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 coverage. If you’ve been relying on employer-sponsored group health insurance, that coverage will likely end—only 29% of large firms offer retiree health benefits1—leaving 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 health-care costs is one of the biggest financial issues you’ll have to sort out when you retire before 65,” says Mary Jo Harper, a Merrill Financial Advisor.
It’s a common challenge: 70% of Americans retire before they become eligible for Medicare2. If you’re one of them, your financial advisor can help you estimate your health-care 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.
Here’s a rundown of what you might explore with your financial advisor to help you cover your immediate and long-term health care needs.
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 Thought Leadership, Bank of America. Or you could look for a part-time job that offers health-care benefits—at least until you do qualify for Medicare.
Ask your employer’s HR department whether you’re entitled to continue your existing coverage for yourself and your family under COBRA, or the Consolidated Omnibus Budget Reconciliation Act. This coverage typically lasts for up to 18 months after you leave your job. However, your premiums will be more expensive than they were when you were working, because you’ll have to pay the full cost of the insurance plus up to a 2% administrative fee. If you turn 65 while you’re covered under COBRA, you can sign up for Medicare Part B, and your partner and any dependents who are younger than 65 can continue COBRA coverage until the 18-month period is up.
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. 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.”
As you shop around, you could consider purchasing a high-deductible health plan and opening 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, and any interest or other earnings are tax-free. Withdrawals are also 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, 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. There’s also no limit on when you can request HSA reimbursements, notes Storey. “You can tap your account any time you need the money.” (For more on HSAs, read “Health Savings Accounts Explained.”)
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 health care needs, says Storey. The cost of regular health care is often dwarfed by the cost of long-term care, which can easily top six figures per year8 and isn’t, for the most part, covered by Medicare. Seventy percent of Americans who are currently age 65 or older will require some type of long-term care during their lifetime9, 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. (For more insights on how to manage the cost of long-term care, read “Will You Be Prepared to Cover the Costs of Long-Term Care?”)
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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