When contemplating retiring early, your decision-making process starts with a long, hard look at your current financial standings. The more time you plan on spending in retirement, the more savings you’ll need to set aside to cover your lifetime expenses. One expense, in particular, has the potential to put a strain on your retirement budget — especially if you plan on retiring before age 65.
Around 54% of Americans receive health insurance coverage through their employer.¹ While you become eligible for Medicare coverage at age 65, those who retire early are put in a unique position.
If you’re thinking about an early retirement, it’s essential to understand the logistics behind obtaining health insurance before age 65.
Your Health Insurance Options
When neither Medicare nor an employer-sponsored plan is available, you must look elsewhere for coverage. Your three primary options are COBRA, local health insurance marketplace, or short-term health insurance plans.
COBRA
COBRA is known as a continuation of your healthcare coverage. If you lose your health insurance benefits (as you would once you leave your job), you can obtain continuing coverage through COBRA for 18 months (or, in some cases, 36 months).
COBRA allows you to continue with your current coverage without interruption. For example, if you already hit your deductible, that is still reflected in your coverage under COBRA.
The downside of COBRA, however, is the cost. You may be required to pay up to 102% of the total plan premiums, whereas before, your employer might have covered a portion of the cost on your behalf.²
Health Insurance Marketplace
In 2010, the Affordable Care Act instituted a federally run marketplace where individuals and families could obtain healthcare coverage. At Healthcare.gov, those not offered coverage through their employer or Medicare can review, compare, and purchase health insurance policies from various providers based on their location.
You may be eligible for a particular enrollment period if you lose coverage after leaving your job. Otherwise, open enrollment occurs between November 1 and December 15 (for coverage beginning January 1 of the following year).
Depending on your household income, you may be eligible for a premium tax credit, which lowers your monthly premiums for the year.
Short-Term Health Insurance
Also known as limited-duration insurance, these plans are designed to provide primary coverage for a short period. If you’re only a few months away from turning 65, short-term coverage could help bridge the gap before Medicare kicks in.
Short-term plans do not include the same coverage guarantees as plans provided through the Affordable Care Act’s marketplace. The coverage tends to be limited to prescription drugs, hospital stays, and some doctor visits. Unlike regular health insurance plans, providers may deny coverage if someone has certain conditions, such as pregnancy or obesity.
Calculating Your Health Insurance Costs
The costs to maintain health coverage early in retirement will vary greatly, but there are a few individual costs you can review to compare policies better:
Premiums: Your premiums are the monthly amount you pay to maintain coverage. Generally, the higher the premium, the more robust the coverage.
Deductibles: Your provider will require you to pay out-of-pocket for medical expenses until you hit your annual deductible. Your provider will begin covering expenses once you spend up to the deductible.
Out-of-pocket maximums: An out-of-pocket maximum is the most you’ll pay annually on qualified medical expenses (excluding premiums). Once you hit this amount, your insurance provider will not require you to pay coinsurance or copayments for the remainder of the year.
Coinsurance: After you’ve met your deductible, you and your insurance provider will begin sharing the costs of covered medical expenses. The percentage you are responsible for paying is the coinsurance. If the coinsurance for an x-ray is 20%, you will only pay 20% of the total cost, and your provider will pay the other 80%.
Copayments: Sometimes, you must pay a flat fee for your prescriptions or office visits. These are called copayments, typically required when visiting your primary care physician, urgent care, emergency room, or certain specialists.
Factor in Your Health Needs and Estimated Usage
The amount of coverage will vary vastly between plans. As we mentioned, the more you pay monthly premiums, the less you’ll have to pay out of pocket. It’s essential to strike the right balance when comparing policies in early retirement since you don’t want to overpay for more coverage than you need — but you also don’t want a high medical bill to drain your savings.
Consider your current health status, including chronic conditions and any prescriptions you’re currently on. Whatever plan you choose should cover your anticipated expenses and consider potential unexpected costs (such as a new diagnosis or condition).
Special Considerations for Early Retirees
While comparing coverage options, there’s one additional factor to consider. Most high-deductible healthcare plans (HDHP) are also called HSA-eligible plans because participants may open a Health Savings Account (HSA) while enrolled.
An HSA is a tax-advantaged savings account designed to cover eligible medical expenses. Contributions to an HSA lower your taxable income for the year they’re made grow tax-free, and withdrawals are tax-free as well (as long as they’re used for eligible expenses).
The funds in an HSA roll over year after year, which is excellent for those anxious about addressing the high cost of healthcare in early retirement. You can use the HSA as another tax-advantaged retirement savings tool (like a 401(k)) if enrolled in an eligible plan.
The Role of Financial Planning
When preparing for retirement, healthcare is one area some people tend to overlook. Yet, it plays a crucial role in your ability to retire comfortably and confidently. Wingate Wealth Advisors creates financial plans that factor in costs for health care in cases of early retirement and when Medicare becomes available at age 65. By taking the time now to budget for healthcare costs, you can better prepare to cover both expected and unexpected medical bills throughout retirement.
We recommend consulting with your financial advisor, who can connect you with insurance experts. With so many factors to consider, having a trusted professional walk you through your complex insurance options for early retirement can be helpful.
Enjoying an early retirement is something many people dream of. And with enough research, planning, and preparation, it’s a goal you can also work towards. If you’re thinking about retiring early and need help working through the logistics, we’re here to help. Reach out to our team to schedule a time to talk.
Additional Resources
- COBRA FAQs
- Glossary of health coverage terms
- HSA Overview
- See if you qualify for the premium tax credit.
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