Health care costs are a big issue for people that plan to retire before they turn 65. If you're under 65 and thinking about retiring early, you may end up paying out-of-pocket health care costs before you're old enough for Medicare.
The cost of health insurance options is already high for most households. If you want to retire early, it should be one of the key items in your plan. Here are some ways you can reduce health care costs before and after you're able to obtain Medicare.
Your Spouse’s Health Plan
Losing your health insurance is considered a qualifying life event. This means that you can enroll in a new health insurance plan outside of the Open Enrollment Period. If your spouse is still working and has health insurance through their employer, it might be easy for you to find health care. Your spouse could add you to their policy during this time.
However, if you're going to retire, there is a good chance that your spouse might be thinking about it as well. This means you'll each need to have a plan when the time comes.
Affordable Care Act (ACA)
When you lose your employer coverage for any reason, you're able to buy an ACA plan on the Health Insurance Marketplace (HIM) or a state HIM (these marketplaces are also called health insurance exchanges).
When you lose the coverage you've had through work for any reason, you're able to apply for a Special Enrollment Period (SEP). The SEP extends out to 60 days after your employer's coverage ends. You're also able to apply for a SEP under the ACA if you expect to lose your coverage within the next 60 days.
You may be able to apply for a subsidy if your family's income drops below a certain level when you retire. The income level to qualify varies on the number of people in your home and the state where you live.
The HealthCare.gov website asks you to select factors that apply and tells you the maximum amount of income you could make and be able to apply for reduced premiums. For instance, if there are two people in your household and you live in Illinois, the income cutoff is $69,680 for 2021.
If you live in a state with its own HIM, the HealthCare.gov website lets you know whether you can apply for lower premiums. It then directs you to the state's health insurance website.
Private Insurance Market
If you are in good health, you might also think about the private insurance market, particularly if your household income is too high to qualify for a subsidy under an ACA plan.
Policies sold in the private market are sometimes called off-exchange plans. You may purchase them directly from the company or through an agent.
When you retire, you may choose to continue the coverage you had from work under the Consolidated Omnibus Budget Reconciliation Act (COBRA) for up to 18 months. After that time, your premium will rise (since you have no help from an employer), and you'll pay any administrative costs. Some of the costs can add up to 2% of the premium charge.
A benefit of choosing COBRA coverage is that you get the same insurance that your former employer gives its current members. It is also likely to be the same one you had while working there. Therefore, you shouldn't have to change your health care providers.
If you're going to retire within 18 months of turning 65, COBRA might be your best option. As long as you keep making your payments, you'll keep your coverage until you're able to apply for Medicare.
You must be given at least 60 days to elect to continue your health coverage under COBRA. This starts when you are given the notice or the date you would lose your current coverage, whichever is later.
Work Part Time
Some employers might give benefits for part-time work. If you're thinking about working part-time, you may be able to make some extra money and receive some health insurance. Each company is different, but you might have to work a minimum number of hours and meet vesting requirements to get it.
Under the ACA, part-time workers are those who work an average of 30 hours per week or less.
Before You Retire
There are some actions you can take before you retire that can help you reduce the costs you pay for health care. They also help you after you retire or enroll in Medicare.
Health Savings Account (HSA)
You can save money to pay for future health care using a health savings account (HSA). An HSA is an account that you pay into before taxes and withdraw from tax-free. However, the money you place in the account can only be used for health care reasons.
This type of account gives you tax-free money for health care and can help lower your taxes if you're still putting money into it after you retire.
Living healthy is one of the best ways to reduce your health care costs when you're older. Not smoking and controlling your weight may help you lower your current and future health care costs. Smoking-related illnesses lead to almost $225 billion in health care costs per year. Obesity is estimated to result in $182 billion per year in health care costs (adjusted for inflation to 2021 dollars).
Taking action in the present to prevent health problems later is always a good choice, and it doesn't cost much when you do it.
Budget and Plan for Retirement
Before you retire early, you should make a budget plan that lets you fully assess your income needs when you retire. It helps to adjust the amount for inflation to the year you retire so that you don't under-plan your needs. You should use a rate of 2% per year for the inflation rate when doing your math. This is because the Federal Reserve tries to keep the average rate of inflation at this level.
Your budget should include future health care costs with their expected growth rate. For example, the Centers for Medicare & Medicaid Services estimates health care costs in the U.S. will rise at an average yearly rate of 5.5% from 2018 to 2027 and will total almost $6 trillion in 2027.
If you're unsure how to proceed, you may want to consult a financial planner and an accountant. These professionals can help you set aside the right amount of money for health expenses. They can also help you structure your investments in a manner that reduces your tax burden when you need to use them for income.