Are you planning to retire early? You’re certainly not alone! It is, of course, a major challenge just to accumulate the type of investment portfolio that will make early retirement possible. But many planning on early retirement forget to plan for one additional detail: adequate health insurance.
With what health insurance costs today, is not an exaggeration to say that paying for it has the potential to significantly alter your early retirement plans. After all, you’ll still need health insurance, but you’ll be too young to qualify for Medicare.
The younger you are when you retire, the longer you’ll need some sort of early retirement health insurance coverage. Luckily, there are a few decent options available today.
So just what are your health insurance options if you want to retire before you will be eligible for Medicare at age 65?
Go On Your Spouse's Health Insurance Plan
Just because you’re ready to retire doesn’t necessarily mean that your spouse is, too. If your spouse will remain employed, and if that job also includes health insurance coverage, switching over to that policy will almost certainly be the most cost-effective strategy.
Even if your spouse's plan doesn't provide an employer subsidy for employees' family members, it's still likely that paying for additional coverage under your spouse's plan will be more affordable than what you could get on the health insurance exchange.
The Health Insurance Exchange
Being self-employed, I actually had the experience of applying for Obamacare on the health insurance exchange back in January, 2015. One of the advantages is that insurers on the exchange have to take you, even if you have pre-existing health conditions. And insurers can’t charge you an additional premium as a result of those conditions.
However, I'm sorry to report that while Obamacare has made health insurance available to more people, the coverage is not inexpensive.
Obamacare comes in three “flavors” bronze, silver and gold. Bronze is the cheapest, but also provides the lowest level of coverage. Gold is the most expensive, but provides the most comprehensive coverage.
The best way to explain potential pricing is by presenting examples. According to healthcare.gov’s 2016 plans and prices preview, here’s what one couple’s plan options might look like. This fictional couple lives in Atlanta. They’re married, age 45 and 55, and have two kids, ages 16 and 14.
Bronze plan options have monthly premiums ranging from $780 to $1,114. The deductibles range from $8,000 to $13,700. And the out-of-pocket maximums range from $12,900 to $13,700.
Silver plan options have monthly premiums ranging from $880 to $1,277. Deductibles range from $3,000 to $13,000. And out-of-pocket maximums range from $8,000 to $13,400.
Gold plan options have monthly premiums ranging from $1,162 to $1,605. Deductibles range from $1,000 to $4,800. And out-of-pocket maximums range from $5,500 to $13,200.
The Health Insurance Exchange offers health coverage for everyone. You can't be turned down. But it is expensive, which can have a material impact on your early retirement plans.
For instance, let’s say you decide to go with a comprehensive gold-level plan. You could pay over $18,000 per year in monthly premiums, which don’t count towards your deductible or out-of-pocket maximum. Plus, you could pay up to $13,200 in out-of-pocket costs. If someone in your family has a major health claim during the year, your expenses could be well in excess of $20,000.
Keep in mind that health plan costs vary, and depend partially on your income level due to subsidies that are available on a sliding-scale-income basis. To check out what your coverage might look like, you can preview plans and prices for your situation here.
Using a Health Savings Account (HSA) to Cover Your Health Insurance Deductible
There is another variable in these examples as well. The quotes are given for a couple in Atlanta, but rates vary from one state to the next. If you live in a high-cost state, the premiums can be much higher. Conversely, they can be substantially lower if you live in a low-cost state.
If you’re uncomfortable with this deductible, investigate combining a healthcare exchange plan with a health savings account (HSA). That will at least enable you to pay amounts within the deductible on a tax-free basis. For 2016, you can contribute up to $3,350 for an individual, or up to the family limit of $6,750. If you’ll be age 55 or older, you can contribute an additional $1,000 to the plan. And unlike IRAs, HSA’s don’t have to be funded with earned income; you can fund yours out of your investment and retirement incomes.
In addition to providing dedicated and tax-deductible cash for the deductible portion of your healthcare expenses, the unspent portion of your HSA can remain in the account to grow on a tax-deferred basis. It can then be withdrawn and used to pay for future medical expenses as the need arises. You can think of it as a kind of medical emergency fund, in which you accumulate funds in years when you have no medical expenses, to be used in the years when you do. In that way, an HSA becomes part of your comprehensive early retirement strategy.
The healthcare exchange may prove to be the only viable option, but given the cost and the low levels of coverage, you owe it to yourself to investigate other alternatives.
COBRA Through Your Soon-to-Be Former Employer
If you have health insurance through your employer, you can also consider continuing it under COBRA coverage. This will be a temporary solution only, as coverage is typically extended to separated employees for no more than 18 months in most cases. However, if you are within 18 months of eligibility for Medicare when you retire early, COBRA could be coverage worth considering for the short term.
COBRA plans are not inexpensive. Once you leave your job, the employer subsidy that pays at least part of the premium disappears. That could turn your $500-per-month contribution to the plan into $1,500-per-month overnight. But if it is a good plan, one that you're familiar with, and covers more than what you are likely to get through the health insurance exchange, it may be worth the higher premium for the short term.
Get a Part-time Job that Provides Health Insurance
Earlier I mentioned that I had applied for family health insurance coverage on the health insurance exchange, but we never actually took the coverage that was available. That’s because my wife landed a part-time job (20 hours per week) with a credit union that offered a full-blown health insurance plan. That’s the plan that we still have now, and it has proven to be excellent coverage. And, naturally, it’s less expensive than Obamacare by a wide margin, due in large part to the employer subsidy.
If you need to get health insurance coverage to cover you between early retirement and your eligibility for Medicare, you may be able to do it with a part-time job.
I’m happy to report that such jobs do exist, though you may have to do some digging. But to help you out, I actually did prepare a list on my own website that you can use as a starting point.
More companies make this benefit available than people generally think. What you'll find, too, is that offering health insurance for part-time employees is more common in certain industries than it is in the general economy. For example, it's not at all unusual to get coverage if you're working for banks, hospitals, local governments, and, surprisingly, grocery stores. Check these places first if you need health insurance coverage.
If you're willing to consider early semi-retirement, and delay the full-blown version until you are eligible for Medicare, getting a part-time job with health insurance coverage could bridge the gap between now and then.
If you’re planning for early retirement, have you factored in what you will do about health insurance coverage in the absence of either Medicare or an employer-sponsored plan? Let us know in the comments.