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You want to retire before age 65? Then you need a plan for healthcare before Medicare starts. This is a really important consideration because it will be the biggest expense for many early retirees.
We're going to go over the options, the costs, and some major cost-saving strategies you can implement so that health insurance is not the hurdle keeping you from early retirement. Let's jump in.
First, if your spouse is still working and you can get on their insurance plan, then that's often going to make sense. I think this one is obvious, so I'm not going to spend any more time on it.
Similarly, some employers offer retiree health benefits. These aren't super common and they'll vary in terms of cost and coverage, but if your employer offers this, then it should be high on the list of options.
The first option I'm going to cover in-depth is COBRA coverage. COBRA is a continuation of your employer-sponsored health insurance. If your employer has 20 or more employees, this could be an option for you.
Typically, COBRA coverage will only last for 18 months so if you're retiring more than 18 months before age 65, then you'll need another option as well to fill the gap.
COBRA is convenient because you get to keep the same coverage you were on prior to retiring. You don't have to worry about changing networks or resetting your deductible.
The major downside of COBRA coverage is that you'll be paying the full premium for that coverage. Your employer won't be subsidizing the cost anymore.
According to the health policy organization KFF, the average employer is covering 73% of the health insurance premiums for family coverage and 83% of the premiums for single coverage.
Under COBRA, that premium assistance goes away and the retiree on COBRA would be responsible for the full premium.
According to the same study from KFF, the average full premium for single health coverage was $8,435 per year and for family coverage it was $23,968 per year. So it is a substantial cost.
One nice thing with COBRA is that you can pay your premiums with a health savings account. So if you have a balance built up in an HSA, then you can pay premiums with tax-free dollars, which helps make the cost a bit more manageable.
Because the costs are so high, the use cases for COBRA are limited, in my opinion. If you're close to 65 and just need a few months of coverage until switching to Medicare, or if you're close to hitting your deductible while you're still employed, then maybe you stay on coverage for the rest of that plan year so that you don't reset your deductible.
Let's take a look at the next option, which is a health sharing plan.
Health sharing plans are similar to insurance, but they're not technically insurance. Nearly 2 million people use one of these plans though, so it's surprisingly popular.
They function in a similar way to insurance, where you have a group of people sharing health care costs. You pay a monthly amount, which functions just like a premium, but you'll pay for health care costs out of pocket. Then you'll submit those costs to the health sharing plan for reimbursement.
While there are a lot of people who have used these plans for years and have been happy with them, there are also some horror stories of people not being reimbursed for big bills. You could say the same thing about some health insurance companies as well, but health sharing plans are less regulated so I think it's safe to say that there is more risk there.
The advantage is that these plans tend to be much more affordable. If you're considering a health sharing plan, I think it's important to do your research on which plans are more reliable and also be comfortable knowing that there's extra risk involved.
Let's talk about the last option, where there is much to say, and that is the health insurance marketplace.
This was created by the Affordable Care Act (ACA) and it provides access to a range of insurance plans from different providers, all of which meet the ACA's requirements for health insurance.
For people purchasing insurance on their own, this is the most common solution.
Plans available in the marketplace vary in premiums, deductibles, and coverage, and every state has different plans.
The plans are presented in four categories, bronze, silver, gold, and platinum, and those are based on how you split the costs of healthcare with the plan.
Bronze plans will typically have the lowest premiums, but you'll pay a higher share when you need care. Platinum plans on the opposite end typically have the highest premiums, but you'll pay less when you need care.
Again, every state has unique plans, so the costs will vary a lot depending on the state you're in, but in general, when you look at the premiums on these plans, you'll notice that they're higher than what you're probably used to paying while employed, sometimes much higher.
But, and this is really important, you may not have to pay the full premium. That's because of something called premium tax credits.
These credits lower the monthly insurance premiums based on a household's income and size. The amount of the credit that you receive is based on your income relative to the federal poverty level.
In early retirement, you likely have some control over how much income you report on your tax return that year. That means you have some control over the premiums that you pay for your health insurance plan.
The exact premium tax credit calculation is complex, so rather than laying that out, let's look at an example.
We're going to look at a 62-year-old married couple in Missouri. If they were to go to the health insurance marketplace, they would find that the cheapest silver plan costs them $2,653 per month in premiums. That's nearly $32,000 per year, which is crazy, but they're going to show only $50,000 of modified adjusted gross income on their tax return in 2024.
That level of income puts them at 254% of the federal poverty level, which means that they're eligible for an estimated premium tax credit of $2,481 per month, bringing the monthly premiums of that same silver plan to a much more manageable $172 per month.
If instead their income doubled to $100,000 in 2024, the cost of that plan would be $708 per month, which is a lot more expensive than when they have less income, but still a far cry from the sticker price on that plan.
This is why it's important to have a plan for your retirement income strategy. You can control how much income would be reported on your tax return by pulling from different sources to create that income.
By taking your income from a combination of pre-tax accounts, Roth accounts, and taxable brokerage accounts, you can optimize your income to bring down your health insurance costs.
Now one important thing to note is that the way the premium tax credits are calculated is scheduled to change fairly significantly in 2026. As of now, the subsidy cliff will be reintroduced, basically meaning that households earning more than 400% of the federal poverty level will get no premium tax credits.
It's possible that the more generous tax treatment gets extended beyond 2025, but as of now it's a risk to be aware of in creating your retirement plan.
Sometimes it's actually more advantageous to create extra taxable income, even if that means you get a lower premium tax credit. Some examples would be Roth conversions or tax gain harvesting, both of which I lay out in more detail in my video on creating a tax-free retirement income. So this is an area where having a professional help you create the optimal retirement income strategy for your specific circumstances can pay for itself very quickly.
At Trek Wealth Planning, we create custom retirement plans for our clients, optimizing their investments, retirement income, taxes, insurance, and more. So if this sounds like something that could be helpful, let's have a conversation. Schedule a free consultation using the link below.
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