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Retiring Early? Your Options for Health Insurance Pre-Medicare Thumbnail

Retiring Early? Your Options for Health Insurance Pre-Medicare

Health Care

So you're thinking about retiring before age 65 but aren't sure what to do about health insurance until Medicare kicks in? You're not alone. Many Americans find themselves in the same boat, wanting to retire early but feeling stuck because of concerns about affordable health coverage.

The good news is that the options for early retirees have expanded in recent years, thanks to the Affordable Care Act (ACA) and other legislation. While you'll likely pay more for health insurance than if you kept employer-sponsored coverage, you have several solid choices to bridge the gap until Medicare eligibility.

In this comprehensive guide, we'll walk through your options in depth so you can understand the pros and cons of each. We'll also provide tips to keep your costs as low as possible.

OVERVIEW OF HEALTH INSURANCE FOR EARLY RETIREES

Once you turn 65, you become eligible for Medicare. But if you retire before then, you'll need to secure alternate health insurance until you can transition to Medicare. Here are some key things to keep in mind:

  • You may enroll in the health insurance marketplace in your state. This will likely be your best option, as you might qualify for subsidies to lower your premiums. Shop carefully to find an affordable plan that meets your needs.
  • COBRA or state continuation coverage can work but is expensive. You can continue your employer plan temporarily via COBRA or state continuation, but you'll pay full price. This does allow you to keep your current coverage for a while.
  • A spouse's employer plan may cover you. If your spouse still works, you can potentially join their employer health plan. This may be more affordable than COBRA.
  • Medicaid is an option if you meet the income limits. If your income is low enough after retiring, you may qualify for Medicaid either right away or later. Be sure you understand how this works in your state.
  • Look for special discounts and programs. Some states and health insurance companies offer special rates or coverage for early retirees that can save you money.

The path you choose will depend on your personal situation. But with the right planning, you can secure quality affordable health insurance until age 65. Let's explore your options in more detail.

USING THE HEALTH INSURANCE MARKETPLACE (ACA INSURANCE)

The ACA Marketplace Insurance Exchange, often referred to as the "Health Insurance Marketplace," is a platform established by the Affordable Care Act (ACA) in 2010. It allows individuals, families, and small businesses to compare and purchase health insurance plans.

The Marketplace offers various plans categorized into tiers, provides subsidies based on household income to make insurance more affordable, and ensures coverage of essential health benefits. Enrollment typically happens during an annual Open Enrollment Period, with exceptions for specific life events. While HealthCare.gov is the federal portal, some states operate their own exchanges.

The goal of the Marketplace is to enhance accessibility and affordability of health insurance for Americans, ensuring coverage regardless of pre-existing conditions. For most early retirees, the best way to get health insurance will be through the health insurance marketplace (exchange) in your state.

Here are some key advantages:

Guaranteed issue: Marketplace plans must accept you regardless of pre-existing conditions. This makes coverage accessible even if you have health issues.

Income-based subsidies: Depending on your income, you may qualify for premium tax credits to lower your costs. This can make marketplace plans very affordable.

Choice of plans: You'll have a variety of plan levels and options to choose from to fit your budget and needs.

Easier to qualify through 2025: Temporary expansions to subsidies have made it easier to qualify and get more financial assistance. These expanded subsidies are scheduled to go away after 2025 unless congress passes a bill to extend them.

To use the marketplace, you simply need to experience a qualifying event like loss of your employer coverage. This triggers a special enrollment period during which you can sign up for a marketplace plan.

Here are some tips for finding the right plan:

  • Compare all levels carefully - marketplace plans come in metal tiers (Bronze, Silver, Gold, Platinum) with differences in premiums and out-of-pocket costs. Consider Gold or Silver plans with cost-sharing reductions if eligible.
  • Watch provider networks - make sure your preferred doctors, hospitals, and medications are covered before choosing a plan.
  • Account for full year income - your subsidies are based on projected income for the full year, including pre-retirement amounts.
  • See if your medications are covered - check formularies to ensure any prescriptions you take will be covered.
  • Compare premiums plus out-of-pocket costs - lower premium plans can sometimes have higher deductibles and copays.

