Health Insurance for Retirees before age 65

Last month I was invited to speak on Twitter with my friend Cody Garrett, a fellow CFP®, on The 7 Options for Health Coverage Before Medicare. Given that over 240 people listened, including many other financial planners, I realized how important of a topic this is for so many early retirees around the country.

The most common questions I receive from clients looking to retire before they’re age 65 have to do with healthcare.  While the questions vary, typically they are something like:

• • What health insurance options are available?
  • How much does health insurance on the exchange (ACA or Obamacare) cost?
  • Is there any way I can qualify for the health insurance premium tax credits, which reduce the monthly costs?
  • What happens if I have an unexpected health-related event?

In this article, we’ll explore the answers to these questions and discuss strategies to consider if you’re transitioning to retirement before age 65.

Before we get too in-depth, it’s important to think about your various health insurance options prior to Medicare eligibility and answer our first question, “What health insurance options are available?” They are:

1) Self-insure

While I have worked with some very wealthy clients over the years, I have yet to work with any clients over age 50 who have chosen this option. If paying completely out of pocket, one big health issue could cost you hundreds of thousands of dollars, if not more, which for most people would jeopardize the success of their retirement. Years ago I had a client say to me, “Mike, when you’re looking at our retirement projections, make sure I never have to go back to work.” Many of the people I have worked with over the years share a similar sentiment. Maybe they’re working for fun or to keep them active, but they don’t want to have to go back to full employment if they can at all help it.

2) Medicaid

Medicaid rules vary by state and are too complex to cover in this article. In Virginia, a household of two people must have an income below $24,353 to be eligible.  For a single household, the income threshold is reduced to $18,075.  These thresholds can be very difficult to stay below for retirees who have a large amount of dividend and interest income, unrealized capital gains, or are living off of IRA distributions.  Note that Medicaid is also less likely to be accepted than Medicare or private insurance, so be sure to make sure your healthcare providers accept Medicaid if this is the route you go.

3) Retiree health insurance

Retiree health insurance coverage is usually available in conjunction with a pension plan. While this option is rapidly declining for current employees, it can still be found for individuals who have worked at large employers, the federal government, or state and local government agencies.  Costs vary dramatically and can range from incredibly affordable to very expensive, depending on the plan, coverage and employer.  One important consideration for retiree coverage is whether or not you need to start your pension benefits to be eligible for health insurance coverage.  While your health insurance may be relatively inexpensive, collecting a pension benefit early may reduce your estimated lifetime benefits, so this should be taken into consideration as you plan your retirement transition.

4) COBRA

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a rule that gives employees the option to continue group health insurance coverage after they leave their employer, whether voluntary or involuntary. You are responsible for the full premiums (employee plus employer cost) plus a 2% administrative fee. Generally, COBRA coverage is available for up to 18 months after separating from your employer. If the employee is eligible for Medicare within 18 months, coverage for an employee’s spouse and dependents can last for up to 36 months.  If you’re planning to retire before age 63.5 and plan to use COBRA, you will need another option to get you to Medicare.

5) Healthcare exchange (Affordable Care Act, ACA, or Obamacare)

At its core, the healthcare exchange offers coverage to anyone not covered by an employer plan or Medicaid. Pre-existing conditions are not excluded and do not prevent you from obtaining coverage. No limits exist for annual or lifetime benefits. Premium tax credit assistance is available, depending on your income.

The federal healthcare exchange was created in 2010. While it has been very politicized, as a financial planner I personally saw the direct impacts to people (or their spouses) with pre-existing health conditions who were still working only for health insurance coverage. And while the coverage can be relatively expensive, many people can qualify for premiums tax credits, which help reduce their monthly health insurance premiums.  Thirty-three states use the federally run website healthcare.gov, while the other 17 states (California, Colorado, Connecticut, Idaho, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, Pennsylvania, Vermont, Washington) and the District of Columbia use their own state-run platform.

