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Retirement

What Are Your Health Insurance Options If You Retire Before Medicare?

Early retirement is a very common goal, but how exactly do you define “early?” For most people, “early” means stopping work before the availability of benefits that are used by retirees like Social Security and Medicare. Uncertainty over whether retirement savings can last without these programs is often the reason people put off retirement.

If you have dreams of sleeping in or traveling the world before you’re eligible for retiree benefits, all is not lost. As is the case with any goal, you must decide to face it head-on and find ways to make it work within your financial plan. Here are a few ways to address meeting your medical care needs if you choose to retire prior to age 65.

Option 1: Obtaining insurance through the federal marketplace

Pros

·       You have the possibility of finding health coverage similar to what you have with your employer – Due to the implementation of the Affordable Care Act, coverage from your employer and coverage through healthcare.gov offer similar coverage benefits, deductibles and premiums. 

·       You may be eligible for subsidies depending on your income – The cost of coverage for health insurance through the federal exchange is correlated to how much taxable income you report. In some cases, these subsidies can bring the cost of coverage in line with what you are currently paying through work.

Cons

·       Coverage can be very expensive – Without the subsidies, you are exposed to the full brunt of the cost of healthcare. Depending on where you live and the size of the deductible you choose, costs can approach $1,000 or more per month. While you may want to maintain the deductible, you have through your employer, you may need to increase it in order to make premiums affordable.

·       Changes in laws pertaining to the Affordable Care Act can make it difficult to plan – The laws that govern the plans that are available on the exchanges have changed in the past, and there is reason to believe that there are more changes to come. This can make it very difficult to plan the cost for this line item in your budget going forward.

Option 2: Use COBRA coverage

Pros

·       You can maintain your same coverage – The Consolidated Omnibus Reconciliation Act or COBRA is a rule requiring employers to offer you access to coverage after separation of service for a certain amount of time. So rather than searching for a similar plan, you can use the same plan.

·       It may still be at a lower cost than coverage through healthcare.gov – The cost of coverage is essentially what you would normally pay in premiums plus what your employer pays. If you work for a large company, the total cost can still end up being cheaper than going it alone in the exchange because of the cost savings the employer may have negotiated.

Cons

·       Coverage is available for only 18 months in most cases – Because the coverage only lasts a maximum of 18 months in most cases, COBRA is only a temporary fix for an early retirement. Once the coverage goes away, the exchange may become your primary option.

·       It is still substantially more expensive than what you probably pay today – If your employer covers a large portion of the cost of your insurance benefit, you may experience sticker shock.

Option 3: Private Health Plans

Pros

·      Cost effective– Because these plans do not conform to the rules set out by the Affordable Care Act, you may be able to find reasonable coverage for your situation at a significant discount. The premiums for this coverage can also be more stable.

·      Customized and flexible coverage– There are many styles of coverage which can allow you to build coverage that suits you. This coverage can often be purchased at any time throughout the year

Cons

·      No Coverage for pre-existing conditions– One reason this coverage is less costly is there is often zero coverage for pre-existing conditions.

Start planning now

As you can tell, all of these options have some drawbacks, but you have no way of knowing how much of a drawback unless you do some research. Here are some things you can do to plan now:

·       Contact your HR department: If you think COBRA is a likely option, reach out to your benefits department to find out how much it costs today. In the case of insurance on the federal exchange, price it now. Yes, there is a reasonable likelihood the pricing will change, but it will give you a baseline to plan.

·       Beef up your HSA: If you have an HSA, make sure you’re maxing out your contributions to the account now. You can use the account to pay for COBRA tax-free. HSAs cannot generally be used to pay health insurance premiums from the exchange or other private insurance tax-free, but they can be used to offset out-of-pocket medical expenses (and they can also eventually be used to pay for Medicare part B premiums).

·       Consider investing in vehicles that will not show up as future income: By investing in accounts like Roth 401ks and Roth IRAs, you can lower the amount of taxable income you generate in a year when you withdraw from these accounts. This may help you to qualify for healthcare exchange subsidies and will eventually allow you to keep your Medicare premiums down as well.

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