Retiring Early and Bridging the Gap to Medicare

Early retirement may be planned or unplanned, but either way, stopping work results in big lifestyle changes. Along with losing a primary source of income, early retirement could also mean losing employer-sponsored healthcare insurance – which can create a significant expense you may not be prepared to cover. How can you bridge this healthcare gap? We outline the various options available between early retirement and Medicare enrollment at age 65.

While most workers expect to retire at age 66 – the full retirement age – according to Gallup, the average age of retirement for all workers is 62.  A study by EBRI found that in 2018, 48% of retirees left the workforce earlier than planned, and that “Poor health, caregiving requirements and stalled career progress or layoffs are common reasons people leave the workforce earlier than expected.”^*

Key concepts we cover: COBRA, Health Savings Plans (HSAs), Affordable Care Act, Private Insurance

Accessing Healthcare

Unless your employer is in the small minority that offers healthcare insurance as a retirement benefit, or your spouse is still employed and can add you to their plan, you’ll need to find coverage until Medicare kicks in at age 65.  The decision is largely one of cost, coverage and the length of the gap. If you find yourself in this situation, there are three primary ways to obtain coverage – accessing continuing coverage through COBRA, leveraging the Affordable Care Act (ACA), and purchasing private health insurance.

 COBRA 

If your employer has more than 20 employees, you can avail yourself of COBRA continuation coverage. Under COBRA, you can continue to be covered under the same plan you had with your employer, but you will have to pay the entire premium yourself, plus up to a 2% administration fee. Coverage is limited to 18 months, so if you retire more than 18 months before you become eligible for Medicare, you’ll need to find other coverage eventually.

While convenient – you keep the plan and the benefits you are used to – COBRA can be expensive. Kaiser Family Foundation estimated that the average annual premium for employer-sponsored health insurance family coverage was nearly $20,000 in 2018.

Covering the Cost of COBRA

If you have a health savings account (HSA), there’s a wrinkle with COBRA that works in your favor. While insurance premiums are not generally considered qualified medical expenses for HSA purposes, payment of premiums during COBRA continuation coverage is allowed.

Health Savings Accounts – An Often-Overlooked Investment

If you are still working, it makes sense to set up a Health Savings Account (HSA) and start contributing as soon as possible. HSAs were created to be used alongside High Deductible Health Plans (HDHPs). (For 2020, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family).

They allow you to save and invest money to be used for medical expenses, including deductibles, co-insurance, prescriptions, vision expenses, and dental care. Unused balances are carried over to the following year, funds never expire, and they can be passed on to a surviving beneficiary. In addition, HSAs are “triple tax-advantaged”, meaning that they are funded with pre-tax dollars, they grow tax-free, and withdrawals are not taxed if they are spent on qualified medical expenses.

Affordable Care Act (ACA) – An Accessible Option

One option, in addition to COBRA or staying on your spouse’s plan, is the Affordable Care Act (ACA). The ACA provides four levels of plans which correspond to the percentage split of health care costs between the plan and the individual.  These are out-of-pocket (OOP) costs you pay every time you use medical care, not your premium costs.  In addition to these costs – the deductible – the amount you have to hit in OOP costs varies amongst the plans.

Bronze plans have the lowest monthly premium, while Platinum plans have the highest.  Bronze plans are most cost-effective if you have a minimal annual need for medical care (outside of emergency care) or prescription drugs, while Gold and Platinum make the most sense if you require a lot of care.

Private Insurance – Customizable, But Can Be Pricey

If you decide not to use the ACA, private insurance is still available, but depending on your situation, you may need to sign up during the open enrollment period. Loss of employment may be considered a qualifying life event, which would enable you to sign up outside of the open enrollment period, but plans have different requirements. Similar to the ACA, choosing a plan will mean taking a thoughtful look at your medical needs, and then parsing the available options to find what is right for you. It may be helpful to use an agent to sort through the different plans – you can find one with the National Association for Health Underwriters “Find An Agent” tool.

Bottom Line

Planning to retire after you become eligible for Medicare is a great strategy, but even if something crops up that changes your plans, there are options. Planning for healthcare expenses by utilizing a health savings account while you are still working, and strategizing your retirement plan withdrawals to remain eligible for ACA subsidies can keep you covered until Medicare kicks in.