“Mind the Gap”: Early Retirement and Health Insurance Coverage

By Candace Scholz, CFP®, MS, MHA

Many Americans decide to leave the 9-to-5 grind before reaching full retirement age (67 for those born in 1960 or later). In fact, the entire Financial Independence, Retire Early (FIRE) movement is based on the idea of saving and investing aggressively in the younger years in order to retire in one’s fifties or even earlier. Apparently, many believe the optimal age to retire is around 58. On average, however, American men tend to retire around age 64, while women make the move a bit earlier: around age 62, according to a study from Boston College. Even more significantly, over half of those surveyed in a Transamerica study indicated that they were retiring earlier than they had originally planned.  

Whenever it occurs, early retirement poses some unique challenges. Aside from the need to fund additional years without a paycheck from an employer, providing for healthcare can be a significant challenge. For those who retire prior to reaching Medicare eligibility at age 65, obtaining adequate health insurance coverage—and paying for it—can pose a particular difficulty.  

The Options  

Health Insurance Marketplace®. Those who lose their employment-based health plan because of retirement prior to Medicare eligibility can utilize this federally operated service to choose from health insurance plans offered by various private insurers. Those who lose coverage because of retirement qualify for a special enrollment period (the usual period is November 1–January 15, each year) and may qualify for insurance premium tax credits and decreased out-of-pocket costs (although these credits are due to expire at the end of 2025, absent an extension from Congress). According to the Government Accountability Office, premiums for Marketplace plans tend to be somewhat higher than those for employer-sponsored plans, so it’s important for those considering this option to compare plans carefully with respect to premiums payable, deductibles, co-pays, and coverage.  

Spousal employment coverage is a viable option for retirees with spouses who are still working and covered by an employer-sponsored plan. However, many employer plans have a specific enrollment period, which is the only time that changes to the coverage—such as the addition of a spouse—can be made. If the spouse has previously only been covering themselves on the plan, the additional premium to cover the person being added will be payable by the working spouse, typically via payroll deduction. Those considering this option will need to time the changeover to coincide with the employer’s enrollment period and also take into consideration the reduction in take-home pay due to the premiums.  

Retiree insurance plans are offered by certain employers, typically those with 200 or more employees. Though the number of employers offering this benefit is declining (21% made  retiree plans available in 2023), it’s worth checking to see if this is an option. Some employers cover the entire amount of the premiums for retired employees; others make coverage available at a reduced rate. Spousal coverage may also be available, though it is typically charged 100% to the retired employee.  

Continuation of Benefits (COBRA). The Consolidated Omnibus Reconciliation Act (COBRA) of 1986 gives employees the right to continue to receive group health benefits in the event of certain qualifying circumstances, including retirement (“voluntary termination of employment for reasons other than gross misconduct”). COBRA typically requires the former employee to pay the entire cost of coverage, so it is typically much more expensive than either employer coverage or a Marketplace plan. However, COBRA can provide a stopgap solution while more affordable options are sought.  

Health Savings Account (HSA). Those contributing to an HSA deposit funds into a tax-advantaged account that can then be used to pay for qualified healthcare costs, including health insurance premiums. However, in order to utilize an HSA, you must have an HSA-eligible health plan, also called a high-deductible health plan (HDHP). These plans often feature lower premiums but, as the name implies, typically have higher deductibles that must be paid out-of-pocket (which is where the funds in the HSA come in). Balances in an HSA grow without taxation, roll over from year to year, and may be invested in various ways. Distributions do not count as taxable income if they are used to pay qualified medical expenses. Contributions are also tax-deductible.  

Once you reach Medicare eligibility at age 65, of course, the situation becomes much clearer. Part A (hospital coverage) is free, and you will be assessed premiums for your Part B (doctor visits, outpatient care, etc.) coverage based on your modified adjusted gross income (MAGI), but whatever the amount, it will typically be lower than other options available to you.  

At Aspen Wealth Management, we know that healthcare costs are top-of-mind for retirees and those preparing for retirement. If you have questions about the proper way to handle this, we can help. To learn more, visit our website and read our article, “Medicare Made Easy: Preparing for Healthcare Costs in Retirement.”