The median retirement age in the U.S. is 62, with seven out of ten retirees stopping work before age 65. This means that a significant majority of people retire before reaching 65. Factors influencing retirement decisions include health, financial status, and job satisfaction.
Consider this example: Dr. Betsy Green is contemplating retiring early from her role as a reconstructive urologist. She and her husband want to spend more time traveling and seeing family and friends. One of her major concerns regarding retiring before age 65 is what she will do about health care insurance.
Securing affordable and reliable health insurance is a crucial concern for individuals retiring before the Medicare eligibility age of 65. The transition period between leaving employer-sponsored health coverage and qualifying for Medicare presents unique challenges.
Fortunately, for Dr. Green and others interested in early retirement, several health insurance options are available to help bridge the gap.
One of the first health insurance options for early retirees is Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage.
If you're leaving an employer that had a group health insurance plan, COBRA allows you to continue the same coverage for up to 18 months, and sometimes longer, depending on your circumstances. This can be helpful as you maintain your existing network and benefits.
However, COBRA is often expensive since you'll be responsible for the entire premium without any employer subsidy.
The Affordable Care Act (ACA) created a marketplace for individuals to buy health insurance. For retirees under 65, the marketplace offers a wide range of options with varying levels of coverage and cost.
You may qualify for subsidies that can significantly lower monthly premiums depending on your income. These ACA plans are comprehensive and must cover essential health benefits such as preventive care, prescriptions, and hospital visits.
Retirees should explore whether they qualify for cost-sharing reductions or premium tax credits to make this a more affordable option.
Private health insurance is another option for pre-Medicare retirees. It can be purchased directly from insurance providers outside of the ACA marketplace. These plans may offer more flexibility in terms of coverage and provider networks, but they can be more expensive, especially for older individuals or those with pre-existing conditions.
If a spouse is still working and doesn't intend to retire soon, joining their employer-sponsored plan may be the most cost-effective option. This allows the earlier retiree to maintain comprehensive coverage at group rates.
Funding health insurance, no matter the option, between early retirement and Medicare eligibility can be challenging. Once Dr. Green and her spouse determine which type of plan is best for their needs, they'll still need to think about other costs or savings they may encounter as an early retiree.
Be sure to anticipate these things:
This can be a powerful tool if you've been contributing to an HSA during your working years. HSAs offer tax advantages for healthcare expenses, and the funds roll over from year to year. You can use HSA funds tax-free for qualified medical expenses, including premiums for certain health insurance plans.
Rather than fully retiring, many people stay on as part-time employees to remain eligible for their employer's health insurance benefits. This "bridge" employment can cover insurance costs until Medicare kicks in while also providing additional income and work-life balance.
Withdrawals from investment accounts or retirement accounts like IRAs or 401(k)s can cover premiums. If you've fully retired, the cost of the premium can simply be added to your monthly required income and be part of your portfolio withdrawal plan.
Dr. Green isn't ready to retire but knows she wants to do so before she turns 65 in six years. She and her husband have already started discussing what they need and want to do. Still, they aren't sure when they need to start bringing in the financial professionals they work with, like their accountant and financial planner.
Individuals and couples looking to retire early should begin looking into health insurance options well in advance of their planned retirement date. Here are some considerations for timing:
Ideally, individuals should start exploring health insurance options at least 1 to 2 years before their planned early retirement date. This allows ample time to:
At this stage, early retirees should:
As retirement approaches, individuals should:
In the final months leading up to retirement, early retirees should:
The ideal timeline may vary based on individual circumstances:
The retirement journey isn't always easy, and retiring before age 65 requires careful planning when it comes to health insurance.
Evaluating your early retirement and health insurance options — whether through COBRA, ACA marketplace plans, or private insurance — ensures that you remain protected during the critical years leading up to Medicare eligibility.
It's never too early to start your retirement preparations and speak with your trusted financial professionals. Our financial planners can help walk you through what you need to consider and what steps you will need to take when planning for early retirement.
CRN202710-7355335
Hattie Warren, CFP®, is a Research and Planning Analyst at Spaugh Dameron Tenny. She works with advisors to create customized strategies for clients, many of whom, like her own family, have encountered the financial challenges of a medical career.
*Does not offer investment advisory services through MML Investors Services.
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