Authored by: Erica Bourquin, CFP®
For many, early retirement represents the reward for decades of disciplined work, saving, and planning. The ability to step away from a demanding career earlier in life creates opportunities to spend more time with loved ones, travelling, pursuing personal interests, or devoting time to charitable endeavors. Many retirees carefully prepare to replace their income from their work with income from their investments, saving and investing enough to fund their desired retirement income throughout their lifetime.
Yet retiring and losing access to relatively affordable employer sponsored health insurance before having access to Medicare at age 65 presents a separate and unique challenge to those navigating the decision on when to retire. Health and medical expenses are often large and unpredictable, and many retirees underestimate the potential financial impact of covering medical expenses without proper protection. Depending on when someone retires, a retiree will need to obtain coverage and protect themselves for anywhere from a few months to more than a decade. This raises an important planning consideration. The decision to retire early should include not only the question "Can I afford to retire?" but also "How will I manage healthcare costs until I am eligible for Medicare?"
There is no single solution that works for every early retiree. The appropriate strategy depends on age, family circumstances, health status, income, and overall financial resources.
COBRA Coverage
For many retirees, COBRA provides the simplest short-term solution. COBRA allows individuals leaving an employer to continue participating in their existing employer health plan for a limited period of time, typically up to eighteen months. The primary advantage is continuity, with doctors, prescriptions, and benefits often remaining unchanged.
While convenient, COBRA coverage is often expensive since the former employee generally becomes responsible for paying the full premium, including the portion previously covered by the employer, along with an administrative fee.
While COBRA is often not the most economical long-term solution, it can provide a simple and consistent option for retirees in the short term.
Individual Marketplace Plans
Health insurance purchased through the Affordable Care Act Marketplace has become one of the most common options for early retirees. These plans offer varying levels of coverage and allow retirees to select deductibles, provider networks, and premium levels that align with their needs.
However, eligibility is based on income rather than total assets. As a result, managing taxable income (specifically modified adjusted gross income) becomes critical for those choosing this option. This is where retirement income planning and tax strategy intersect with healthcare planning.
Coordinating withdrawals from taxable accounts, retirement accounts, and Roth accounts will influence healthcare costs and needs to be planned for to ensure that retirees have sufficient liquidity to fund their expenses, all while keeping their income low.
Coverage Through a Spouse
If one spouse continues working and receives employer sponsored health insurance, adding the retired spouse to that plan can be an efficient solution. This option may provide comprehensive coverage while delaying the need for individual insurance until both spouses retire.
Private Health Insurance
Some retirees prefer purchasing coverage directly from insurance carriers outside the Marketplace. Private plans may provide broader physician networks or offer services suited to specific medical needs for individuals with specialized healthcare requirements.
Healthcare Costs
Even when monthly premiums are considered, they represent only one component of total healthcare spending. Retirees also need to consider the costs they already may be familiar with covering including:
- Annual deductibles
- Out of pocket maximums
- Prescription drug costs
- Specialist visits
- Hospital expenses
- Dental and vision care
- Long-term healthcare considerations
Unexpected medical events can significantly affect retirement spending. Planning for these possibilities helps reduce financial stress during retirement.
Building Healthcare into a Comprehensive Retirement Plan
Retiring earlier in life can be an exciting milestone, but it requires thoughtful preparation beyond accumulating enough assets to leave the workforce. Individuals who retire before Medicare eligibility often discover that healthcare planning will influence many other financial decisions since healthcare may be one of the most significant expenses during that time. Understanding the available options, planning for expenses, establishing the right protection, and coordinating those decisions with your broader financial plan can help reduce costs, uncertainty, and support long-term financial success.
At Granite Harbor Advisors, we believe retirement planning is most effective when every piece of your financial picture works together. We help our clients evaluate healthcare decisions alongside their investment, tax, estate planning, and insurance strategies to provide greater confidence and peace of mind throughout their financial journey.