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Staying covered until Medicare
kicks in

If you retire early, how can you replace employer-based health insurance coverage? These tips can help you bridge the gap.

 

WHEN YOU RETIRE EARLY, ONE MAJOR NEW EXPENSE can loom large: health insurance. If you’ve been relying on your employer’s group health insurance, your coverage will likely end — only 21% of large firms that offer health benefits extend coverage to retirees.1 That leaves you responsible for the full cost of your premiums until you become eligible for Medicare at age 65. Deciding how you’re going to cover healthcare costs is one of the biggest financial issues you’ll have to sort out when you retire before you turn 65.

 

It’s a common challenge: Nearly 70% of Americans retire before they become eligible for Medicare.2 If you’re one of them, your financial advisor can help you estimate your healthcare needs in retirement and weigh the best coverage options available to you until Medicare kicks in, including ways that you can manage your family’s health coverage if you previously had your dependents on your employer’s plan.

 

How big is the healthcare coverage gap early retirees face?

american map themed with american flag

70%
Percentage of Americans who retire before they are eligible for Medicare2

Percentage of large firms offering healthcare benefits that extend coverage to retirees1

21 percent

Percent likelihood that Americans who are currently age 65 will require some type of long-term care5
70%

Medical Helath Card illustration

 

The cost of long-term care can easily top
six figures per year4
and isn't, for the most part, covered by Medicare

Medicine jar with 100 dollar bill in it

27.8 percent

Percentage of government exchange healthcare plans purchased by people ages 55–643

 

How big is the healthcare coverage gap early retirees face?

american map themed with american flag

70%
Percentage of Americans who retire before they are eligible for Medicare2

Percentage of large firms offering healthcare benefits that extend coverage to retirees1

21 percent

Percent likelihood that Americans who are currently age 65 will require some type of long-term care5
70%

Medical Helath Card illustration

 

The cost of long-term care can easily top
six figures per year4
and isn't, for the most part, covered by Medicare

Medicine jar with 100 dollar bill in it

27.8 percent

Percentage of government exchange healthcare plans purchased by people ages 55–643

 

 

Here’s a rundown of what you might explore with your financial advisor to help you cover your immediate and long-term healthcare needs.

 

Another workplace plan

Your easiest option, if you’re married and your spouse or domestic partner is still working, might be to sign on to their workplace plan, says Ben Storey, director, Retirement Research & Insights, Bank of America. Or you could look for a part-time job that offers healthcare benefits — at least until you do qualify for Medicare.

 

COBRA

Ask your employer’s HR department whether you’re entitled to continue your existing coverage for yourself and your family under COBRA (the Consolidated Omnibus Budget Reconciliation Act). You’ll likely pay higher premiums under COBRA than you did when you were working — participants generally have to pay the full cost of the insurance plus up to a 2% administrative fee —but it may be worth considering.

 

COBRA coverage typically lasts for up to 18 months after you leave your job, but there are some exceptions related to Medicare, disabilities and other factors that could extend the coverage for you or your spouse and dependents to as long as 36 months. Your financial advisor or HR department can fill you in on the details.

 

If you turn 65 while covered by COBRA, you can sign up for Medicare Parts A and B. Your COBRA coverage typically ends when you get Medicare, but your spouse (if under 65) and dependents will remain eligible for COBRA until the designated coverage period runs out. For more information on how Medicare eligibility affects COBRA coverage, visit medicare.gov and check out the Department of Labor’s guide to COBRA.

Exchange-based plans

Under the current provisions of the Affordable Care Act (ACA), people who lose coverage under an employer’s plan may be able to purchase insurance from a federal or state insurance exchange outside of the regular open enrollment period. In fact, people between the ages of 55 and 64 account for 27.8% of plans purchased on the government exchange.3 You can research the policies currently available to you at healthcare.gov. “I’d suggest comparing the costs and coverage of exchange-based insurance with all of your other options,” says Storey. “Depending on what type of coverage you need and the options available in your area, you may find lower premiums on the exchange, especially compared to COBRA.”

 

Ben Story Headshot
“You can draw on health savings account funds to pay certain Medicare premiums.”

— Ben Storey, director, Retirement Research & Insights, Bank of America

Opening a health savings account tied to a high-deductible plan

As you shop around, you could consider purchasing a high-deductible health plan that meets federal tax standards permitting you to open a health savings account (HSA). The high-deductible health plan will likely have lower premiums than others you’re considering, and the money you invest in an HSA, only available to those who purchase a high-deductible plan, can be used to pay for qualified medical expenses not covered by your insurance. Contributions are tax deductible for federal tax purposes, and any interest or other earnings are federal tax-free. Withdrawals are also federal tax-free as long as they’re used to pay for qualified medical expenses. Any unused balances remain in the account, potentially gaining in value. No other type of tax-advantaged savings account offers all of these features.

 

“Once you’re eligible for Medicare and enroll, you can no longer contribute to an HSA, although you can draw on your HSA funds to pay certain Medicare premiums and out-of-pocket medical expenses,” says Storey. There’s also no limit on when you can request HSA reimbursements, he adds. “You can tap your account any time you need the money.”

 

Planning ahead for future costs

After your immediate health coverage needs are sorted out, it’s a good idea to talk with your financial advisor about ways you might prepare for your long-term care needs, says Storey. The cost of regular healthcare is often dwarfed by the cost of long-term care, which can easily top six figures per year4 and isn’t, for the most part, covered by Medicare. An American who is 65 has nearly a 70% chance of needing some type of long-term care during the remainder of their lifetime5 and long-term care insurance premiums increase the older you are when you apply for coverage. If you haven’t already purchased it, your financial advisor can help you determine whether long-term care insurance makes sense for you or your spouse, factoring in age, medical history and other considerations.

 

In addition, if you know you’re about to leave the workforce — whether you’ve decided to take early retirement or you believe a layoff is imminent — it’s a good idea to ask your doctor and your dentist whether there are any procedures they would recommend you take care of while you’re still covered by your employer’s health plan.

 

And, of course, it can’t hurt to start exercising and eating right if you’re not already. As Storey notes, “The best health insurance is staying healthy.”

 

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1Kaiser Family Foundation, “2022 Employer Health Benefits Survey,” October 27, 2022.

 

2Employee Benefit Research Institute (EBRI) and Greenwald & Associates 2022 Retirement Confidence Survey.

 

3Kaiser Family Foundation, “Marketplace Plan Selections by Age: Open Enrollment 2022.”

 

4Genworth Cost of Care Survey, 2021.

 

5U.S. Department of Health and Human Services, “How much care will you need?” Longtermcare.gov, accessed March 16, 2023.

 

This material should be regarded as educational information on healthcare considerations and is not intended to provide specific healthcare advice. If you have questions regarding your particular situation, please contact your healthcare, legal or tax advisor.

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