Finding Coverage Until Medicare Kicks In Isnt Hard But Policies Can Be Pricey
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Question: My wife and I plan to retire at age 55. Our main concern is what to do about health care until we are eligible for Medicare. What are our options?
Answer: As early retirees, you’ll have several options for health insurance coverage until you qualify for Medicare at age 65. The biggest challenge is finding affordable health insurance coverage.
For example, most early retirees can keep their coverage for up to 18 months under COBRA, the federal law that requires companies with 20 or more employees to let workers remain on their health plan.) But under COBRA you’ll have to pay the full premium. Keeping coverage under COBRA can make sense for retirees who need to fill a short gap or if you’re undergoing treatment and other policies don’t cover your current doctors or providers.
Many early retirees buy health insurance through their state’s health care exchange . The policies can be pricey, but insurers can’t deny you coverage or charge you more because you have a pre-existing condition. And many retirees qualify for tax credits to help cover the cost of the premiums. To be eligible for a subsidy, your income cannot exceed 400% of the federal poverty level .
Qualifying For Health Insurance Premium Tax Credits: A Case Study
Its not difficult to see an enormous difference in premiums if youre able to reduce your modified adjusted gross income below 400% of the FPL, but heres an example that shows how much a retired couple could save.
Imagine youre two married early retirees living in Hamilton County, Indiana. Youve done well for yourselves, and you have the retirement nest egg thats large enough you can comfortably live on $70,000 per year.
Unfortunately, thats more than 400% of the FPL, so youll face the full weight of health insurance premiums in Indiana at this income. According to this calculator from the Kaiser Family Foundation , the average cost for a Silver plan in your county and state works out to $1,470 per month.
Plus, with Silver plans through Healthcare.gov, you still pay 30% of healthcare costs and your plan pays 70% until your deductible and annual out-of-pocket maximum is reached. No matter how you cut it, that can be really expensive!
But imagine for a moment you were able to reconfigure the amount of money you live on by reducing your modified adjusted gross income. In that case, your entire healthcare scenario can be turned upside down.
Figure 1 Uninsured Retirees Previously Covered By Own Employers
SOURCE: Jeannette A. Rogowski and Lynn A. Karoly, “COBRA Continuation Coverage: Effect on the Health Insurance Status of Early Retirees,” Health Benefits and the Workforce, Volume 2, Department of Labor, 1998.
Among early retirees who were uninsured after retirement, the proportion previously covered by their own employers declined significantly in the post-COBRA period, from 52.1 percent to 25.6 percent . Nonetheless, more than one-fourth of uninsured retirees in the post-COBRA period had previously been covered through their own employers. Because these retirees, with the exception of those in small firms, should have been eligible through COBRA to continue their employment-based health insurance for 18 months after retirement, it is likely that they are uninsured because they could not afford the health insurance premiums.
A multivariate analysis of the loss of health insurance upon retirement confirms that COBRA does, in fact, reduce the likelihood of becoming uninsured upon early retirement. Nonetheless, a primary reason for not taking advantage of the continuation mandate is low income.
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Remember To Enjoy Your Early Retirement
Once folks are in early retirement, they should avoid a tendency not to enjoy their wealth. My clients who were very good savers sometimes have trouble becoming spenders, Lubinski says. That can be helped by creating a retirement spending plan.
Retirees usually spend on a U-shaped curve, with higher spending in the early years when their health and energy is high, then a natural slow down, and in some cases an increased spending pattern in the later years when health care becomes an issue, says Lubinski. Having a written retirement income plan that is customized to the retirees actual spending goals gives them the confidence to spend and enjoy their retirement.
Youve saved it, and in early retirement, your plan is to have more years to enjoy what youve saved.
Cobra May Be A Good Option For You
The Consolidated Omnibus Budget Reconciliation Act created a program that allows former employees, their spouses, and dependent children to continue receiving health insurance coverage from a former employer, but only applies to employers with 20 or more employees. Under COBRA, a retired employee can receive the same health insurance coverage for up to 18 months. But you must pay the entire premium – part of which your employer probably previously covered. In some cases, people who opt to use COBRA also have to pay an extra 2% to cover administrative fees associated with it. This can be an expensive option, but maybe worth it if you wish to maintain your current coverage for up to 18 months.
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Use Obamacare For Early Retirement
Whether you love the program or hate it, for a few years, Obamacare did make early retirement health insurance costs much more affordable.
