, you can reduce your expenses and keep more of your retirement income.
How Medicare Costs Can Increase Based on Income: Understanding IRMAA
Medicare isn’t free, and for higher-income retirees, it can become significantly more expensive. IRMAA is an additional charge applied to Medicare Part B (doctor visits and outpatient care) and Part D (prescription drugs) for retirees whose income exceeds certain thresholds. The Social Security Administration determines this surcharge based on your Modified Adjusted Gross Income (MAGI) from two years prior. That means the Medicare premiums you pay today are based on your income from two years ago, which can catch many retirees off guard.
For example, in 2024, if your MAGI is $103,000 or less for one person or $206,000 or less for married couples, you pay the standard Part B premium of $174.70 per month per person. But if your income exceeds those limits, your premiums increase in tiers, with some retirees paying over $594 per month per person. Over the course of retirement, that extra cost can add up to tens of thousands of dollars. By managing your taxable income strategically, you can avoid unnecessary IRMAA charges and save money in the long run.
Strategies to Reduce Your IRMAA Bracket
There are several ways to lower your IRMAA brackets in retirement and, in turn, minimize your Medicare premiums. One of the most effective strategies is converting a portion of your traditional IRA or 401(k) into a Roth IRA before enrolling in Medicare. Withdrawals from a Roth IRA are tax-free, so once the money is inside a Roth, it won’t count toward your MAGI, helping you avoid IRMAA thresholds. It’s often beneficial to do this in the early years of retirement before you start taking Social Security, as your income may be lower during that period.
Another tax-efficient approach is charitable giving. If you’re at least 70½, you can make a Qualified Charitable Distribution (QCD) directly from your IRA to a charity. The amount given doesn’t count as taxable income, which can help keep you below the IRMAA limits. This allows you to support a cause you care about while also benefiting from tax savings.
The way you withdraw funds from different accounts can also impact your taxable income. A well-planned withdrawal strategy typically involves using taxable investment accounts first, followed by tax-deferred accounts such as 401(k)s and traditional IRAs, up to the IRMAA limit. Any additional income needed can then come from tax-free sources like Roth IRAs or Health Savings Accounts (HSAs). This approach ensures you don’t push yourself into a higher Medicare premium bracket unnecessarily.
The Impact of Social Security Timing on Medicare Costs
The decision of when to claim Social Security has a direct effect on your Medicare costs. Many retirees claim benefits as early as age 62, but delaying until age 70 can provide major advantages, particularly when it comes to tax efficiency.
Delaying Social Security results in higher monthly payments, which can reduce the need to withdraw as much from taxable retirement accounts. This keeps your overall taxable income lower and helps you stay below IRMAA 2025 thresholds. On the other hand, claiming Social Security early while also taking withdrawals from tax-deferred accounts can increase your MAGI and trigger higher Medicare premiums.
Coordinating Social Security timing with your withdrawal strategy is key. Many retirees benefit from drawing down traditional retirement accounts in their 60s while delaying Social Security, which allows them to keep taxable income at a manageable level and maximize their future Social Security benefits.
Budgeting for Healthcare in Retirement Without Surprises
Even if you successfully avoid IRMAA, healthcare will still be one of your largest expenses in retirement. Many retirees underestimate the true cost of Medicare, which includes premiums, deductibles, copays, and prescription drug costs. Medicare Part A is usually free but still has deductibles and hospital costs. Part B requires monthly premiums, and Part D adds costs for prescription drug coverage. On top of that, Medigap or Medicare Advantage plans can help fill gaps in coverage but come at an additional cost.
It’s essential to plan for long-term care, as Medicare doesn’t cover extended stays in nursing homes or assisted living facilities. Options include long-term care insurance, hybrid life insurance policies that include long-term care benefits, or self-funding with dedicated investments. Without a plan in place, long-term care expenses can quickly drain your savings.
Healthcare costs tend to rise faster than regular inflation, with medical expenses increasing by an average of five to seven percent annually. To ensure your budget remains realistic, factor in these cost increases when planning for the future. Many retirees find it helpful to set aside dedicated savings or use HSAs before enrolling in Medicare to help cover these rising expenses.
Taking Control of Your Retirement Healthcare Costs
Your retirement income should go toward enjoying life, not getting hit with unexpected Medicare costs or excessive tax burdens. By strategically managing your taxable income, planning your Social Security timing, and budgeting for healthcare in advance, you can keep more of your hard-earned savings. The earlier you start planning, the better positioned you’ll be to minimize unnecessary expenses and make your retirement as financially secure as possible.
