Most people prioritize planning for stable income in retirement, but preparing for the financial realities of health care later in life is often overlooked.

This may be partly due to the misguided belief that Medicare will serve as an adequate and affordable backstop for all future health needs. But the federal insurance program is not one-size-fits-all, and it comes with its own set of costs, limits and gaps that need to be factored into your retirement planning.

“The complexity and filing options around Medicare can be overwhelming,” says Griffin Geisler, a wealth strategist at RBC Wealth Management–U.S. “Many people don’t realize that Medicare only covers certain costs, which can lead to large out-of-pocket surprises for those unfamiliar with the program’s structure and limits.”

Understanding Medicare’s coverage, as well as its limits and gaps, is crucial to planning a retirement with enough savings to cover your health care needs.

Medicare basics

It’s easy to think of Medicare as a single program that automatically activates at age 65, but it’s not that simple. There are four different parts of Medicare, each covering different aspects of health care:

Part A (hospital insurance)

• Covers: Inpatient care for short-term hospitalization, hospice and skilled nursing facilities and some outpatient home health care
• Premiums: Typically none
• Deductible: $1,676
• Coinsurance: Applies after 60 days

Part B (medical insurance)

• Covers: preventative care and outpatient care
• Premiums: $185 to $628 monthly, depending on income
• Deductible: $257
• Coinsurance: 80/20 coinsurance (patient pays 20 percent of all Medicare-eligible expenses)

Part C (Medicare Advantage)

• An alternative path to traditional Medicare coverage that functions similar to network-based employer-sponsored health insurance
• Combines coverage for hospital stays, preventive care and outpatient care in a single plan. May also include prescription drug coverage
• Administered by private insurance companies

Part D (prescription drug coverage)

• Optional coverage for prescription drugs
• Can be added in addition to Part A and/or Part B
• Administered by private insurance companies

Certain health-related expenses, such as extended hospital stays, long-term care, hearing aids, vision coverage, dentures and most dental care, are not covered by traditional Medicare (Parts A and B).

“Those costs, although not directly medical, tie into your overall health care, so you have to make sure to either have supplemental coverage or plan for those expenses accordingly,” Geisler says.

Prepare for sticker shock

Most Americans know medical care is expensive, but an RBC Wealth Management survey about health care in retirement found that overall costs are being underestimated.

When asked how much they expect to spend on routine health care at age 65, respondents to the RBC survey anticipated a relatively modest $2,700 a year. In reality, the Bureau of Labor Statistics estimates that at age 65, annual spend on health care for a healthy couple is close to $13,000 ($6,500 per person).

“These are out-of-pocket costs,” Geisler says. “And that number only increases as a person ages, so when you start looking 20 or even 30 years out, it adds up really fast.”

Another major factor is the potential for long-term care, which can cost more than $100,000 annually and is not covered by Medicare. Where you live will also affect your out-of-pocket costs, as private insurance costs can vary depending on the number of available health providers in your area.

High-earning individuals need to factor the impact of Income Related Monthly Adjustment Amounts (IRMAA) into their plans, as they will be required to pay significantly more for Medicare Parts B and D than other enrollees.

“IRMAA is a big consideration for our clients,” says Geisler. “We develop strategies to help manage their income in their Medicare years to potentially mitigate some of those extra costs.”

Having an existing employer plan may make it unnecessary to sign up for Part B; however, it’s important to determine how your coverage works with Medicare before making the decisions about enrollment.

Be proactive to avoid penalties

Given the costs involved, it’s crucial to prepare for retirement health care as early as possible—long before you actually need it.

Geisler stresses the importance of doing research and making Medicare coverage decisions well ahead of your initial enrollment period, which begins three months before you turn 65.

Filing for Medicare late (unless you have an employer-based special enrollment period exception) can lead to significant enrollment penalties that have lasting consequences. Instead of a one-time fee, these penalties are added to your monthly premium and some may be charged as long as you have the coverage, which is usually the rest of your life.

“Talk to your advisor to make sure you understand all of your options for Medicare and the specific requirements or exceptions that may apply to your situation,” he says.

Understanding Medicare is key to making informed decisions and managing health care costs at age 65 and beyond.