One of the ideas behind Obamacare was that everyone could get insurance preexisting conditions were not a factor. This was especially useful for people in their 50s and 60s most of whom have had or are facing some kind of health issue.
While you can still get coverage if you have a preexisting condition, Obamacare insurance has gotten a lot more expensive and the future of the program is in flux.
Many insurers have significantly raised premiums, in part because the Trump administration decided to stop payments to insurers that cover the discounts they are required to give to some low-income customers to cover out-of-pocket costs.
Nonetheless, if you are retiring early, it is still worth it to explore your Obamacare health coverage options on healthcare.gov.
Rehearsing For What May Be A Permanent Situation
While youre planning for healthcare in early retirement, you can take some comfort in knowing that you may be planning for a permanent situation. Basically, the Medicare light at the end of the tunnel at age 65 probably isnt going to be as generous as it is right now. According to the Social Security Administrations A Summary of the 2018 Annual Reports, the Medicare trust fund will be depleted by 2026, three years sooner than what they reported in the 2017 report. Thats just eight years away, and its destined to alter healthcare coverage in old age for the foreseeable future. Its likely that any solution will include either reducing benefits, or raising the eligibility age. But if youve been preparing for healthcare in early retirement, youll be ahead of everyone else. You can simply continue with the options youve been using in your early retirement years. So while there are no perfect options, think of it as preparing your life for the new reality in health insurance. And while youre at it, be prepared to shift from one solution to another, and always keep your eyes and ears open for new options.
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How To Plan For Healthcare Needs Before Retirement
When I was working towards financial independence, I always baked in the cost of healthcare and inputted a 5% annual healthcare cost growth rate. Healthcare costs, childcare costs, and tuition costs are three of the fastest growing costs in America. For early retirees, being able to generate enough passive income to pay for these expenses is the bare minimum.
To determine my healthcare cost in retirement, I asked my employer what the full non-subsidized healthcare cost they paid per month for me was, then I built my healthcare cost model.
Even though we budgeted to pay $1,400+/month in healthcare costs after both of us left our full-time jobs with subsidized healthcare, it still was a big shock. We had to first get over the fact that we both were no longer getting steady paychecks twice a week. Then we had to get used to paying a large new monthly expense.
One good solution I have for everyone is to start doing some enjoyable freelance work on the side to help cover your costs. As an early retiree, you still have valuable skills to leverage. You also suddenly have plenty more time in the day to do things you enjoy.
If you become a sole proprietor or create a company, you may be able to write off some or all of your healthcare costs as a business expense. If your business effective tax rate is 25%, you could save 25% on healthcare costs. However, check with a tax professional first.
Providing Retiree Health Insurance Encourages Early Retirement
Employees under the age of 65 have substantially higher turnover rates at firms that offer subsidized retiree health coverage than at firms that do not.
The strong link between health insurance and employment in the United States may cause workers to delay retirement until they become eligible for Medicare at age 65. However, some employers extend health insurance benefits to their retirees, and individuals who are eligible for such benefits need not wait until age 65 to retire with group health coverage.
In Does Retiree Health Insurance Encourage Early Retirement , authors Steven Nyce, Sylvester Schieber, John Shoven, Sita Slavov, and David Wise use employee-level data from 64 diverse firms that are clients of TowersWatson, a leading benefits consulting firm, to investigate the impact of retiree health insurance on early retirement. After controlling for individual characteristics and pension incentives, they find that employees under the age of 65 have substantially higher turnover rates at firms that offer subsidized retiree health coverage than at firms that do not. Subsidized retiree health coverage has its strongest effects at ages 62 and 63, resulting in a 21 percent increase in the probability of turnover at age 62 and a 32 percent increase in the probability of turnover at age 63.
–Claire Brunel
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You Can Stay On Your Employers Plan For 18 Months After Retiring
Once you leave a job and a health insurance plan, your employer is required to extend coverage through the COBRA plan. The good news is that it will enable you to continue with your current coverage. But it comes with two large doses of bad news, which is why a lot of people opt not to take it:
The combination means COBRA coverage is a) temporary, and b) very expensive. Best use for COBRA: Use it as a short-term window of opportunity for you to make other health insurance provisions.
