25 Jan 2022 | Healthcare in Retirement – Retiring Early and Bridging the Gap to Medicare
Early retirement may be planned or unplanned, but either way, stopping work results in big lifestyle changes. Along with losing a primary source of income, early retirement could also mean losing employer-sponsored health insurance – which can create a significant expense you may not be prepared to cover. How can you bridge this healthcare gap? We outline the various options available between early retirement and Medicare enrollment at age 65.
While most workers expect to retire around 66 – the full retirement age –the average age of retirement for all workers is actually 62, according to Gallup. A study by EBRI found that in 2018, 48% of retirees left the workforce earlier than planned, and that “Poor health, caregiving requirements and stalled career progress or layoffs are common reasons people leave the workforce earlier than expected.”*
More recently, the United States is experiencing a new wave of early retirements as part of the Covid-educed Great Resignation movement.
Unless your employer is in the small minority that offers healthcare insurance as a retirement benefit, or your spouse is still employed and can add you to their plan, you’ll need to find coverage until Medicare kicks in at age 65. The decision is largely one of cost, coverage and the length of the gap. If you find yourself in this situation, there are three primary ways to obtain coverage – accessing continuing coverage through COBRA, leveraging the Affordable Care Act (ACA), and purchasing private health insurance.
Consolidated Omnibus Budget Reconciliation Act (COBRA) Continuation of Benefits
If your employer has more than 20 employees, you can avail yourself of COBRA continuation coverage. Under COBRA, you can continue to be covered under the same plan you had with your employer, but you will have to pay the entire premium yourself, plus up to a 2% administration fee. Coverage is limited to 18 months, so if you retire more than 18 months before you become eligible for Medicare, you’ll need to find other coverage eventually.
While convenient – you keep the plan and the benefits you are used to – COBRA can be extremely expensive. Kaiser Family Foundation estimated that the average annual premium for employer-sponsored health insurance family coverage was nearly $20,000 in 2018.
Covering the Cost of COBRA
If you have a health savings account (HSA), there’s a wrinkle with COBRA that works in your favor. While insurance premiums are not generally considered qualified medical expenses for HSA purposes, payment of premiums during COBRA continuation coverage is allowed.
Health Savings Accounts – An Often-Overlooked Investment
If you are still working, it makes sense to set up a Health Savings Account (HSA) and start contributing as soon as possible. HSAs were created to be used alongside High Deductible Health Plans (HDHPs). (For 2022, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family).
They allow you to save and invest money to be used for medical expenses, including deductibles, co-insurance, prescriptions, vision expenses, and dental care. Unused balances are carried over to the following year, funds never expire, and they can be passed on to a surviving beneficiary. In addition, HSAs are “triple tax-advantaged”, meaning that they are funded with pre-tax dollars, they grow tax-free, and withdrawals are not taxed if they are spent on qualified medical expenses.
Affordable Care Act (ACA) – An Accessible Option
One option, in addition to COBRA or staying on your spouse’s plan, is the Affordable Care Act (ACA). The ACA provides four levels of plans which correspond to the percentage split of health care costs between the plan and the individual. These are out-of-pocket (OOP) costs you pay every time you use medical care, not your premium costs. In addition to these costs – the deductible – the amount you must hit in OOP costs varies amongst the plans.
Bronze plans have the lowest monthly premium, while Platinum plans have the highest. Bronze plans are most cost-effective if you have a minimal annual need for medical care (outside of emergency care) or prescription drugs, while Gold and Platinum make the most sense if you require a lot of care.
Another aspect of ACA is the way in which they determine tax credits for individuals. Currently, it is 100% based on your income. The lower income you have, the more likely you will qualify for a larger tax credit, which will result in a lower monthly premium. So, if you can rely on personal savings/ investments outside of your retirement accounts (IRAs, 401ks, 403bs), this may be the lowest cost option.
Private Insurance – Customizable, But Pricey
If you decide not to use the ACA, private insurance is still available, but depending on your situation, you may need to sign up during the open enrollment period. Loss of employment may be considered a qualifying life event, which would enable you to sign up outside of the open enrollment period, but plans have different requirements. Similar to the ACA, choosing a plan will mean taking a thoughtful look at your medical needs, and then parsing the available options to find what is right for you. It may be helpful to use an agent to sort through the different plans – you can find one with the National Association for Health Underwriters “Find An Agent” tool.
Retiring before Medicare age is a goal many of us have, but it can come with uncertainty regarding healthcare coverage. Planning for healthcare expenses by utilizing a health savings account while you are still working, and strategizing your retirement plan withdrawals to remain eligible for ACA subsidies can keep you covered until Medicare kicks in.
*Lori Lucas, president and CEO of the Employee Benefit Research Institute.
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