Healthcare Strategies for Early Retirees

Congrats!! You’re retiring before 65. All is good except you can’t get Medicare until 65. What do you do?

The average couple spends $280,000 on healthcare expenses during retirement, based on this recent study. For those retiring before age 65 you might be wondering how you will fill this gap.

Here are a couple of options for health insurance before you turn 65.

COBRA

When you leave your job, regardless of why you left (retired, fired or quit), you have the ability to stay on your employer's insurance.

Tips:

You typically have 60 days after you leave to elect COBRA.You can choose which health, vision or dental plans you want to keep. If you work for a smaller company you might want to check your COBRA eligibility.

Upside:

If you pick this option you are guaranteed to be able to utilize your existing plan for up to 18 months. If you’re midway through the year and have met your deductible this might be the best option for you.

Downside:

Generally, you can only use it for 18 months.Sticker shock! In other words, your company has to keep you on the plan but doesn't have to subsidize you anymore. You can be charged the full amount of the insurance (your premiums and what your employer paid), plus a 2% administration charge.

Might or might not be tax deductible. You’ll want to check with your CPA on this.

Jacki is retiring at 62. She normally pays $74 per month, and her employer pays $301 to cover her total health insurance premium. She can stay on her employer’s plan for another 18 months, but her cost could potentially be  $74 + $301 that her employer uses to pay plus a 2% surcharge of $7.50 for administration fees for a total of $382.50 per month. Also, this premium may or may not be tax deductible.

Affordable Care Act

Your annual income must be below 400% of the federal poverty level to be eligible for subsidies. For 2018, a one-person household must be less than $48,560 and for a two-person household, their combined annual income must be below $65,840. The healthcare marketplace is open from November 1 to December 15, unless there has been a qualifying event. If you retire or leave your job, you typically have about 60 days to elect to buy a plan from the marketplace.

You can go to www.healthcare.com to shop the marketplace. Certain states, such as New York and Vermont, have their own websites.

Tip:

You might be eligible for a subsidy.Using income from Roth 401k or Roth IRA could be very helpful in taking out income without increasing your AGI for subsidy purposes. Consult with a tax or financial professional to determine if this strategy works for you.

Upside:

Could be cheaper than COBRA.

Downside:

Generally tends to be more expensive without a subsidy.

Jacki is retiring at 62 in the State of Florida. She finds a plan in the healthcare marketplace. Her annual income including Social Security, 401k and IRA distributions is $50,000. Based on her income, her monthly health insurance premiums are $1,061/month. Had her income dropped to $48,000/year then her monthly premiums would be closer to $394/month.

Group Retiree Coverage (Employer Extended Health Insurance)

If you are lucky, your employer might offer you the ability to stay on there plan until you are eligible for Medicare, and they might continue subsidizing or paying for you while you wait. This is a rarity, but if availabile, will most likely be your best option for the price.

Jacki is retiring from a company who has a group retiree coverage for health insurance until Jacki is eligible for Medicare. Previously, Jacki paid $74 a month for insurance. She will continue to only pay $74 until she is eligible for Medicare. Every company is different and the premiums you will pay before and after you retire might be different.

Health Share Plans

These are offered through religious ministries in which members covenant together to take care of each other’s healthcare costs.

Upside:

Premiums are much lower.

Downside:

May not take you if you have a pre-existing condition.They normally don't offer comprehensive coverage.Your values might not line up with a faith-based plan.

Jacki is retiring at 62. She signs up for her health share plan offered by a Church. She must adhere to the strict faith-based policies and items covered by that plan while on it.

Spouses Health Insurance

Another option many people forgot about is to switch to your spouse’s insurance. If you have a different retirement date from your spouse or partner it's normally better to switch to their plan as long as they are employed.

Jacki is retiring at 62. Jacki’s spouse or partner plans on working for another 2 to 3 years. Jacki is joining her spouse health insurance plan. If Jacki is not married, she would need to get the appropriate paperwork that shows they are in a domestic relationship to be added to his/her insurance.

Self Insurance

One last option to consider is to be self-insured, aka – having no insurance. Being self-insured is very dangerous and should not be taken lightly unless the numbers work.

Jacki is retiring at 62. She is single, has appropriate long term care insurance and other insurances. She has no history of any medical conditions and does not participate in any high intensity or dangerous activities that can cause serious injury. She has the appropriate medical on her car policy so she will be covered in the event of an injury due to an accident. She has $4 million in assets and is comfortable paying for any illness or injury out of pocket that might arise.

Just remember, these options are short term. They might be expensive at first, but with proper planning and budgeting, you will hopefully be in good shape until you are eligible for Medicare. Enjoy your Golden Years!