Retiring Before 65? Read this about your healthcare options.
Retiring early is common enough that most people know someone who has done it. What fewer people can describe is how that person paid for health insurance between their last day of work and their 65th birthday. Medicare doesn’t start until 65. Employer coverage usually ends when employment does. The years in between have to be covered by something, and the something is usually decided years earlier than people expect.
The options
Retiree medical. Some energy employers offer continued medical coverage to retirees, and some don’t. Where it exists, eligibility usually depends on a combination of age and years of service, and the terms can change. The first thing to do is find out whether your employer offers it, what the eligibility rule is, and the date you’d qualify. That date can move a retirement decision by a year in either direction.
COBRA. Federal law generally lets you continue your employer’s group plan for a limited period after you leave, commonly up to eighteen months. You pay the full premium plus a small administrative charge, which means the cost jumps from what you saw on your paycheck to the whole amount. It’s the same coverage you had, with the same doctors, which makes it useful for the first stretch. It doesn’t reach 65 for most early retirees.
A marketplace plan. Coverage bought through the health insurance marketplace is available regardless of health history, and the premium tax credit reduces the cost based on household income. That last part matters for planners. In the first years after retirement, income is often lower than it was, which can make the credit meaningful. It also means that decisions like a Roth conversion or a large capital gain in those years can change what you pay for coverage. The two have to be planned together.
A spouse’s plan. If a spouse is still working, their employer plan may be the simplest bridge. Leaving your job usually counts as a qualifying event that opens their enrollment window outside the normal period.
Why this year’s enrollment matters
If retirement is inside five years, the packet on your desk this month is part of the bridge.
The HSA. Fund it now. An HSA balance can pay for qualified medical costs in the gap years, and after 65 it can pay most Medicare premiums. It’s the account best built for this stretch, and the years you’re still working are the only years you can contribute.
The transition year plan. The plan you choose for the year you retire will carry into COBRA if you use it. Choose it with that in mind rather than on premium alone.
The eligibility date. If retiree medical exists at your employer, know the date you qualify before you pick a retirement date. Missing it by a few months is an expensive mistake.
What it costs
We won’t put a number here because it depends on the employer, the plan, the household, and the year. What we can say is that coverage in the gap years is one of the larger line items in an early retirement budget, and the households that handle it well are the ones that priced it three to five years out instead of three to five months out.
Where to start
Two calls. One to your benefits department to ask whether retiree medical exists and what the eligibility rule is. One to your advisor to put the gap years into the plan with real dates and real costs. If you’d like to start with the second call, Let’s Talk.
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