When people consider retiring before age 65, the most common question isn’t just, “Do I have enough to retire?” It’s actually about health insurance. For many, paying for health insurance is one of the biggest hurdles to retiring early, often delaying their plans until they qualify for Medicare at age 65.
But here’s the thing: most people don’t even fully understand their health insurance options if they decide to retire before 65. That’s exactly what we’re diving into today—your three main options for health insurance before Medicare kicks in. Let’s break them down.
Option 1: COBRA
COBRA allows you to continue your current employer-sponsored health insurance plan after you leave your job. This option is available if you have worked for a company with at least 20 employees. Upon separating, you have 60 days to make a COBRA election, which allows you to stay on your employer’s health plan for up to 18 months.
While keeping your familiar plan might seem like a no-brainer, here’s the catch: you’re responsible for the full premium, including the portion your employer used to cover, plus up to a 2% administrative fee. Let’s say your plan costs $10,000 annually and your employer used to cover 70%. Under COBRA, you’d pay the full $10,000, plus the fee.
This can add up quickly. For context, the average premium for a family health insurance plan in 2024 was $25,572. Because of the high cost and short coverage period, COBRA is often not the best option for those retiring early—unless you’re close to Medicare eligibility.
When Does COBRA Make Sense?
COBRA can work well if:
- You’re retiring at 63.5 and only need coverage for a short gap before Medicare.
- You have a Health Savings Account (HSA) with significant savings.
Most people don’t realize that HSA funds can be used to pay COBRA premiums. This defers from other forms of health insurance since you typically are not allowed to use HSA funds to pay for premiums.
Option 2: Private Health Insurance Plans
Private health insurance plans are often short-term in nature and vary by state. These plans can provide coverage for 12 months at a time, with an option to renew.
Pros of Private Health Insurance:
- Often cheaper than COBRA or Affordable Care Act (ACA) plans.
Cons of Private Health Insurance:
- May exclude pre-existing condition coverage.
- Limited preventive care and essential health benefits.
- Fewer protections compared to ACA or employer-sponsored plans.
Because of these limitations, private plans might not suit everyone. However, they can be a good option for healthy individuals who don’t qualify for ACA subsidies. To navigate the complexities, I always recommend working with a health insurance broker to find a plan that fits your healthcare needs.
Option 3: Affordable Care Act (ACA) Marketplace
The ACA Marketplace (commonly referred to as Obamacare) offers comprehensive health insurance plans that must include essential benefits, such as:
- Coverage for pre-existing conditions.
- Prescription drugs, lab tests, and preventive care.
- Limits on out-of-pocket costs.
The Marketplace offers four plan levels—Bronze, Silver, Gold, and Platinum—which vary in cost-sharing between you and the insurer. Bronze plans have lower premiums but higher out-of-pocket costs, while Platinum plans have higher premiums but lower out-of-pocket expenses.
Premium Tax Credits
One major advantage of ACA plans is the availability of premium tax credits for households with incomes between 100% and 400% of the federal poverty level. These subsidies significantly reduce premiums for those who qualify.
Let’s look at an example:
Example 1: No Tax Credits
- Household Income: $250,000 (retired couple, age 55).
- Monthly Premium (Silver Plan): $1,733.
- Annual Cost: $20,796.
Example 2: With Tax Credits
- Household Income: $60,000 (after strategic tax planning).
- Monthly Premium (Silver Plan): $287.
- Annual Cost: $3,444.
By keeping income low through strategic planning, such as managing distributions from retirement accounts, retirees can unlock significant savings.
How to Lower Income for ACA Subsidies
Retiring early while maintaining a low taxable income requires thoughtful portfolio design. Here are a few strategies:
- 72(t) Distributions: Access retirement accounts penalty-free.
- Borrowing Against Investments: Use a “buy, borrow, die” strategy to live off your portfolio tax-free.
- Rule of 55
- Using Taxable Brokerage Account for Cash Flow
Final Thoughts
These are your three primary health insurance options if you retire before age 65: COBRA, Private Health Insurance Plans, and the ACA Marketplace. Each has its pros and cons, and the best choice depends on your personal situation, including income, health, and retirement timeline.
If you need help creating a retirement plan that addresses health insurance and other essential considerations, reach out to us at MDRNWealth.com .We’d love to help you build a retirement plan tailored to your goals.
This information is general education only and is not to be construed as specific tax, legal or investment advice.
