There are many pros of retiring early, but the top perks are considerable: no hectic work schedule; the ability to vacation when you want to; time freedom to have fun with your spouse, children, and grandchildren. If you’ve planned effectively, your savings, assets, and other investments can fund an early exit from the workforce until you can start distributions from your retirement plan when you reach official retirement age. But what are health insurance options until you qualify for Medicare? Depending on the age you take early retirement, this is a critical question.
Financial Factors to Consider if You Want to Retire Early
You are not eligible for Medicare Part A and B until you reach the age of 65 (unless you qualify due to specific circumstances as described in the section below). If you retire before then, it is prudent to explore other avenues for health care coverage to replace an employer-sponsored plan.
Social Security benefits
If you retire before retirement age, your Social Security benefits are affected. For example, you are eligible to receive Social Security benefits at 62 years of age, but you won’t receive full benefits until you reach full retirement age. So, you’re looking at a reduction of your benefit payments in those early retirement years—which impacts the bottom line of your overall Social Security benefits you’ve earned all those years you worked.
Distributions from retirement plans
If you take early distributions from a retirement plan, you’ll also owe penalties (and possibly tax) on those withdrawals. It’s not sensible to deplete your hard-earned savings before you need to—especially if you’ll have to pay a chunk of your early withdrawals to Uncle Sam.
Unless you’re in a financially free situation, these monetary hits can make quite a dent in your cost of daily living. Your expenses are the largest factor in your ability to retire early. And health care is quite a large expense, especially if you experience an unexpected illness or catastrophic accident that affects your quality of life. But you do have options—which is the point of this article.
Health Insurance Options until You Qualify for Medicare
You aren’t eligible for Medicare benefits until you turn 65 unless you qualify due to extenuating circumstances. Examples of those who may qualify for Medicare before they turn 65 include:
- those with end-stage renal disease
- people who have Lou Gehrig’s disease (ALS)
- individuals who have received Social Security benefits for 24 months due to a disability
If you don’t qualify for early benefits, you have several options to consider:
Enroll in your spouse’s employer-sponsored plan.
This may be your most cost-effective option. For couples who don’t retire together, the retiring spouse may be eligible for coverage through their spouse’s employer-sponsored insurance plan. Depending on the employer’s policy, you may have to pay for your own premium, but because you’ll be on a group policy, your premium may be quite cheaper than an individual policy.
Participate in COBRA to help bridge your health coverage act.
A COBRA policy is required for business that qualify to extend a former employee’s health care benefits for up to 18 months after their departure. Keep in mind, paying this coverage may be your responsibility, and it can cost quite a bit of money. But, in the face of rising health care costs, having any policy in place can save you quite a bit of money if you experience a significant health issue. If you’re retiring close enough to 65 for a COBRA policy to cover you until Medicare kicks in, this may be a good short-term solution for you.
Purchase an individual policy.
This option is often the only route entrepreneurs and the self-employed have available to them, even during employment. But, when you retire and leave an employer-sponsored plan behind, you can explore these, too. The Affordable Health Care Act makes this easy through their online healthcare marketplace. These policies can be cost effective as you may be eligible for a discount/subsidy depending on your annual income.
If you don’t qualify for a discounted rate because your household income is too high, you can purchase a private policy without a subsidy. If you are unfamiliar with the cost of individual policies, prepare yourself for a moment or two of sticker-shock. However, it’s better to have health care coverage than not, regardless of your age. So, while expensive, individual insurance is a solid option until you’re eligible for Medicare.
Health Insurance Is Expensive, but so Is Quality Health Care
The cost of health care in general continues to rise, year after year. If you want to plan an early exit from the work force, you can incorporate anticipated health insurance costs into your overall financial planning. You must understand your options if you want to obtain any type of health insurance—and receive quality medical care in early retirement—without it breaking the bank. The information provided in this article is meant to be a loose guideline of available choices you have. Your financial advisor can help you determine which option is the best for you.