Let’s Have a Heart to Heart: Pre-Retirement Healthcare Planning
How Not to Retire in Vein
Today’s blog continues a series that focuses on the financial planning strategies for early retirees. I introduced the idea of early retirement with my blog, Are you on Fire Financially, and followed that up with the first consideration which is how to generate income in early retirement entitled: It’s All About the Benjamins. Now, I turn my attention to today’s blog on the all important subject of healthcare planning in early retirement. After housing and transportation, healthcare is the third-largest expense people will have when they retire at age 65 - and that expense is subsidized by Medicare*. Clearly with an early retirement, where one does not have this subsidy, it is imperative to be aware of their healthcare options prior to Medicare eligibility. Below, I will outline some of your options.
You Really Can’t Get Medicare Before 65?
There are a handful of options that may provide a healthcare bridge from early retirement to age 65, when people are eligible for Medicare. While it is true a few people are eligible for Medicare prior to age 65; medically speaking, you don’t want to be in this category as that would mean you have a clinical ailment such as end-stage renal disease or ALS (amyotrophic lateral sclerosis)**. Even if you elect to accept Social Security at age 62, you still will not be eligible for Medicare until age 65. Therefore, early retirees need to consider their own health status (ranging from extremely poor to extremely good) in their decision with the healthcare option they choose. Additionally, early retirees need also to consider the health status of those that may rely on them for healthcare (Note: children can remain on or even join a parent’s plan up until age 26, even if they are married and not living at home).
Healthcare Options in Early Retirement
Employer Retirement Healthcare Benefits — Let’s start with the most generous option. A fortunate few have employers that provide paid-for healthcare in early retirement. This perk is so tremendous that it is no longer offered for both government and non-government employees. However, if you were hired decades ago, you may be grandfathered into such a plan as are some of my clients. If you have worked for several decades with a private or public (i.e., government) employer, you should review your Retirement Health Care options with your HR department. I have called the benefits department with my clients to confirm the details regarding these early retirement healthcare benefits.
On occasion, some employers in the process of downsizing provide healthcare benefits to help encourage older employees to retire early.
Previous-Employer Retirement Healthcare Benefits — Did you know that even if you retire early and leave your employer, you can still receive your healthcare through them for a certain amount of time? You can typically receive an additional 18 months of coverage, but only in certain instances, it can also be extended to 36 months. This was made possible via the Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA for short. However, most times you will have to pay the full cost of your health care coverage, plus an additional 2%. While you were working, your employer-subsidized a significant portion of these costs. This was a perk to attract employees for which they also received a tax deduction. By paying for coverage yourself, there may be strategies one can use to ensure you receive a tax deduction for health care premiums paid.
Spouse’s Plan — If your spouse isn’t quite ready to retire early with you, obtaining healthcare through their employer may be an option as well. However, not all employers provide this coverage and certain rules and fees will likely apply.
Public Market — Another option is the public market that was established by the Affordable Care Act. This legislation enables people to obtain coverage, even if you have a pre-existing medical condition. While the costs of these plans can vary widely, the recently enacted American Rescue Plan Act of 2021 (ARPA) provides even more generous subsidies. These subsidies are entirely based on a person’s income. For example, if you do not need a lot of income because you’ve paid off your mortgage and have a good amount saved in the bank or in non-retirement accounts, your health insurance premiums could be significantly subsidized. However, your healthcare provider options may be limited with these plans, and you likely won’t be able to keep your current doctor.
Private Market — An additional option is through private markets which can be accessed via agents or brokers. I’d recommend you go with an independent agent/broker that can shop multiple providers. However, because these are private plans, the government-funded premium tax credits cannot be applied and the premiums can be on the higher side.
Healthcare Sharing plans** — It must first be noted that this is not medical insurance. Instead, these are agreements to share the medical costs with a group of like-minded individuals. These are typically organized under ministries or other religious organizations. Specifically, members send in monthly ‘shares’ (i.e., premiums), which are distributed to or on behalf of other members with medical expenses (i.e., benefits payments) in accordance with program guidelines. They are built upon the principle of people with similar beliefs and values coming together to share each other’s burdens; not unlike the risk-pooling nature of health insurance. However, a large part of the appeal of healthcare sharing programs is that in practice, they are much less expensive than health insurance.
As a result, families can become members in healthcare sharing programs for $300 to $500 per month, compared to the average unsubsidized cost of family traditional health insurance coverage at $1,564 per month. These plans do not decline membership due to pre-existing conditions; however, there are limitations on sharing bills related to any recent pre-existing conditions.
However, unlike Health Insurance, healthcare sharing programs do not have binding contractual agreements, so it is important that you review these options thoroughly before considering them instead of traditional insurance.
Below is a graph, courtesy of Fidelity, that shows where early retirees tend to receive their healthcare.
Source: Fidelity Workplace Investing***
Additional Considerations:
Health Savings Accounts (HSA) — I’m a huge fan of HSAs! In fact, I have written concerning them on more than one occasion because, in my opinion, they are absolutely fantastic. If you have invested money in these accounts, the proceeds can be used at any time to pay for medical needs which would include between early retirement and Medicare. As a reminder, these accounts are triple tax-free whereas Roth, Traditional IRAs, 401ks etc., are only double tax-free. For example, HSA contributions are tax-deductible, and both the growth and distributions (if used for a qualifying medical expense) are tax-free. Roth, Traditional IRAs, and 401ks may only be double tax exempt as tax will need to paid on the distributions for Traditional IRAs/401ks, and there are no tax deductible contributions for a Roth IRA. However, for an HSA you must have a qualifying high deductible medical plan. Additionally, the contributions were limited to the following amounts in 2020: Individual $3,550 and Family $7,100. For those age 55 and older, you can contribute an additional $1,000.
Final Parting Thoughts
Nothing is more important than one’s health, and one of the best things you can do to reduce future healthcare expenses is to commit to a healthier lifestyle now. It goes without saying that increased exercise and better nutrition may greatly mitigate, and in some cases, may even reduce your future health care expenses. You can read more about how expensive healthcare will be in retirement here: Somewhat Unusual Planning Advice - Diet and Exercise.
Finally, when it comes to healthcare in early retirement, there are many factors to consider. Your health and the health of any that need coverage, any pre-existing conditions, duration of coverage, and of course the cost of coverage. Obviously, there are a lot of unknowns regarding what one’s health will be in the future; however, the above shows that one does have options for healthcare in early retirement.
Thank you for taking the time to read this blog. I hope you found the information useful. If you have any questions, about early retirement, please feel free to schedule a meeting by clicking here.
Sources:
* https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
*** https://www.fidelity.com/viewpoints/retirement/transition-to-medicare
