How to Retire Early and Lower Your Health Care Costs
If you are considering retiring prior to age 65, you are likely balancing the excitement of the possibilities of what lies ahead in your life during this major transition with some legitimate concerns. One of those concerns is how to pay for one of the biggest expenses during your retirement years—out of pocket health care expenses.
The cost of health care is already expensive for most households. As retirement nears, the outlook doesn’t get much better. In fact, according to Fidelity on average a couple can expect to spend $275,000 on health care expenses throughout their retirement years. That figure is based on a 2017 estimate and represents a 6 percent increase from the previous year ($260,000 in 2016).
The problem with these types of estimates is that they are based on an anticipated retirement age of 65. So, what happens if you retire early? As you may have anticipated, retiring prior to age 65 could significantly increase your anticipated health care costs.
How much will your estimated health care costs increase if you retire prior to Medicare eligibility at age 65? You can estimate your health care costs using this calculator provided by AARP:
Where to Obtain Health Insurance Coverage
Proactive health insurance planning is necessary to try and keep your health care costs as low as possible. Reviewing your health insurance options will help you move forward with confidence with your plans to retire on your terms. Here are the health insurance options for employees accepting an early retirement program incentive:
Obtain coverage through your spouse’s employer-sponsored health plan. If your spouse is still working and eligible for health insurance coverage through their employer, the process of finding a backup insurance policy may be an easy solution. This is because whenever a spouse loses health insurance coverage after taking an early retirement offer this is considered a qualifying event for the purposes of being added to an existing plan. Be sure to start the process of discussing your retirement options as early as possible if you are married so you can coordinate the timing for when you leave the workforce.
Obtain coverage quotes from the private insurance marketplace. If you are relatively healthy, you should review your options in the private insurance marketplace. The earlier the start date for your retirement, the greater the likelihood it will benefit you to shop around for the right insurance. The private insurance marketplace offers a wider range of coverage options. But family and individual health insurance plans may end up costing you more money. That being said, it doesn’t hurt to take a look at the private insurance options and shop around.
You can get started comparing insurance plans and prices by using an online marketplace. Some examples of helpful sites include ehealthinsurance.com and gohealthinsurance.com. Another recommended option includes working directly with an insurance broker. Just keep in mind that if you end up deciding to obtain health insurance coverage under COBRA or the Affordable Care Act, it’s still recommended that you shop around and compare the premium costs and coverage amounts.
Explore coverage options under the Affordable Care Act (ACA). When you lose your employer-provided coverage this is deemed a qualifying event for the purposes of obtaining coverage under the ACA. This means you can obtain coverage outside of the normal open enrollment period. For early retirees, this is important due to the fact that income-based subsidies are available under the Affordable Care Act. Depending on the amount of your new household income amount after early retirement you may qualify for a subsidy of insurance premiums.
These subsidies are based on your modified adjusted gross income during the year that the policy is in effect. You can start comparing policy options in your state at HealthCare.gov. You can also estimate if you will qualify for income based subsidies using the Health Insurance Marketplace calculator available through the Kaiser Family Foundation.
Check with your current or previous employer to see if you are eligible for retiree health coverage. The share of retirees covered by employer-provided retiree health insurance has dropped significantly over the past few decades. According to the Kaiser Foundation only 16 to 25 percent of retirees had supplemental Medicare coverage. If you have retiree health insurance available, be sure to pay attention to service dates and age requirements for eligibility. It is also important to find out how those benefits change as you age.
Use COBRA to maintain group coverage for 18 months. When you retire you may choose to continue your group coverage under COBRA for 18 months. But your premiums will likely increase significantly since you will now be paying the full premium yourself. One exception would be if you have retiree health plan dollars available to offset the costs if you have access to a retiree health plan. Keep in mind that if you have a health savings account, you can use funds from the HSA to pay for insurance premiums for health care continuation coverage through COBRA.
The benefit of choosing COBRA coverage is that your insurance coverage and you won’t have to change providers. The downside is that you are now losing the employer based subsidy and will pay the entire cost of your health insurance premium.
In the event you have a pre-existing condition and will be retiring within 18 months of turning 65, COBRA may end up being your best option in this period of uncertainty. As long as you continue to pay your premiums, you will be able to maintain coverage until you are eligible for Medicare. If you don’t have a pre-existing condition, choosing COBRA will give you some extra time to figure out your next steps for insurance. However, it’s possible that less cost prohibitive coverage will be found when you obtain coverage under the ACA.
Seek part-time work that provides access to health insurance coverage. Some employers are more generous than others in the benefits department. If you are considering part-time work during retirement, you may be able to generate extra income while obtaining health insurance coverage. You will most likely still have to cover all or most of the cost of your health insurance. However, by participating in a group plan you may have access to more comprehensive coverage. Check to see if potential employers in your area provide health care insurance for part-time workers.
Ways to Take Control of Your Future Health Care Costs
Here are some other things to consider that will help to lower your out of pocket health care expenses:
Take advantage of a health savings account while you are still working. If you are covered under a high deductible health plan, you can save for future health care costs in a health savings account (HSA). Health savings accounts are very beneficial because they offer triple tax exemption. The money that you put into HSAs lowers your current taxable income, grows tax-deferred, and comes out of your account tax-free as long as you use it for health-related expenses.
Develop health habits that will help before and after you reach retirement. Avoiding problem behaviors such as smoking and obesity can help you avoid staying on the path to high current and future costs. It is also important to become an informed patient. According to health literacy providers such as EdLogics, the focus on education for over 50 high cost conditions including metabolic syndrome, heart disease, and diabetes will help empower individuals to take action and improve their overall health and well-being.
A Bank of America Merrill Lynch survey revealed that nearly two-thirds aren’t saving as much in their retirement plans at work due to health care costs. Smart health habits can help keep your costs low during retirement. But a healthy lifestyle may also be the key to building up a bigger retirement nest egg.
Create a budget plan for retirement. Creating a ballpark estimate of your lifestyle expense needs and wants can help you fully assess your desired retirement income needs in today’s dollars. This can also be helpful when examining the impact of the various expenses that may change once you leave your job (health insurance premiums, travel, etc.).
Increase your Cash Reserves. Most financial planners recommend maintaining at least 3 to 6 months of living expenses in an emergency fund. If you are retiring early you should consider saving more than this ballpark estimate. Building short term liquid savings in accounts such as a savings account, interest checking, money market fund, short duration CDs or Treasury Bills can help you cover projected maximum out-of-pocket health care costs. This extra savings can also be helpful in keeping your taxable income as low as possible.
Health insurance subsidies are based on modified adjusted gross income for the year you want coverage.
Use smart income tax planning techniques to keep your premium costs low. You most likely wouldn’t retire before first establishing a basic income plan. Similarly, you need to have a basic tax plan to help you figure out ways to structure your retirement income in a tax smart manner. For early retirees relying on the guaranteed insurability through the healthcare marketplace, tax planning can also help you lower your premiums. Tax-free income from a Roth 401(k), Roth IRA, or HSA can be a valuable part of your tax plan.
As mentioned earlier, the ACA insurance subsidies are income based for the current premium year. Effective tax planning can help you meet lifestyle expense goals while minimizing the cost of health insurance coverage.
See this article for more information on how to get health insurance when you retire.