Take Advantage Of Open Enrollment
If you choose to purchase health insurance coverage through the marketplace, you may have to wait to do so until the open enrollment period. Open enrollment usually begins in November and lasts through the middle of next January each year. You may be able to sign up for a plan outside of the open enrollment period if you experience a significant life event, such as moving to a different state, losing previous health insurance coverage, getting married, or having a child.
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Tips On Saving For Healthcare Expenses
- Not everyones eligible to open an HSA. But you still have several options when it comes to investing in your future healthcare expenses through interest-bearing accounts such as certificates of deposit . To help, we published reports on banks with the best CD rates, the best savings accounts and the best money market accounts.
- Retiring early sounds like fun, but it can be costly especially when you lose your benefits package. If you want professional guidance with exploring all your options, we can help you find a qualified financial advisor. Use our SmartAsset advisor matching tool. After you answer some simple questions about your needs, it connects you with up to three local advisors. You can compare their specialties and set up interviews before making a decision to work with one.
Do I Need Health Insurance If I Have Medicare
While Medicare is an excellent option for retirees, you wont qualify for it until you turn 65. If you retire before that date, youre responsible for getting your own coverage. However, even eligible Medicare beneficiaries may need additional insurance.
Medicare covers a large portion of your health expenses, but it doesnt pay for all of your necessary medical services. Original Medicarewhich includes Medicare Part A and Medicare Part B doesnt cover:
- Dental care
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Get Coverage Through Your State Or Medicaid
If you’re retiring earlier than age 65, you may qualify for Medicaid. There are strict income limits, however, so make sure you qualify based on your state.
States calculate who’s eligible based on a percentage of the federal poverty level, and you can find your state’s percentage here.
While it’s not the right fit for everyone, it’s worth checking out if you know your income in retirement will be small.
Can I Change My Health Insurance Coverage
Yes. After you retire, you will still have the opportunity to change your enrollment from one plan to another during an annual open season. You cannot change to another plan simply because you retired. Each year, Open Season runs from the Monday of the second full workweek in November through the Monday of the second full workweek in December. The 2021 Federal Employees Health Benefits Open Season will run from November 8 through December 13, 2021.
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Take The Highest Obamacare Deductible And Have A Big Emergency Fund
The conventional option is to get coverage on the health insurance exchanges. You can sample the policies available at HealthCare.gov, by completing a few screens with general information. The basic idea is to take one of these policies with a high deductiblelike $10,000. Cover that by having at least that amount in your emergency fund. The policies are surprisingly inexpensive if its just you, or you and your spouse, and you have a relatively moderate income. But if you have a family to cover, and/or a high income, the premiums can be as big as a house payment. The key to Obamacare coverage is the tax credit, and thats why a modest income will work in your favor.
Below is an example of a high deductible plan for a 40-year old married couple earning $60,000 per year. The monthly premium is a very reasonable $363.18 per month, net of a $471.32 income tax credit . The deductible is $10,300 , with an out-of-pocket maximum of $13,300 . As you can see, its not perfect, but it is an option.
Getting Ready For Medicare
Once you’ve figured out how to bridge the gap to Medicare, you’ll need to explore Medicare itself as you approach 65, the age when most people become eligible. There’s a lot to learn. If you’re like most people, you may be confused about how and when to transition from your interim coverage to Medicareand when you need to do it. And remember, Medicare coverage is provided to each eligible individual who enrolls. You cannot cover your spouse under your Medicare coverage they will have to enroll on their own when eligible. Here are answers to 6 common questions:
Read Viewpoints on Fidelity.com: 6 key Medicare questions
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Dedicate An Income Source To Pay Specifically For Health Insurance
Lets say that you can earn $50,000 per year from your investments, and thats sufficient to cover your basic living expenseswithout health insurance. The workaround is to create an additional income source specifically dedicated to paying for the health insurance premium. The best way to do thisand one that renders you no better than semi-retiredis to have a part-time business. Not only does that create an income to cover your health insurance premium, but it also enables you to deduct those premiums against your self-employed income. If your health insurance premium will be $800 per month, you can cover it and fully deduct it against a $9,600 business income. Another side benefit of a part-time business is that you can also set up a health savings account to cover the out-of-pocket costs. Its something of an IRA for medical costs. Your contributions to the plan are deductible against earned income. Withdrawals taken for approved medical costs incur no tax liability. You can contribute up to $3,450 per year as an individual, or $6,900 for a family plan, both for 2018. It makes a compelling case for developing a part-time business in the early retirement planning phase.