Health care is one of the most important aspects of planning for an early retirement. Medicare eligibility doesn't kick in until you reach age 65. Pre-65 retirees who don't have access to employer-subsidized health insurance could be facing some substantial costs for a number of years until they are eligible for Medicare.
On today's show, we discuss the various health care options for pre-65 retirees and how those options can affect the rest of your long-term retirement planning.
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1. Sign up for COBRA.
In 1985, the Consolidated Omnibus Budget Reconciliation Act (COBRA) established guidelines for folks to stay on their former employer's health care plan while unemployed for a period of 18-36 months, depending on the qualifying event. In most cases, retirees can stay on their old health plan for 18 months, although some companies do offer COBRA benefits beyond three years.
The catch is that when you go on COBRA you have to pay 100% of the premium and an additional 2% administration fee. That means the cost of monthly health care premiums can go from practically nothing to potentially thousands of dollars. For that reason, COBRA is best viewed as an option to bridge a couple months between early retirement and turning 65.
2. Jump on your working spouse's plan.
Perhaps the easiest option for working married couples if one spouse retires is to switch to the other spouse's health care plan. Retirement is a qualifying event that should allow you to make this switch with a little help from the working spouse's HR department. Just make sure you investigate how the new plan will affect your current level of health care, including premiums, deductibles, and coverage for your preferred doctors, specialists, and prescription drugs.
3. Buy insurance from your state's health care marketplace.
If you need health insurance for a period of years rather than months and you can't join a spouse's plan, compare COBRA rates to plans your state of residence offers on HealthCare.gov. Marketplace plans are grouped into three tiers: Bronze (insurer pays 60% of the deductible, you pay 40%), Silver (70%, 30%), and Gold (80%, 20%).
Subsidies for these plans are available and are based on your income. The American Rescue Plan Act of 2021 removed the "subsidy cliff" for 2021 and 2022 to provide greater access to health care as we continue to work through the pandemic. For 2022, premiums are capped at no more than 8.5% of household income. If you don’t qualify for a subsidy the the cost of a Silver or Gold plan can be prohibitively expensive.
Some pre-65 retirees could qualify for low-income health insurance through Medicaid. But your eligibility for this program is based on your total assets. If, as a pre-65 retiree, you have low taxable income but a large amount of assets, Medicaid probably won't be an option.
4. Redefine "early."
According to a 2021 study by Fidelity, a retired couple aged 65 could need as much as $300,000 to cover the cost of health care in retirement. It's very possible those numbers are going to keep going up as more seniors live longer.
Remember, Medicare isn't free, and it doesn't pay for everything. In particular, seniors who anticipate needing long-term care for themselves or their spouses should take a long look at their retirement health care strategy before they retire.
It's also important to circle back and ask yourself why you want to retire before 65 in the first place. As I mentioned in a recent blog post, anyone who's eying retirement as an escape from the personal and professional frustrations we've all faced since COVID-19 could be retiring for the wrong reasons. Dealing with pre-65 health care costs could make a challenging transition even more stressful. Pushing back your early retirement goal even by a year or two could give you a chance to pad your nest egg, reassess your options, and approach retirement from a more positive place.
On the other hand, if you're excited to get an early start on the next stage of your life, there are ways that your retirement assets can help you lower both your taxable income and your health care marketplace premiums. Get in touch with Keen Wealth and one of our advisors will be happy to discuss some of your options.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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