An important part of applying for health insurance through the marketplace is you must disclose your estimated income for the year to determine eligibility for financial assistance. Your reported income helps calculate the amount of premium tax credits you're eligible for, which in turn reduces your monthly insurance premiums. If your actual income differs from the estimated amount, adjustments are made at the end of the year when you file taxes.

At tax time, you reconcile the advance premium tax credits (APTC) you received with the credits you were actually eligible for based on your annual income. If your income exceeds the estimate, you may need to repay a portion of the credits.

Conversely, if your income is lower than projected, you may receive additional credits, potentially resulting in a tax refund or reduced amount owed. It's essential to accurately report your income during enrollment, as inaccurate information may lead to penalties and impact your eligibility for assistance.

With the right marketplace plan, you can have comprehensive affordable medical coverage well before hitting Medicare eligibility at 65. We usually tell out clients to budget an average of $800 to $1500 per person per month for an ACA health insurance plan. This can vary widely depending on income and subsidy amount for that year. 

WHEN COBRA OR STATE CONTINUATION COVERAGE MAKES SENSE

COBRA, the Consolidated Omnibus Budget Reconciliation Act established in 1985, allows individuals to continue their health insurance under an employer's plan if they lose their job or experience other qualifying events. This provision typically lasts 18 months but can extend to 36 months in specific situations.

However, it can be costly, as beneficiaries often pay the full premium, previously partially covered by their employer, plus potential administrative fees. While COBRA provides continuity, it's essential to weigh its costs against its benefits and consider alternatives like the ACA Healthcare Marketplace, Medicaid, or short-term insurance plans.

While often expensive, opting for COBRA or a state-based continuation plan can work well in certain early retirement situations:

  • You're very close to Medicare eligibility and need coverage for less than 18 months.
  • You've already met your out-of-pocket maximum for the year so continuation is cheaper for the remainder of the plan year.
  • You have complex medical needs and want to maintain continuity of care and providers.
  • You receive a severance package or retention deal from your employer that covers a portion of your COBRA premiums.
  • Marketplace plan premiums and out-of-pocket costs would actually be more expensive for your situation.

Just know that you'll pay the full premium yourself, which is often $500 or more per month for an individual. But continuing your current coverage for a short period may provide peace of mind.

You're eligible for up to 18 months of COBRA coverage from your employer's health plan. Certain states like California offer similar continuation coverage as well. Check if this option makes the most financial sense for your early retirement needs.

LEVERAGING A SPOUSE'S EMPLOYER HEALTH PLAN

If your spouse still works and has employer-sponsored health insurance you can join, this may be an affordable coverage avenue before Medicare if:

  • Your spouse's plan has good benefits and reasonable premiums.
  • You like your spouse's doctors and providers better than marketplace plan options.
  • Your medications and treatment will be fully covered on your spouse's health plan.
  • Adding you won't overly increase costs for your spouse's coverage.

The main advantage here is getting to take part in a group plan that spreads risk across many people, often resulting in lower premiums. Just remember that joining a spouse's plan makes you ineligible for subsidies in the marketplace. Do a full cost comparison to see which option is better.

And if your spouse later loses their job, this will trigger a special enrollment period to hop back over to the marketplace if needed.

EXPLORING MEDICAID AS AN EARLY RETIREE HEALTH PLAN

If your income is within Medicaid eligibility levels for your state, either immediately upon retiring or later on, Medicaid can provide very low cost health coverage until Medicare kicks in. Here's what you should know:

  • Income limits - eligibility is based on monthly income and varies by state. It's around $1,500 per month for an individual in most cases.
  • Asset limits - some states impose limits on savings and assets for Medicaid. This does not apply to Medicare.
  • Estate recovery - most states recover Medicaid costs from your estate after you pass away. Something to plan for.
  • Benefits - Medicaid offers comprehensive health and drug coverage with low out-of-pocket costs for enrollees.
  • Provider choice - your selection of doctors may be narrower with Medicaid than private plans.
  • Medicare transition - the switch from Medicaid to Medicare at 65 can result in higher costs for some retirees. Understand this change.

