Health Insurance Before Medicare: Options for Early Retirees

For many people dreaming of early retirement, health insurance is the biggest question mark. Medicare generally doesn’t begin until age 65, so anyone retiring earlier needs a plan to cover health care for the years in between. Health insurance and out-of-pocket medical costs can be one of the largest expenses in an early retirement budget, so planning ahead is essential.

COBRA continuation coverage

COBRA is a federal law that generally lets you keep your employer’s group health plan for a limited time after leaving your job. For job loss or retirement, COBRA coverage often lasts up to 18 months, though longer periods may apply in certain situations. COBRA generally applies to employers with 20 or more employees, and many states have similar laws for smaller employers.

The advantage of COBRA is continuity. You keep the same coverage, doctors and network, and any progress toward your deductible and out-of-pocket maximum for the year carries over.

The catch is cost. You usually pay the full premium, including the portion your employer used to cover, plus a small administrative fee. Since employers often pay a large share of premiums, COBRA can be surprisingly expensive. It can be a useful bridge for a short period, such as until you’re eligible for another plan, but it’s often not the most affordable long-term option.

ACA marketplace plans

You can buy individual health coverage through HealthCare.gov or your state’s health insurance marketplace. Plans sold through the marketplace must cover essential health benefits, such as doctor visits, hospital care, prescriptions and preventive services, and can’t deny coverage or charge more based on preexisting conditions.

Leaving a job and losing employer coverage usually qualifies you for a special enrollment period, typically 60 days, so you don’t have to wait for the annual open enrollment period.

Depending on your household income, you may qualify for premium tax credits that lower your monthly cost. Eligibility and the size of the credit depend on your income relative to the federal poverty level and the cost of plans in your area. Some lower-income enrollees may also qualify for cost-sharing reductions that lower deductibles and copays. The rules for these subsidies have changed with legislation in recent years, so check HealthCare.gov for current details.

Because early retirees often have significant control over their taxable income through how they withdraw money, the way you take money out can affect your eligibility for premium tax credits. Withdrawals from taxable accounts, Roth contributions and cash savings may count differently than traditional IRA withdrawals or Roth conversions. Careful planning of withdrawals can help manage your income for subsidy purposes.

A spouse’s employer plan

If your spouse or partner still works and has employer coverage, joining their plan may be the simplest and most affordable option. Losing your own coverage typically qualifies you for a special enrollment period to join a spouse’s plan. Compare costs and coverage with other options.

Part-time work with benefits

Some early retirees take part-time jobs specifically because they offer health insurance. Certain employers offer health benefits to part-time employees. This approach is a key part of what’s sometimes called Barista FIRE, where people achieve partial financial independence and work part-time for income and benefits.

Medicaid

If your income is low enough, you may qualify for Medicaid, depending on your state’s eligibility rules. Many states expanded Medicaid eligibility under the Affordable Care Act. Medicaid generally considers income rather than assets for most adults under 65 in expansion states, which can matter for early retirees with savings but low taxable income. However, rules vary by state, so check your state’s requirements.

Other options

Health care sharing ministries are arrangements in which members share medical costs, often based on shared religious beliefs. However, they aren’t insurance, aren’t regulated as insurance and may not guarantee payment of claims. They may also exclude preexisting conditions or certain types of care. Read the terms very carefully before relying on one.

Short-term health insurance plans are another option in some states, but they often have limited coverage, may exclude preexisting conditions and aren’t required to cover essential health benefits.

Budget for out-of-pocket costs

Premiums are only part of the cost. Deductibles, copays, coinsurance and prescription costs can add up, especially as you age. When budgeting, consider your plan’s out-of-pocket maximum, which is the most you’d pay for covered services in a year.

A health savings account, if you’re eligible through a high-deductible health plan, can help cover medical costs with tax advantages. Building up an HSA while working can provide a valuable resource for health costs in early retirement.

Plan ahead

Estimate health insurance and out-of-pocket costs before setting your retirement date, and include them in your retirement budget. Research plans and premiums in your area, considering how costs may change as you age.

Remember that Medicare enrollment generally begins around your 65th birthday, with an initial enrollment period that starts three months before the month you turn 65. Enrolling on time helps avoid late enrollment penalties and gaps in coverage. With careful planning, you can bridge the gap to Medicare and enjoy early retirement with confidence.