Healthcare Options for Early Retirees
Leaving the workforce before age 65 means saying goodbye to employer-sponsored health insurance, forcing you to make crucial decisions about your healthcare coverage. While the lure of early retirement is strong, healthcare planning can be a significant challenge, especially for those who don’t yet qualify for Medicare.
In fact, the 2023 EBRI/Greenwald Research Retirement Confidence Survey found that 20% of workers plan to retire between ages 60 and 64—years before Medicare coverage kicks in at 65. Although Social Security allows benefits as early as age 62.5, financial advisors typically consider early retirement any time before Medicare eligibility at 65.
Without the security of employer-provided health coverage, you’ll need to explore other options for affordable and comprehensive care during this gap.
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How to Bridge the Gap Before Medicare
Healthcare is one of the biggest expenses for early retirees, but there are several strategies you can use to bridge the gap until you become eligible for Medicare.
Depending on your lifestyle, income, and health needs, the right plan for you could vary widely.
1.) Buy Your Own Health Insurance Directly
For many early retirees, the Affordable Care Act (ACA) Marketplace provides a wide range of health insurance plans at different price points.
The ACA also offers subsidies based on your income and household size, which could make healthcare more affordable than you think.
If your income drops significantly in retirement, you may qualify for substantial subsidies to reduce the cost of premiums. Keep in mind that this calculation is based on modified adjusted gross income (MAGI), which might be lower in retirement than during your working years. In this case, the ACA can be a financial lifeline.
However, be sure to review the coverage options carefully. If you plan to travel frequently or have specific doctors in mind, make sure to choose a plan with a broad network or one that offers out-of-network flexibility.
2.) Join a Health Sharing Plan
Health Sharing Plans, often faith-based or membership-driven, pool members’ contributions to share healthcare expenses.
Though not insurance, they offer a flexible, lower-cost alternative for retirees in good health who don’t anticipate major expenses.
Key Benefits:
- Lower Costs: Monthly contributions are typically lower than insurance premiums, making it budget-friendly for early retirees.
- No Network Restrictions: Members can choose any doctor, ideal for retirees who travel or want provider flexibility.
- Flexibility: Fewer rules, no referrals needed, and coverage for holistic treatments.
- Community Focus: Members share in each other’s medical costs, fostering a sense of community.
Drawbacks:
- No ACA Subsidies: Health sharing plans don’t qualify for income-based government assistance. But they can still work very well if you don’t expect to get a subsidy anyway, or only a small one, due to your income.
- Pre-Existing Conditions: Restrictions may apply, leading to high out-of-pocket costs.
- Not Tax-Deductible: Unlike high-deductible health plans (HDHP) with HSAs, contributions aren’t tax-deductible.
- Limited Legal Protections: These plans aren’t regulated like insurance, offering less protection for large claims.
It’s wise to talk to a Personal Benefits Manager to weigh whether the lower cost of a health sharing plan is worth it for you, especially if you’re in good health and don’t anticipate major medical expenses.
3.) Join Your Spouse’s Health Plan
If your spouse is still working and has access to employer-sponsored health insurance, this could be one of your best Healthcare options for early retirees.
Joining your spouse’s plan allows you to benefit from group rates and potentially lower premiums, while also providing the comprehensive coverage offered by workplace plans.
This option could save you the headache of shopping for individual coverage. However, be sure to evaluate the network and out-of-pocket costs to make sure the plan meets your specific health needs.
Tax-Smart Financial Moves for Health Coverage
Early retirees should take full advantage of tax strategies to reduce healthcare costs.
Here are a few financial tools that can help:
1.) Take Penalty-Free Withdrawals Using Section 72(t)
If you have a traditional IRA and retire before age 59.5, Section 72(t) of the tax code allows you to make penalty-free withdrawals to cover health insurance premiums or other living expenses. The key is to take “substantially equal periodic payments” (called a “SoSEPP”) over a set period. This can help you tap into retirement savings without facing early withdrawal penalties, offering flexibility to fund your health insurance.
