There is no ironclad rule about when you can retire.
While most of us need decades to save enough to retire comfortably, if you sell your startup at 28 for millions, retirement could be in your immediate future. Regardless of when you retire, do not overlook healthcare expenses in your budget.
And if you retire before age 65, healthcare may be more expensive for you than later in retirement. The reason is that Medicare isn’t available until age 65, and it typically costs less than most of the options available to early retirees pre-Medicare.
If you’re planning on retiring early, read on for additional information about healthcare options.
- There are various insurance plans to choose from while you wait for Medicare.
- Out-of-pocket fees can be expensive under private insurance options, but there are a few ways to mitigate the costs if you’re eligible.
- Make sure you have a financial plan to cover health costs before you officially retire.
Health Plan Options for Early Retirees
You may think that individual coverage is your only option. Since it can be costly depending on your region and healthcare needs, here are a few more choices to consider before you go shopping.
Your Spouse’s Insurance Plan
If your spouse still works and their employer offers medical insurance, you may have the option to enroll in their plan. Your retirement would trigger a qualifying event, allowing you to transition during a special enrollment period.
This may be the simplest and most cost-effective option for early retirement benefits. Qualifying for your spouse’s insurance plan also usually disqualifies you from applying for any other supplemental insurance plan.
Coverage from Your Former Employer
Some employer, union, or trust insurance plans offer retiree health benefits. The duration and extent of health coverage vary between each plan, though they are typically similar to plans offered to active employees.
To determine whether this option is available, start by requesting a copy of the Summary Plan Description from your employer. The summary will describe the plan’s terms, specifically if it’s offered to retirees and for how long. If the summary doesn’t mention benefits continuing during your retirement, they likely don’t provide retiree benefits.
If your employer does offer retiree healthcare coverage, you may be able to retain your retiree medical plan and enroll in Medicare. In some cases, it may act as supplemental coverage for expenses that Medicare doesn’t cover, such as dental, vision, and hearing.
Talk to your employer’s benefits administrator to understand the full extent of healthcare coverage during retirement.
COBRA is a federal law that gives workers and their families the right to continue on their company’s group plan if that insurance ends due to an event, including layoffs, retirement, and disability. COBRA coverage is available for 18 months—longer in some limited circumstances—but once you switch to COBRA, your employer no longer subsidizes the cost of your insurance. Thus, you’re responsible for paying the entire insurance cost, plus an additional 2% for administrative fees, making the premium increase substantial.
Under COBRA, retirement is a qualifying event (categorized as quitting), and you would be eligible to apply on the first day of retirement.
COBRA has an eligibility survey to see if you qualify in three questions.
- Did you have an employer-sponsored group health insurance plan?
- Does the employer have 20 or more workers?
- Why did the work insurance stop? Remember, under COBRA, retiring and quitting are the same thing.
COBRA is only a viable option for the short term, and it is typically available for 18 months or until you’re eligible for Medicare—whichever period is shorter. If you need coverage for a longer term, you’ll need to consider other options.
The Public Marketplace
The Health Insurance Marketplace allows you to shop for plans offered in your state and within your preferred networks. As with COBRA, retirement is considered a qualifying event for you to apply outside of open enrollment.
The application will ask you questions about your household size (including dependents), modified adjusted gross income (MAGI), and which state you live in. Depending on your answers, you may qualify for premium tax credits to lower the cost of your premium.
If you qualify, the tax credit is typically applied in advance, and a check is sent directly to the insurance company to lower your monthly premium.
It’s imperative that you report any changes to your income or household as soon as possible. If your income increases or your household size decreases, you may qualify for a lesser tax credit. If those changes are unreported by the time you complete your tax returns that year, you will be asked to “reconcile” the credit and pay back any extra money received.
The Evolution of Private Insurance and The Importance of Tax Credits
The Affordable Care Act (ACA) has made acquiring privately offered insurance plans more affordable and accessible, most notably by making them a “guaranteed issue.” That means that your medical history or pre-existing conditions can’t be a reason for companies to deny coverage.
Other notable health insurance laws include:
- The American Relief Plan (ARP) increased premium subsidies and removed the qualifying income caps—previously capped at incomes above 400% of the poverty line.
- The follow-up to ARP (Inflation Reduction Act) extended these benefits through 2025
Don’t overlook the importance of premium tax credits, as you might be in a position to significantly lower your insurance cost. Suppose you’re planning on delaying Social Security or drawing on after-tax savings. In that case, your Adjusted Gross Income may be low enough to qualify for tax credits, particularly if you don’t have a spouse generating income. Don’t overlook this planning opportunity if you’re likely to be in this situation.
You can find plans compliant with ACA through the Healthcare Insurance Marketplace.
Your state may have its own exchange, too.
Whichever insurance option you choose, remember that remaining uninsured for even a few years isn’t recommended. While you never plan for accidents, continuous insurance after retirement will ensure you can at least cover the expense and receive adequate care.
Understanding Your Out-of-Pocket Costs
Don’t let the out-of-pocket expenses surprise you, especially when your employer has largely paid for that cost. Fidelity reported that a couple retiring at 62 would pay an average of $17,000 in out-of-pocket medical expenses throughout retirement.
A few ways to manage the costs:
- Identify the lowest-cost option that provides the network and coverage you need
- Qualify for premium tax credits if the Exchange is your best option
- Work part-time for health insurance and some extra cash flow
- Dig into each plan’s out-of-pocket requirements
COBRA, for example, might be the best option if spousal coverage isn’t available and you’re not eligible for premium tax credits. However, the premium isn’t the only economic consideration – you’ve got to consider your out-of-pocket costs under each plan, too.
Be Financially Prepared Before You Retire
The best way to prepare your finances is to know what you’re planning for, which means knowing how you’ll get insurance before you retire. This will allow you to save what’s needed to cover the expense and to apply in advance to avoid any coverage interruption.
Whatever your plans are, make sure you have a plan that covers your health needs, your dependents’ needs, and your cash flow.
Schedule a free consultation with Minerva Planning Group to start your retirement plan.