Navigating retirement involves a great deal of planning. Thanks to Medicare, your health insurance is largely planned for you. Medicare will undoubtedly be one of the cornerstones of your financial plan in retirement.
The transition to Medicare is, in theory, a straightforward process: Stay on your (or your spouse’s) employer’s health insurance until you reach age 65, when you can switch to Medicare. If there are still gaps in your health coverage after enrolling in Medicare, you can opt for a Medicare Supplement Insurance policy (also known as Medigap coverage) to expand the standard coverage.
But what if you’re planning to retire before age 65? What if you’re forced to retire sooner than you anticipated? In either case you’ll need to come up with a plan for bridging the “health care gap” between when you retire and when you qualify for Medicare. Consider the following options for early-retirement health insurance to bridge that gap.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows you to stay on your former employer’s health insurance plan if you retire or get laid off. The downside is that you’ll likely see a significant spike in your premiums, as most employers will no longer chip in. This is worth considering if you really like your current plan and want to keep your in-network providers.
Keep in mind COBRA coverage is only guaranteed for 18 months, so you may still need to fill another gap before Medicare kicks in.
Group Retiree Coverage
Some employers offer continued coverage for early retirees. Typically, it’s the same plan you had pre-retirement, and many employers continue to cover premiums at the same (or close to the same) level. If you’re lucky enough to have access to group retiree coverage, it’s usually the easiest and most cost-effective way to go.
Private Individual Insurance via a Health Insurance Exchange
Under the Affordable Care Act, anyone can purchase a policy from the state or federal health insurance exchange, regardless of preexisting conditions.
The options available and premiums will depend on where you live and which level of coverage you choose. If you’re in relatively good health, consider purchasing a high deductible health plan (HDHP). The premiums are lower, and you can contribute to a pre-tax health savings account (HSA) for medical expenses. Those with complex medical needs, however, may be better off forgoing HSA eligibility and instead opting for a lower annual deductible.
Your income will also determine how much you pay for health care coverage. Those with low income may qualify for reduced premiums and copays as well as tax credits, which can drastically lower costs.
If you’re considering this route, it’s well worth it to plan ahead. If you have the flexibility, consider aiming for a reduced income during the gap years to lower your health insurance costs.
Whichever option you choose to bridge the gap, know that it will almost certainly lead to higher annual expenses than while you were still working. If you plan to retire before age 65, consider your options carefully, and don’t forget to budget for the higher cost of health care in early retirement.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual.
Erik has been with Wealth Enhancement Group since 2008 and is a practicing CERTIFIED FINANCIAL PLANNER ™. A planning-oriented advisor, Erik serves a key role on the Roundtable team of specialists and advisors by focusing on clients’ unique needs and situations.