If you plan to retire prior to age 65, one of your biggest challenges to deal with is determining how to pay for out-of-pocket health care costs before becoming eligible for Medicare. The cost of health insurance options is already high for most households and should be a major consideration for anyone planning on an early retirement.
Proactive health insurance planning is necessary to keep your health care costs as low as possible. Here are some health insurance choices you should consider:
Obtain coverage through your spouse’s employer-sponsored health plan. If your spouse is still working and eligible for health insurance coverage through their employer, the process of finding a backup insurance policy may be an easy solution. That is because losing your own health insurance coverage is considered to be a qualifying life event that enables you to enroll in a new health insurance plan outside the usual Open Enrollment Period.
Explore coverage options under the Affordable Care Act (ACA). When you lose your employer-provided coverage for any reason—even if you quit your job—you are eligible to buy an ACA plan on the federal health insurance marketplace (HIM) or a state HIM. (These marketplaces are also referred to as health insurance exchanges.) Losing coverage through work qualifies you for a Special Enrollment Period.
That period extends to 60 days after you lost coverage through your employer. You can also begin the process of buying an ACA plan during a Special Enrollment Period if you expect to lose your coverage within the next 60 days.
You may be eligible for a subsidy if your household’s income is below a certain level. The income level necessary to qualify varies depending on the number of people in your household and the state you live in. The HealthCare.gov website asks you to select those variables and then lets you know the maximum amount of income you could make and be eligible for reduced premiums. For example, if there are two people in your household and you live in Illinois, the income cutoff is $68,960 for 2020.
Obtain coverage quotes from the private insurance market. If you are relatively healthy, you might also consider reviewing your options in the private insurance market, particularly if your household income is too high to qualify for a subsidy for an ACA plan.
Policies sold in the private market are sometimes called off-exchange plans. They may be purchased directly from the insurance company or through an intermediary, such as an insurance broker or agent.
Use COBRA to maintain your previous coverage. When you retire, you may choose to continue your employer’s coverage under COBRA for up to 18 months. However, your premiums will increase significantly since you will now be paying the full premium yourself as well as administrative costs that may amount to an additional 2 percent of the premium charge.
A primary benefit of choosing COBRA coverage is that it is the same insurance coverage your former employer gives to its current employees—and also likely to be the same coverage you experienced while working there—and so you shouldn’t have to change health care providers.
If you are retiring within 18 months of turning 65, COBRA may end up being your best option. As long as you continue to pay your premiums, you will be able to maintain coverage until you are eligible for Medicare.
You must be given at least 60 days to elect to continue your health insurance coverage under COBRA, starting on the later of the date you are given the election notice or the date you would lose your existing coverage.
Seek part-time work that provides access to health insurance coverage. Some employers are more generous than others in the benefits department. If you are considering part-time work during retirement, you may be able to generate extra income while obtaining health insurance coverage. Requirements vary by company, but you will probably have to work a minimum number of hours over a selected period to be eligible.
Here are some other things to consider that may help you lower your out-of-pocket health care expenses—both before and after you become eligible for Medicare:
Take advantage of a health savings account (HSA) while you are still working. You can save money to pay for future health care expenses—including those you incur after the age of 65 and are on Medicare—in an HSA. Before you retire, any money you put into your HSA lowers your amount of income subject to federal tax and is also tax-free when you use it for health-related expenses.
Develop healthy habits that will help before and after you reach retirement. Avoiding health issues such as smoking cigarettes and becoming obese may help you lower current and future health care costs. Smoking-related illnesses lead to almost $170 billion in health care costs annually. And obesity is estimated to result in $147 billion in health care costs (in 2008 dollars).
Create a budget plan for retirement. Before you retire early, you should create a budget that lets you you fully assess your retirement income needs in today’s dollars. Your budget must include future health care costs, taking into consideration the expected growth rate for such expenses: The Centers for Medicare & Medicaid Services estimates health expenditures in the U.S. will increase at an average annual rate of 5.5% from 2018 to 2027 and will total almost $6 trillion in 2027.
An original version of this article appeared at TheBalance.com.