You’ve done it! You worked hard, saved your money, and now it’s time to reap the fruits of your labor. What’s more, you were able to retire before 65, earning yourself some much-deserved time to travel, volunteer, dive deep into your hobbies, or whatever else you please.
While this sounds like “The Life,” there is one potential snag you have to watch out for: the cost of health insurance/medical care. A 2014 report found that couples who retire before being eligible for Medicare spend an average of $17,000 per year ($18,800 in 2021 dollars) on out-of-pocket health care costs until they are able to enroll in Medicare. This can represent a real financial burden not just in the price tag itself but needing to cover such large expenses so early in retirement could lead to “sequence of returns” risk.
So what’s the best way for you to handle healthcare costs before you are eligible to enroll in Medicare? Let’s walk through the options.
Health Insurance Options for Early Retirees
If your spouse or domestic partner has health insurance, either through their current employer or a former employer’s retiree medical coverage, you might be able to be added to that plan as well.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a law that allows employees (or an employee’s dependents) to keep their group coverage through their former employer’s health insurance plan. This can be a great short-term stopgap, but it’s not usually well-suited for longer-term solutions. COBRA allows you to keep your current insurance, which means you won’t have any changes to your coverage or network, so you can typically expect to keep your same doctors and pharmacies. By maintaining your insurance through a larger organization, you put yourself in a better position to win a dispute with your insurance provider, should such a dispute occur (to that point, COBRA compliance is only mandated for companies with at least 20 employees; if you worked for a smaller employer, this may not be an option). Typically, it only lasts for 18 months after the employee leaves the company, but it can be extended in some cases. However, it can be quite expensive. Usually, when working, your employer will subsidize a portion of your insurance premiums. These are usually passed on to you after you join COBRA. Additionally, COBRA allows your former employer to charge you 102% of their costs to compensate for any additional administrative tasks they undertake to keep you on their insurance plan. As such, this is best suited for people within a year and a half of receiving Medicare.
If there isn’t an organization you can receive health insurance through, you can purchase insurance on your own through the healthcare marketplace. Due to COVID-19, enrollment in marketplace health coverage has been extended through August 15th. Also, if you have a significant life change (such as losing job-based insurance coverage), you can enter into a special enrollment period where you can enroll in a marketplace insurance plan even if it’s outside of the traditional enrollment period.
All marketplace plans are required to cover 10 essential health benefits, including hospitalization, emergency services, prescription drugs, etc. Plans are broken out into 4 tiers: Bronze, Silver, Gold, and Platinum. Plans range from low premiums and high deductibles to high premiums and low deductibles and vary by the percent of total healthcare costs that are covered. Fortunately, there are also caps on age-related pricing, where a 64-year-old can be charged no more than three times the premium rate of a 21-year-old. The ACA also outlawed denying or increasing premiums for applicants with preexisting conditions and limited out of pocket costs to $6700 per year.
Under the $1.9 trillion American Rescue Plan Act of 2021 passed in March, the clock started April 1 for millions of people to potentially pay lower premiums and claim higher tax credits if they have a health insurance plan purchased through the Affordable Care Act (ACA) marketplace. The law eliminates an income cap that has restricted who qualifies for ACA tax credits to help offset the cost of monthly insurance premiums, opening the door to people with incomes above 400% of the federal poverty level ($51,040 for individuals & $68,960 annually for couples), who were previously ineligible for the tax credits. It also limits the maximum amount anyone must pay for marketplace health insurance to 8.5% of income vs. 9.83%, and boosts subsidies to lower-income consumers—those with incomes between 100% and 400% of the poverty level (from $12,760 to $51,040 for a single person or $26,200 to $104,800 for a family of four). Premiums after these new savings will decrease, on average, by $50 per person per month or by $85 per policy per month. Four out of five enrollees will be able find a plan for $10 or less/month after premium tax credits, and over 50% will be able to find a Silver plan for $10 or less. The new provisions are temporary and not expected to extend past 2022 unless Congress acts to make them permanent.
Choosing which tier of insurance to purchase depends on a variety of personal factors unique to your situation. In general, the more you expect to use your health insurance, the more a high premium-low deductible plan makes sense for you. But, if you do choose a Bronze or Silver plan, you’ll likely be able to find one that qualifies as a High Deductible Health Plan, which means it’s compatible with a Health Savings Account (HSA). These can be very useful vehicles for saving for health expenses, as contributions to an HSA are triple-tax advantaged.
Whichever route you go, be sure to investigate your options carefully before retiring early.
| Mike Hengehold, CPA/PFS MST RICP®
Mike is the Founder and President of HCM Wealth Advisors. Over the last 30 years, he’s provided financial planning guidance to a myriad of families to help them realize their financial dreams. Mike is an avid homebrewer and animal lover, and when he’s not at work you can often find him on the golf course working on his short game.