While not ideal for all situations, Medicaid can function as an affordable fallback option if your income is low and assets limited in early retirement. Just be sure to plan ahead for the Medicaid to Medicare transition at 65.

WAYS TO REDUCE HEALTH CARE COSTS BEFORE MEDICARE

While individual health insurance until Medicare eligibility will likely cost more than an employer plan, there are ways to reduce your expenses:

  • Shop carefully every year - premiums and plans change annually; you may find lower priced options.
  • Look for early retiree discounts - some states and insurers offer lower rates and plans for retirees under 65.
  • Consider a higher deductible - plans with higher deductibles often have significantly lower monthly premiums.
  • Use your retirement savings wisely - the lower your income the higher subsidy you could qualify for on the ACA. Try to utilize brokerage accounts, checking, and Roth IRAs for your living expenses.
  • Investigate drug discounts - programs like GoodRx can save you money on prescriptions regardless of insurance.
  • Move to a lower cost area - where you live can impact health insurance rates and other costs; research options.
  • Delay tapping Social Security - this allows your income to stay lower until you claim benefits at a later age.

With careful planning, you can secure suitable health insurance that doesn't break the bank before getting on Medicare. Prioritize your needs and compare all your choices.

KEY TAKEAWAYS ON HEALTH INSURANCE FOR EARLY RETIREES

Securing affordable health coverage from the time you retire early until Medicare eligibility at 65 is crucial. Here are some key tips:

  • For most, the health insurance marketplace will offer the most affordable comprehensive coverage via subsidies.
  • Weigh the pros and cons of COBRA or state continuation coverage as a temporary option.
  • If you have a working spouse, joining their employer health plan may be cost-effective.
  • Medicaid can provide a coverage safety net if you meet strict income and asset requirements.
  • Shop smart and use cost-saving strategies like high deductibles, Rx discounts, and retirement account withdrawals to make health insurance affordable.
  • Work with a knowledgeable independent insurance agent for guidance in navigating your options.

While paying for individual health insurance in early retirement takes careful planning, the options available today make it much more feasible than in the past. With a good plan, you can get quality affordable medical coverage until Medicare kicks in at 65.

FREQUENTLY ASKED QUESTIONS ABOUT HEALTH INSURANCE FOR EARLY RETIREES

1. If I retire at 62, can I just buy insurance through healthcare.gov until I qualify for Medicare?

Yes, healthcare.gov and your state's health insurance marketplace will offer plans you can purchase for individual health coverage until you turn 65 and become eligible for Medicare. You may also qualify for subsidies to help make these marketplace plans more affordable.

2. What is the cheapest health insurance option for retirees under 65?

The cheapest health insurance for early retirees is typically Medicaid, if you meet the income and asset limits set by your state. If you make too much money to qualify for Medicaid, the next most affordable option is usually a marketplace plan with premium subsidies for which you'll qualify if your income isn't too high.

3. Should I take COBRA coverage if retiring before 65 or go straight to the health insurance marketplace?

In most cases, going directly to the health insurance marketplace will be the better financial option compared to COBRA. But COBRA can make sense for short gaps in coverage, certain health conditions, or if your employer contributes to the cost of COBRA as part of severance benefits when leaving your job. Do a cost comparison to see which choice fits your needs best.

4. What health insurance costs should I budget for if retiring before Medicare eligibility?

For marketplace plans, budget anywhere from $700 to $1600 per month for an individual if you don't qualify for subsidies. With subsidies, costs could be as low as $100/month or even $0 if your income is under 150% of the federal poverty level. Budget more for plans that cover your spouse/family too.

HEALTH INSURANCE OPTIONS GIVE YOU FLEXIBILITY IN EARLY RETIREMENT

Gone are the days when pre-existing conditions and prohibitive costs kept you stuck in a job solely for the health benefits. Today's health insurance landscape gives you choices. While being without employer coverage before Medicare requires forethought and budgeting, you can craft an early retirement strategy that works for your needs.

Arm yourself with the guidance and tools in this guide, weigh the pros and cons carefully, and enroll in the optimal health plan for your situation. With the right affordable healthcare coverage secured, you can embark on an exciting early retirement journey.

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