If you’re planning to retire early, you might be wondering what you’ll do for health insurance coverage. Medicare won’t kick in until you turn 65, and the rising cost of healthcare each year could translate to unknown monthly premiums and out of pocket costs. This leaves you in a precarious situation if you don’t have another form of benefits.
Fortunately, the Affordable Care Act includes several rules designed to limit your costs. For example, insurance companies may charge a 64 year old premiums of no more than three times those of a 21 year old. The ACA also outlaws rejecting applications or charging more for preexisting conditions, and limits out of pocket costs to $6700 per year.
I’m not taking a stance on Obamacare here, but if you’re looking to retire early the road to health coverage is easier now than it was a few years back. But despite the improvements, a major illness or injury could still take a big chunk out of your retirement savings. And as you probably know, the worst possible time to deplete your nest egg is immediately after you stop working.
Health Insurance for Retirees Under 65
You have several options if you’re not sure where you’ll find coverage until you turn 65. The first is signing up for COBRA through your employer. COBRA lets you stay on your employer’s health plan after leaving the company, as it’s meant to reduce coverage gaps when people change jobs.
It usually only lasts for 18 months though, and can be very expensive. Most companies shoulder some of your premium costs while you’re employed. After you depart they’ll pass these costs on to you. COBRA even allows them to charge you 102% of their cost, as compensation for the administrative burden of keeping you “on the books.”
For these reasons COBRA is best suited for short term gaps in coverage. Finding a new policy can be time consuming and frustrating. Even if it’s more expensive, it’s nice to know for sure you can keep you existing doctors and routines.
There’s also something to be said for having coverage through a large organization. If you have a dispute with your insurer over a claim, it’s much easier to fight when you have a large employer acting as your advocate.
Other Employer Sponsored Options
It’s becoming rare these days, but some companies offer health benefits to their employees through retirement. If you or your spouse are eligible for one, this is probably your best option. These plans are generally cheaper, and there will be a great deal of continuity with the plan you’re already on.
If COBRA isn’t a viable alternative and you don’t have other coverage, you’ll need to find insurance privately. Before the Affordable Care Act was passed this was often extremely difficult. If you had a preexisting condition insurance companies could simply reject your application, or charge you premiums that were prohibitively expensive.
For all the negative attention Obamacare has gotten, early retirees are one of the groups who’ve clearly benefited from the legislation. Beyond the aforementioned cost limitations, each state is now required to maintain a healthcare exchange. Each exchange hosts a menu of policy options from many different insurance companies.
For the first few years after the ACA was passed, accessing the exchanges was like pulling teeth. Many were set up poorly and confused visitors. Others had too many glitches to work at all.
It’s taken a few years, but the experience is far better now. Most states have worked out the “kinks”, and at this point they all operate relatively smoothly through healthcare.gov.
One of the first things you’ll notice on healthcare.gov is that policies vary by four tiers:
As you progress from the platinum down to the bronze plans, each tier has a decreasing premium, higher deductible, and higher out of pocket costs.
If you’re confident in your chances of staying healthy for the next few years, you might consider a Silver or Bronze plan. These plans will save you bucks on premiums each month, but you’ll be on the hook for a greater share of the bill if you do get sick or injured.
The biggest benefit of a Silver or Bronze plan is that many are considered High Deductible Health Plans. If you choose one you’ll be allowed to contribute to a health savings account (HSA), which is meant to help you put money aside for future medical expenses.
They also have major tax benefits. Any dollars you put into an HSA are deductible from income, up to the annual limits. Your savings earn interest as they sit in the bank, and once your balance grows to $3000 you can even invest the cash in a few different mutual funds.
Then, down the road, you can take money out of the account tax free as long as it’s used for qualifying medical expenses. Money goes in tax free, grows tax free, and comes out tax free as long as you use it for your healthcare needs. If planned correctly using the HSA can save you some serious tax dollars.
Ultimately there are three health insurance choices for retirees under 65. You can sign up for retirement benefits through your employer (if they’re offered), you can sign up for COBRA, or you can find coverage on your own. Fortunately, the last option is far easier today than it once was.
As you decide how to proceed, it will help to sit down with your doctor and discuss the options. Compare what’s available through your state’s exchange, and ask for advice on how to make the transition as seamless as possible. If you’re currently undergoing any medical treatment or are closing in on age 65, COBRA might just be the path of least resistance. Even though it’s more expensive the continuity in your coverage could be worth it.