Health Insurance For Early Retirement: 4 Options

In a previous blog post, I discuss four factors to consider before retiring at age 60. One of those factors is funding your health insurance coverage before Medicare kicks in at age 65. This is often the determining factor in making the early retirement decision for most people. Can you bridge the health insurance gap until you’re 65? In today’s post, I want to share four options if you need health insurance for early retirement.

Accessing Healthcare

The National Bureau of Economic Research recently found an increase in workers choosing early retirement due to the COVID-19 pandemic. In fact, the decline in labor force participation doubled the cumulative drop between 2008 and 2016. More and more people are choosing early retirement.

While some people are lucky enough to have an employer that offers healthcare insurance as a retirement benefit or a spouse that is still employed and can add them to their health insurance coverage, many do not. If you’re not one of these lucky folks, you’ll need to figure out health insurance coverage between now and age 65.

Your decision will eventually come down to cost, coverage, and the number of years you need to insure. If you find yourself looking for health insurance for early retirement, here are four options to get the coverage you need:

  1. Continuing your current coverage through COBRA,
  2. Leveraging COBRA coverage using an HSA,
  3. Buying a policy through the Affordable Care Act (ACA) marketplace, and
  4. Purchasing private health insurance.

1. COBRA Continuation Of Benefits

If your employer has more than 20 employees, you have the option of continuing your coverage through COBRA. Under the Consolidated Omnibus Budget Reconciliation Act (a.k.a. COBRA), you can continue to be covered under the same group health insurance plan you have through work.

Unfortunately, you will have to pay the entire premium yourself, plus an administration fee of up to 2%. COBRA Coverage is limited to 18 months, so if you retire before age 63-1/2, you’ll need to eventually find other coverage.

Under normal circumstances, you would have 60 days after your separation from service to elect to take COBRA benefits. However, thanks to COVID, you now have until 60 days after the COVID-19 national emergency is declared to be over. As of the time of this writing, the state of emergency is still in effect. However, be sure to confirm this with your benefits administrator.

While the COBRA option is convenient – you keep the same plan and the benefits – it can be expensive. Kaiser Family Foundation estimated that the average annual premium for employer-sponsored health insurance family coverage was nearly $20,000 in 2018. That’s a big price tag, especially if those funds are decreasing your retirement savings early on.

2. Leveraging COBRA Using Your HSA

If you have a Health Savings Account (HSA), there’s a wrinkle with COBRA that could work in your favor. Insurance premiums are not normally considered qualified medical expenses for your HSA, however, there’s an exception when it comes to COBRA continuation of coverage.

That’s right – you can pay for COBRA using your HSA.

Health Savings Accounts – An Often-Overlooked Opportunity

If you are creating a plan to retire early and have access to an HSA, this could be a fantastic retirement tactic. Front-loading your HSA with tax-free funds to pay COBRA premiums would be a great way to bridge the insurance gap until age 65.

If you are still working, it makes sense to set up a Health Savings Account and start contributing as soon as possible. HSAs were created to be used alongside High Deductible Health Plans. For 2021, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.

HSAs allow you to save and invest money to be used for medical expenses, including deductibles, co-insurance, prescriptions, vision expenses, and dental care. Unused balances are carried over to the following year, funds never expire, and they can be passed on to a surviving beneficiary.

In addition, HSAs are “triple tax-advantaged”, meaning that they are funded with pre-tax dollars, they grow tax-free, and withdrawals are not taxed if they are spent on qualified medical expenses. Moreover, once you turn 65 and qualify for Medicare, these plans don’t simply go away. You can use them to pay Medicare premiums, long-term care insurance premiums, or use it as a retirement account – just as you’d use an IRA.

3. Affordable Care Act (ACA) Marketplace

Another health insurance for early retirement option is the Affordable Care Act (ACA) marketplace. The ACA provides four levels of plans which correspond to the percentage split of health care costs between the plan and the individual. It’s important to point out, however, that many early retirees accustomed to group health insurance experience some level of sticker shock over policy premiums.

As you would expect, the greater the coverage, the higher the cost. Bronze plans have the lowest monthly premium, while Platinum plans have the highest. Bronze plans are most cost-effective if you’re relatively healthy and have low medical care or prescription drug cost. Gold and Platinum plans will make the most sense if you tend to have high annual medical expenses.

4. Private Insurance

If you decide not to use the ACA marketplace, private insurance is still available. While the loss of employment is often considered a qualifying life event, you may need to sign up during the open enrollment period, depending on your situation. Retiring early would likely enable you to sign up outside of the open enrollment period, but different plans have different requirements.

Similar to the ACA marketplace, choosing the right plan means taking a thoughtful look at your medical needs and finding the best option for you. It may be helpful to use an agent to sort through the different plans – you can find one with the National Association for Health Underwriters “Find An Agent” tool.

Finding Health Insurance For Early Retirement

Retiring after you become eligible for Medicare is a great strategy. However, if your plans unexpectedly change, there are still options available. If you need help figuring out health insurance for early retirement, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
ipad free ebook: How to Retire Checklist
Retirement help delivered to your inbox
Subscribe to our monthly newsletter and get your copy of our free ebook: The ‘How to Retire’ Checklist