For most Americans, healthcare is one of the largest expenses in retirement—especially for those who retire before age 65. In this article, we’re sharing three early retirement health insurance options that can help you bridge the gap until you’re eligible for Medicare.
The Covid-19 pandemic prompted a wave of early retirements, primarily among Baby Boomers. In fact, more than 3 million Americans retired early because of the Covid-19 crisis, according to research from the St. Louis Fed.
Meanwhile, there’s a growing movement among younger generations to retire early by saving aggressively now.
Unfortunately, Medicare, the federal program that provides health coverage for more than 65 million Americans, doesn’t begin until age 65. If you’re one of the many Americans ready to retire before age 65, you’ll need to have a plan in place to continue your healthcare coverage.
Here are three early retirement health insurance options to consider if you retire before age 65:
#1: Workplace Insurance
Retiring early doesn’t necessarily mean you can’t continue to take advantage of workplace insurance. For example, if your spouse is still working, you may be able to join their employer-sponsored health insurance plan.
Different companies have different rules regarding eligibility and benefits, so you’ll want to confirm this is a viable option. Also, this option may increase your spouse’s healthcare premiums and/or your out-of-pocket healthcare expenses, so be sure to factor the extra costs into your budget when planning for early retirement.
Another early retirement health insurance option is to get a part-time or full-time job post-retirement that offers employee benefits. However, keep in mind you may need to meet certain criteria to qualify, such as completing a probationary work period or committing to working a minimum number of hours each week.
Lastly, some employers offer retiree benefits, including health insurance.
In fact, 21% of large companies that offer health benefits also offer retiree health plans for some employees, according to a recent survey. Some employers may even pay a portion of the monthly premiums. And in some cases, you may be able to keep your retiree benefits after you sign up for Medicare to supplement your coverage.
If available, workplace insurance can be one of the most cost-effective early retirement health insurance options. Not only do you benefit from the economies of scale of a group plan, but you also don’t have to spend time shopping around for coverage.
On the other hand, you may not be eligible for coverage right away, so you still need temporary coverage to bridge the gap.
#2: COBRA/Short-Term Health Insurance
If your insurance gap is less than three years, you may want to consider COBRA or short-term health insurance.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers to offer retirees the option to continue their health benefits for a limited time. If your employer had at least 20 employees on more than 50 percent of its typical business days in the previous calendar year, COBRA may be one of your early retirement health insurance options.
To be eligible for COBRA, you must have enrolled in your employer’s health plan when you were an employee. In addition, the health plan must be active for current employees.
If you’re eligible, you can typically continue your existing healthcare coverage for up to 18 or 36 months after you stop working. Even if you don’t sign up for COBRA yourself, your covered family members may be eligible to continue their benefits.
After you stop working, you’ll receive a COBRA election notice if you qualify. You then have 60 days from your last day of coverage or from when you receive the notice (whichever is later) to continue or decline your healthcare coverage.
COBRA can be a convenient option for some early retirees since it makes it easy for you to continue your existing coverage.
However, it can also be one of the more expensive early retirement health insurance options. On average, the monthly COBRA premium for one person is $400 to $700 per month.
Short-Term Health Insurance
If you’re not eligible for COBRA, another option may be short-term health insurance if you’re within a few years of turning 65. Short-term insurance replaces gaps in coverage for up to one year, but you may be able to extend it for up to three years.
Keep in mind that not all states allow short-term health insurance coverage. In California, for example, lawmakers passed a law in 2018 that prohibits the sale or renewal of short-term health insurance in the state. Plus, eligibility depends on your income and medical history.
Short-term health insurance can be a less expensive early retirement health insurance option than the ACA marketplace if you only need it for a short period. However, it may not be easy to get, and it typically doesn’t provide comprehensive coverage.
#3: ACA Marketplace
For many people who retire early, the Affordable Care Act (ACA) marketplace will be your best bet for temporary, affordable coverage—especially if you have several years until you turn 65 and are eligible for Medicare.
All ACA plans must provide 10 essential health benefits, including preventive care, mental health services, and prescription drug coverage.
The ACA marketplace offers annual open enrollment typically beginning in November and lasting through January. However, the exact dates vary by state.
In addition, certain qualifying life events allow you to sign up for coverage outside of the open enrollment period. For example:
- Loss of healthcare coverage
- Household changes such as marriage or divorce
- Changes in residence
In 2023, the average cost of health insurance on the marketplace for someone who’s 60 years old is $1,025 per month. Less expensive, low coverage plans typically start at around $500 per month.
Thus, the affordability of the ACA marketplace as an early retirement healthcare option depends on what type of plan you select. Options range from high-deductible catastrophic plans to comprehensive coverage.
In addition, you may be able to lower your costs if you’re eligible for the premium tax credit. Generally, only the lowest income Americans qualify for this credit, though.
Additional Early Retirement Health Insurance Options
If you prefer not to use the ACA marketplace, you can also purchase a commercial health insurance policy directly from an insurance company or broker. The main advantage of a commercial policy is that you can select any plan that fits your budget and medical coverage needs.
However, these policies can also be expensive. And unlike the marketplace, the premium tax credit isn’t available.
Finally, while not technically early retirement health insurance options, a health savings account (HSA) and/or membership organization benefits can help lower your healthcare costs in retirement.
If you have an HSA, you can use the funds to pay for qualifying medical expenses if you retire early. Qualifying expenses may include insurance deductibles, co-pays, and coinsurance.
Generally, you can’t use HSA funds to pay for health insurance premiums, unless they fall into one of the following categories:
- Long-term care insurance
- Health insurance you receive while collecting unemployment benefits.
HSAs are advantageous because they offer triple-tax savings. Contributions are pre-tax, funds can grow on a tax-deferred basis, and withdrawals are tax-free if you use them for eligible expenses.
On the other hand, you need a qualifying high-deductible health plan to open an HSA. In addition, you’ll still likely need one of the early retirement health insurance options above until you turn 65.
Meanwhile, some membership organizations offer members exclusive benefits such as affordable health insurance coverage and other healthcare discounts. Examples include:
- Alliance for Affordable Services
- Freelancers Union
These discounts can help defray the cost of health insurance if you retire early. However, eligibility and coverage can vary by organization, membership status, and state of residence.
Satori Wealth Management Can Help You Evaluate Your Early Retirement Health Insurance Options
Planning for retirement can be overwhelming, especially if you’re going it alone. An experienced financial advisor like Satori Wealth Management can help you achieve your early retirement goals with confidence.
To see if we may be the right fit for your financial planning needs, we invite you to start your Free RetireNow™ Checkup and schedule your first 30-minute meeting. We look forward to meeting you!
Danny G. Michael is the founder and CEO of Satori Wealth Management, Inc. He has 20 years of experience in retirement planning working with individuals, families, and business owners.