By Jimmy Miller
Is health insurance preventing you from retiring early? This is the reality for many hardworking individuals who want to quit working before they turn 65. But dealing with the high costs of health insurance (and the increasing need for it as they age) before becoming eligible for Medicare means that they feel forced to keep working.
Even those that have made savvy financial choices during their working lives and have saved a considerable amount are finding it nearly impossible to retire early. And those that do proceed with an early retirement find that they’re spending a sizable portion of their nest egg on healthcare since they’re no longer covered under their employer’s plan.
As an advisor, when I ask my clients what they think their greatest expense after retiring will be, most of them tell me it’s travel. I wish that was the right answer, but for most people, it isn’t. And while you may be fortunate to go into retirement with great health, the reality is that as you age, the greater your healthcare needs become.
How Much Do Retirees Spend on Healthcare?
According to a new study by Fidelity, the estimated amount of money a 65-year old couple who retired in 2019 can expect to spend on healthcare throughout retirement is $285,000. Some estimates that consider the rising cost of healthcare put the estimate closer to $390,000. And this doesn’t account for any long-term care expenses, either.
For some perspective, the average balance in a Fidelity 401(k) for 60 to 64-year-olds in America is $183,700. Those near retirees may of course have other accounts, but it still speaks to the possible shortfall.
Those who have saved very well for retirement and are thinking about early retirement should acknowledge that healthcare insurance is usually the biggest impediment and cost once they are no longer covered under an employer-sponsored plan.
This isn’t to say that early retirement is completely off the table for those who don’t want to work until they are 65. It simply means that it’s important to uncover any financial blind spots associated with healthcare costs and plan to mitigate the impact as much as possible.
When Am I Eligible for Medicare?
The day you turn 65, you are probably looking to enroll in Medicare insurance. Medicare has two primary parts: Part A, which is hospital insurance, and Part B, which covers general doctor’s office visits and medical services. There’s also an optional prescription plan, called Part D.
Most individuals can enroll in Part A with no premium (to qualify, you must have at least 10+ years of work history and have paid Medicare taxes during those 10 years), and will only pay a premium for Part B. As of 2020, the premium for Part B Medicare is $144.60 per month. This premium usually increases each year, so retirees should plan to pay more each year for Medicare. The premium may also be higher for high-income individuals (here’s an excellent breakdown of Medicare premium fees).
When you turn 65, you have a deadline to enroll in Medicare, unless you are going to continue working and will be covered under an employer health insurance plan with at least 25 people in it. You can begin enrollment three months prior to turning 65 and have up until three months after your 65th birthday to complete the enrollment.
If you delay enrollment, you could be subjected to a 10% penalty on your Medicare Part B for every year you do not enroll. For example, based on the current Medicare premium, if you wait two years to enroll, you will pay an extra 20% or $28.92 in premium as a penalty! This isn’t a one-time penalty either, you have to pay the increased premium every month for as long as you are enrolled in Part B.
For those wishing to retire early, delaying Medicare enrollment isn’t usually an issue. Even if you decide to enroll in social security benefits early (which you can do when you turn 62 if you don’t mind taking a reduction in benefits), you cannot enroll in Medicare until age 65 unless you meet one of the following criteria:
- You have been on social security disability insurance for at least two years;
- You have end-stage renal failure; or
- You are on social security disability insurance because you suffer from ALS or Lou Gehrig’s disease (if this is the case, the two-year requirement is waived).
If you do not meet one of the above special cases, then you’ll need to find another way to bridge the health insurance gap until you’re eligible for Medicare coverage.
Health Insurance Options for Early Retirees
As you’re exploring the possibility of retiring early, you should consider the multiple options you have for health insurance until you are eligible for Medicare. Here’s a closer look at how some of my clients are bridging the gap so they can quit working and live their best lives:
If you participated in your employer-sponsored health insurance, you will likely be eligible to receive benefits through COBRA after you retire. COBRA (Consolidated Omnibus Budget Reconciliation Act) allows you to maintain your current insurance plan without a gap in coverage.
There are two caveats to consider with COBRA coverage: the first is the cost. While you were employed full time, your company probably picked up part of the tab for your insurance and you paid the remainder. With COBRA coverage, you’re going to be responsible for the full payment.
This usually causes sticker shock for many retirees once they realize just how much their company was paying for insurance (most companies pay for more than half of the total!). You may want to ask your employer what the total cost would be if you chose to retire early. At least this gives you an opportunity to explore your finances to see if you can make it work.
To make COBRA more affordable, you may be able to tap into a Health Savings Account (HSA) if you have a high-deductible plan. Generally, HSA funds aren’t eligible to cover insurance premiums, but the exception is premiums under COBRA coverage (lucky you!).
The second caveat is that COBRA coverage doesn’t last forever. In most cases, COBRA extends your coverage up to 18 months after your departure. If you’re hoping to go from COBRA to Medicare, this means that you’ll need to plan to leave your job when you’re 63 ½ — which isn’t much of an early retirement, but it could make a difference.
