When having conversations with individuals approaching retirement, but who have yet to reach age 65, one primary concern is often in the forefront of their mind: What am I going to do about health insurance before I reach Medicare age?
Even for those who have put themselves in a financial position to retire, access to health insurance is a real concern. In fact, at times, it is the reason why some are still working.
Today, we’d like to discuss three primary options available to those who have not yet reached Medicare age (65) and outline the pros and cons of each.
1. COBRA
Best for: Someone 63+ or Bridging the First Few Years of Retirement
By law, your employer (if > 20 employees) is required to extend continuing health coverage to you for at least 18 months, so evaluating this option is often a natural first choice.
a. Pros:
Familiarity with the plan: Through COBRA, you will remain on the same healthcare plan you have become familiar with while working. In addition to understanding what the plan covers, your preferred care providers will remain in network so long as the employer does not change their plan options.
Ease of transition: To remain on your current employer health plan through COBRA, a COBRA election form will be provided to you within 14 days of your retirement date (or separate qualifying event). If you agree to the terms on the election notice, all you need to do is sign the form and submit it to your insurance provider.
b. Cons:
Cost: While working, your employer likely subsidizes your healthcare coverage, either in full or by paying a portion of your premium. While your employer is required to extend coverage to you post-employment, they are not required to pay any portion of the premium. As such, remaining on your current healthcare plan will result in you having to pay the full cost of coverage plus an additional 2% charge.
Finite Coverage: If the amount of time between retirement and Medicare is longer than 18 months (or longer if the employer plan allows), you will have to again reevaluate your healthcare options at that time.
2. Spouse’s Health Insurance Plan
Is your spouse planning to continue to work? If so, can they add a spouse to their employer plan?
a. Pros:
Familiarity with the plan: Assuming your spouse was previously enrolled on their employer plan, they should be familiar with what is covered, the benefits of the plan, and expected out of pocket costs.
b. Cons:
Cost: Premiums will vary by employer, but in general the addition of a spouse to an employer healthcare plan will result in a material increase in monthly premiums. This, in turn, will result in a reduction in take home pay for your spouse as premiums will be deducted through payroll.
3. Healthcare.gov
A third option is to explore coverage options available to you on the public healthcare marketplace established through the Affordable Care Act (ACA).
a. Pros:
Guaranteed issue: Regardless of your health condition, by law, plans are required to cover all those who apply–even those with preexisting conditions. Each policy will come with a stated monthly premium, deductible, max out-of-pocket–without regard to your health condition.
Possibility to obtain subsidized coverage: Under current law (enhanced by the American Rescue Plan of 2021), some individuals may qualify for subsidized premiums–meaning you will receive a discount on the monthly premium. The subsidy is based on your level of income. The lower it is, the higher the likely subsidy. Prior to the American Rescue and Inflation Reduction Act, the subsidies were cliff-based–meaning if your income went $1 over the threshold, you would have to repay the full subsidy–a nightmare scenario for many, particularly retirees.
Fortunately, at least through 2025, subsidies are now phaseout based. While increasing income will reduce your subsidy, it is unlikely that a small change in income will result in a material change in subsidy. Notice, we said through 2025–as with many laws, they are temporary–will this be extended? Potentially, but it is difficult to say. While planning ahead provides you with the highest odds of success, this does highlight the importance of remaining nimble and flexible in your early retirement approach.
- How to plan for maximizing your premium subsidy: It is a question of how you will be supporting yourself in early retirement. Having a diversified stream of “income” can assist in managing this. Note that while drawing from retirement accounts, pensions, or part-time work will result in increasing taxable income, withdrawing from a bank account or brokerage account may not. We work regularly with clients in managing their income during this period to maximize the subsidy benefits.
Variety of options: Numerous plan options will likely be available to choose from. The options come with a range of monthly premiums, deductibles, and maximum out-of-pocket costs, giving you the option to select the plan that best fits your financial and healthcare needs.
b. Cons:
Access to preferred providers: You will want to consider if your preferred care provider is “in network” for the plan you select. If not, you will either need to select a different plan, which could come at a higher cost, or find providers that are “in network” on your new plan.
Cost: A wide range of monthly premiums will likely be available as you shop for your plan. Several factors go into determining the monthly premium, such as the annual deductible, network providers and out-of-pocket costs, and can range from modest to highly expensive depending on the level of coverage needed and your age at the time of enrollment.
Uncertainty: In the early years of the ACA, annual premium adjustments have been volatile, at times reaching the double digits. Unexpected increases in monthly premiums can have a profound effect on your financial situation and should be planned for accordingly. In addition to the possibility of increased costs, political climates are subject to change. While the process to change or eliminate the law would be an arduous one, it is a possibility.
Transitioning into retirement comes with numerous decisions. If retiring prior to age 65, one of those decisions will be how you plan to bridge the healthcare gap between retirement and Medicare. Prior to making the decision to retire, consider the healthcare options you have available to you and how the changes in your healthcare coverage may affect your retirement years prior to reaching age 65.