6) Private health insurance

If you don’t qualify for premium tax credits based on your income, you may still be able to purchase private health insurance outside of the exchange. You can do this by going directly through a health insurance company or agent. Before you automatically rule out premium tax credit assistance, be sure to do some thoughtful planning to ensure there is no way you would ever qualify. You may otherwise leave money on the table.

7) Health care sharing ministries

Health care sharing ministries (HCSMs) are not insurance, but instead are cost-sharing organizations to help share medical costs among its members. These can be a very affordable way to help pay medical bills, but with some important distinctions. Since these plans are not actually insurance, they are not ACA compliant. This can mean pre-existing conditions and preventative care may not be covered and annual or lifetime benefit limits are permitted. They also are typically offered through religious organizations where membership is required before you are allowed to participate.

Now that you understand the options, let’s answer the second common question.  “How much does health insurance on the exchange (ACA or Obamacare) cost?” This greatly depends on your state, desired coverage level, family size, and usually age. In 2020, national averages for plans were $456 for individuals and $1,152 for a family.¹ As premiums may be much higher or lower for your own situation, the best way to determine the cost is to actually visit the website for your particular state and input information about your family. For healthcare.gov, go to “Get Coverage” and then “See plans & prices.” This will allow you to input your location, family size, age, and income. You’ll then get a “Fast Facts” page, which shows the number of plans and the average premium for each level of coverage within the bronze, silver, and gold categories.

Once you have this information, you can estimate your total yearly costs based on estimated usage, as well as see if your doctors, healthcare facilities, and prescription medications are covered. This should hopefully give you a good idea of what your actual total costs may be.

Is there any way I can qualify for the health insurance premium tax credits, which reduce the monthly costs?

Yes, it is very likely you can qualify. Prior to 2021, a “subsidy cliff” was in effect.  This meant that if you went even $1 of income above 400% of the federal poverty level based on your family size, you were not eligible for any premium tax credits. Thousands of dollars could be forfeited because you received an unexpected dividend or interest payment. Obviously, this was not ideal for an early retiree with a large taxable account. To plan for this, it was important to leave a large buffer so that any unexpected income didn’t push you over the cliff and be very careful about the timing of various income streams. Income was accelerated or deferred, as needed, to help provide for living expenses

With the passage of the American Rescue Plan Act of 2021, the cliff was temporarily eliminated for 2021 and 2022. Instead, premium tax credits are subject to a gradual phase-out of benefits based on no more than 8.5% of your modified adjusted gross income (MAGI). While there are proposals to continue this treatment past 2022, as of this writing nothing has passed and the subsidy cliff is scheduled to return in 2023. So while it is still important to factor in health insurance premium tax credits when deciding where to take retirement income or planning for Roth conversions, the impact is not quite as dramatic as it was before 2021.

What happens if I have an unexpected health-related event while on the exchange?

Every health insurance plan I have seen has a maximum out-of-pocket annual limit.  So if you’re on a high-deductible plan and your annual limit is $17,000, that means the insurance carrier should cover any covered medical expenses above that limit. While this is certainly not inexpensive, it at least provides a limit that you can plan for and will hopefully not jeopardize your overall financial plan.

How do you choose?

Given all of the options available, how do you choose which one is best for your situation?  Personally, I like to think about insurance as protection against a catastrophic event. I’m happy to cover regular, routine events that generally are not very expensive myself, rather than pay for an expensive insurance policy that has very low deductibles and covers everything under the sun. But that is my own personal preference. Some clients I work with would prefer to take the financial incentives out of their own health decisions and prioritize their health rather than have to make a decision on a certain surgery or procedure based on their out-of-pocket costs. I completely respect this and fully recognize that everyone has their own thought processes that work best for them.

Recognizing my own personal biases, I do my best to present these options in an educational manner, allowing us to discuss the pros and cons of each health insurance option available, and then listen to what is most important in my client’s lives as it relates to their own health care decisions.