Private Health Insurance
You don’t have to purchase insurance through an employer or the government. This has always been the case, and is the reality for self-employed individuals, freelancers, gig workers, and anyone who doesn’t receive health insurance through work.
The biggest downside? The cost. Paying for an unsubsidized healthcare plan is expensive, even if you get the minimum coverage. The cost of private health insurance tends to grow as you get older because it’s more costly for insurers.
Something you’ll want to consider with this option is the level of coverage and the local providers that will accept your insurance. If the specialists you go to aren’t in the network, you could end up paying even more out of pocket.
The Federal insurance exchange (Obamacare) allows you to purchase insurance coverage up until you turn 65. Depending on your income, you may qualify for assistance in covering part of your insurance premium. If your income is less than 400% of the Federal Poverty Limit, then you may also qualify for a tax credit. That’s about $47,000 for an individual and $97,000 for a family of four.
One of the advantages of using the federal exchange is the ability to begin coverage outside of open enrollment. This means you don’t have to “time” your date of departure based around open enrollment periods.
However, even though the exchange was designed to make affordable healthcare accessible, some plans may still offer sky-high premiums. It’s best to shop around for the best rates and coverage to find one that addresses all of your needs.
Get Added to a Working Spouse’s Healthcare Plan
If your spouse is planning on continuing work and receives healthcare through their employer, you may be able to join their coverage during open enrollment. This is a common option among couples with notable differences in age and is often the most cost-effective option. Because the employer usually pays for more than half of the premiums, you and your spouse can both enjoy coverage at a lower rate than sourcing your own insurance.
Adding a spouse to a plan will usually increase the premium compared to individual coverage, but the difference is still usually less than having one spouse acquire private insurance or purchase coverage through the federal exchange.
However, if you and your spouse are trying to retire together, this usually isn’t an option. You and your spouse will need to examine the financial impact of joint retirement and whether it makes financial sense for one to keep working or not.
Travel Medical Insurance
If you plan on traveling a lot during your retirement years, you might consider doing so abroad and relying on travel medical coverage. This is becoming a common practice known as ‘medical tourism,’ and allows you to maintain health coverage as you travel. These plans may also come with emergency evacuation coverage in the event you need to be flown back to the U.S.
Expats who use this type of health insurance usually pay for some medical and dental expenses out of pocket, which are often cheaper in other countries.
One thing worth mentioning about using travel medical insurance to bridge the retirement gap is that you need to be comfortable in seeking medical care in a foreign country. These policies also only apply if you are traveling abroad for the majority of the year.
Shift to Part-Time Work
For many, retirement doesn’t always mean they want to stop working altogether. In some cases, it might be best to trade your time-consuming, highly stressful nine-to-five job in favor of a more flexible part time job.
This is the reality for many people who choose early retirement. They don’t want to keep working in the same capacity they’ve been for the past several decades. They want to enjoy more time freedom to be with family and do the things they love doing, but they don’t want to give up insurance or the security of a paycheck (albeit a smaller paycheck).
If this is the case, then a part-time job with benefits might be the best option. Some employers still offer health insurance to part-time employees, although it might be a plan with less coverage. If you’re in good health, then a lower level of coverage might not be a bad compromise.
Something to consider with this option is that many part-time positions will require you to work a minimum of 3-6 months before becoming eligible for healthcare. If you’re leaving your current employer to go to a new company, then COBRA coverage can help to fill this gap for you. Or, you might ask your current employer if they have any part-time positions available so that you can semi-retire and potentially qualify for immediate benefits.
The Takeaway for Early Retirement
Clearly, health insurance is a big showstopper for many individuals who wish to retire early, regardless of their current health needs. We can appreciate the fact that health insurance exists with the hope that you never really need to use it, but life is unpredictable and when needs arise, you’ll be glad to protect your nest egg as much as possible by letting insurance pick up some of the bill.
The best thing you can do if you’re considering an early retirement is to create a comprehensive financial plan, explore your health insurance options and how each one will impact your finances and your ability to receive care. Expensive and necessary medical care shouldn’t cast a dark shadow on your desire and ability to enjoy a longer retirement.
James Miller is the founder of Baobab Wealth Management, and offers advisory services through Intervest International Inc., an SEC registered investment advisor. With 20 years of experience, Jimmy works with individuals and families to create financial plans that address their individual situations. He has a bachelor’s degree in business administration and holds the CRPC (Chartered Retirement Planning Counselor) and the CMFC (Chartered Mutual Fund Counselor) designations from the College for Financial Planning. When not working on a financial plan, you will usually find Jimmy with his wife, Sonja, and his son, Hendrik, or his clients enjoying the great outdoors! Jimmy is an avid fisherman, hunter, scuba diver, mountain climber, sailor, and world traveler! He also enjoys volunteering his time with the Boy Scouts of America as a troop leader. Learn more about Jimmy by connecting with him on LinkedIn.