Health care in early retirement can be one of the largest expenses for a new retiree. Here are 3 options you may want to consider if you are retiring before you are age 65 and need health insurance before you become eligible for Medicare:
Your first option should be to look if your former employer offers benefits or subsidies for health care insurance.
A lot of early retirees or those that accept early retirement or voluntary severance offers have some sort of employer subsidy for health insurance available.
You may be able to stay on the plan you are currently on, or at least receive a monthly stipend to help pay for another policy.
Another option is COBRA, (Consolidated Omnibus Budget Reconciliation Act).
COBRA gives workers and their families who lose their health insurance the ability to continue their health benefits provided by their employer health plan for limited periods of time, usually up to 18 months though some exceptions exist.
Under COBRA, you will have to pay not only your own portion of the health insurance premium, but also the portion that your employer paid as well. because of that, this may often be a more expensive option for health care.
However, this allows you to stay on your current health plan, which can be very important if you are happy with your current coverage. Also, if you are just using COBRA coverage to bridge the gap between your early retirement and when you are age 65 and eligible for Medicare, this may be much less hassle than finding a new health insurance policy.
The third option is to use the health care exchange which can be found at Healthcare.gov
If you use the exchange, there are a lot of options available that qualify for credits and subsidies for those with low income, which is a position a lot of early retirees find themselves in.
If you did choose a policy on the exchange, proper financial planning is very important. You can control your income be using different retirement accounts, or delaying your pension or Social Security in order to qualify you for lower cost health insurance options.
With these options and some planning, a lot of retirees are able to find affordable options for health care until they reach age 65 and become eligible for Medicare.
You can expect a health insurance policy purchased on the healthcare.gov exchange to cost as much as $10,000 – $12,000 per year. This can be reduced if you have income low enough to qualify for special tax credits.
For early retirees with significant IRA and 401(k) savings, this presents a problem because withdrawals from these pre-tax retirement accounts will count towards taxable income and may disqualify you from these valuable credits.
A financial plan that is created a few years before early retirement can be incredibly valuable to ensure you can find affordable health insurance options in retirement before you are eligible for Medicare.
It is important to plan for a realistic amount of health insurance expenses if you retire before age 65 and are eligible for Medicare. This expense can be paid for with your retirement savings, such as an IRA or 401(k). However you should understand the tax impact of doing so.
HSAs (Health Savings Accounts) can also be a great option for paying for health insurance in early retirement. It is a common strategy for those pursuing early retirement to save heavily into an HSA before retirement.