2.) Consider an HDHP to Maintain HSA Contributions
A high-deductible health plan (HDHP) combined with a Health Savings Account (HSA) is another popular option for early retirees who are comfortable managing higher out-of-pocket expenses in exchange for lower premiums and valuable tax benefits. This pairing is particularly useful for those looking to maximize savings over the long term.
Key Benefits of HDHPs with HSAs
- Triple Tax Advantage: One of the biggest advantages of an HSA is its triple tax benefit—your contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are tax-free. For early retirees, continuing to contribute to an HSA allows you to set aside tax-advantaged funds to cover medical costs in both the short term and long term.
- Maximizing ACA Subsidies: If your income decreases in retirement, you may qualify for ACA subsidies, which could lower the cost of an HDHP through the marketplace. The combination of ACA subsidies and the tax savings from an HSA can make this option more affordable than you might initially think.
- Long-Term Growth Potential: Unlike a health sharing plan, an HSA allows you to invest your contributions in stocks, bonds, or mutual funds, allowing for potential growth over time. For retirees with a longer time horizon before Medicare kicks in at age 65, this growth potential can help build a larger healthcare fund for future use.
- Portability: HSAs are fully portable, meaning you own the account and can use the funds at any time, even after transitioning to Medicare. This makes them a valuable asset to continue building during early retirement, offering financial flexibility as your healthcare needs evolve.
- Continued Contributions: If you’re enrolled in an HDHP, you can continue contributing to your HSA even during retirement. This is a great way to keep saving for medical expenses tax-free. For those expecting high healthcare costs in the future, such as long-term care or major surgeries, having an HSA stocked with funds can provide peace of mind.
Drawbacks to Consider
- Higher Out-of-Pocket Costs: HDHPs come with higher deductibles, which means you’ll need to cover more of your healthcare costs before insurance kicks in. For early retirees who need frequent medical care, this could be a financial burden.
- Limited Coverage Flexibility: HDHPs often come with more limited provider networks than health sharing plans. If you have specific healthcare providers you want to keep or if you plan to travel, you’ll need to carefully evaluate whether the HDHP’s network meets your needs.
- Not Ideal for Everyone: HDHPs paired with HSAs are best suited for healthy individuals who don’t expect to incur significant healthcare costs early in retirement. If you have chronic conditions or anticipate needing extensive medical care, the high deductibles could outweigh the tax savings and lower premiums.
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Additional Healthcare Options for Early Retirees to Consider
Here are a couple more avenues you might explore when securing health insurance after early retirement:
1. Part-Time Work
If you don’t mind a less demanding role, taking on a part-time job that offers health insurance benefits can be a smart move.
Many large retailers, for example, offer part-time employees access to health coverage. Even though it’s not the traditional retirement plan most envision, it could help you bridge the gap while maintaining your financial independence.
2. Short-Term Health Plans
Short-term health plans can provide temporary coverage until you find a more permanent solution.
While these plans don’t offer comprehensive coverage and can exclude pre-existing conditions, they may be an option for healthy individuals who need to fill a short gap before qualifying for Medicare or finding a better alternative.
The Long-Term Game: Delay Social Security for Bigger Benefits
While it’s tempting to claim Social Security benefits as soon as you’re eligible at age 62.5, delaying until age 70 can be a much smarter financial decision.
By waiting, you can increase your monthly benefit by as much as 8% per year, maximizing your long-term income in retirement. That’s a very strong tax-free return by waiting that is very tough to match outside of Social Security.
Also, delaying Social Security can have tax benefits. If you’re not drawing benefits, you may qualify for more ACA subsidies, as your taxable income is lower. This can result in even greater savings on health insurance costs, making it a win-win.
Healthcare Options for Early Retirees Conclusion
The healthcare decisions you make as an early retiree will have long-lasting impacts on your financial well-being.
From comparing the costs of health sharing plans and ACA subsidies to exploring the benefits of HDHPs and HSAs, there’s a lot to evaluate. That’s why it’s essential to contact a Personal Benefits Manager who can guide you through these options, ensuring you maximize savings while securing the healthcare you need. With professional guidance, you can make informed choices that protect both your health and finances as you transition into a well-earned retirement.
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