What's the best health insurance for early retirees?

Although early retirement is a goal for many Americans, fewer than 1% retire before the age of 50, according to a LIMRA study published in 2015. Perhaps somewhat more realistically, a 2023 EBRI/Greenwald Research Retirement Confidence Survey found that 20% of workers say they plan to retire between the ages of 60 and 64.

One problem with making good on the dream of early retirement is that while Social Security allows individuals to retire — or begin drawing government retirement benefits — at age 62.5, financial advisors commonly define early retirement as any age before 65 — the year at which individuals qualify for Medicare benefits, leaving a potential gap in how to mitigate financial risks related to health care costs.

It's a situation made more problematic by the COVID-19 crisis, during which 3 million Americans retired early, voluntarily and involuntarily. One report found that 53% of retirees said they were considering "unretiring" because they need more money and 45% cited inflation as the reason. Since health care costs are the second-most expensive item in retirement, it stands to reason that an inability to afford health care costs could be a driving factor for unretirement.

For pre-retirees, finding the right coverage can be stressful if not overwhelming. Most Americans have three options for health insurance between the time they retire early and the time they turn 65. Learning more about how they work, and who they work best for, will add value to your practice.

Spouse's employer-sponsored health plan
If one spouse will continue to work, enrolling the early-retiring spouse in the other's plan is an excellent option to consider. Loss of coverage is considered a trigger for special enrollment periods, so if properly planned, gaps in coverage can be avoided. If this is an option, evaluating provider networks, fixed costs and maximum exposure is an important analysis to undertake. However, many employers don't subsidize the premiums for spousal coverage, and not all employers offer coverage for anyone other than the employee. This is especially true for smaller employers. 

Who should consider joining a spouse's employer-sponsored health plan?

• Clients who will be covered under their spouse's employer (i.e. both the retiree and the working spouse's premiums will be subsidized by the employer).

• Clients who will experience less disruption to their provider network/relationships than if they chose a Marketplace plan.

COBRA
For all pre-65 retirees who have had employer coverage, the first option to consider is obtaining health insurance through COBRA. This coverage usually extends for 18 months. That means that if your client has more than 18 months between losing their employer-sponsored health insurance and receiving Medicare coverage, they'll need to find other coverage. COBRA can also be expensive because your client pays the entire premium (plus a 2% administration fee), whereas before their employer likely paid a portion of their monthly costs. It may be less expensive, however, than a Marketplace plan in the case of family coverage, but often isn't for a single individual.

Who should consider COBRA?

• Clients who already met their deductible this year.
• Clients who want to keep their current provider network.
• Clients who need coverage for just a few months until they're eligible for Medicare.

Individual health plan from the 'Obamacare' marketplace
Early retirees can also shop for health insurance policies on the public exchange Health Insurance Marketplace (the Affordable Care Act or Obamacare). Depending on the state they live in, they may have to use a state-specific marketplace. 

Premiums for policies sold on the Marketplace can be subsidized through tax credits based on income and depending on where the individual lives and the size of their household. 

Early retirement often creates changes in adjusted gross income, so individuals who might not have been eligible for premium tax credits may find that premiums that were previously quite high have been significantly reduced based on their lower, post-retirement income.

It's also worth noting that The American Rescue Plan Act of 2021, implemented as a result of the pandemic, substantially raised the income levels at which one can qualify for premium tax credits, so it's always worthwhile to check and see if your clients qualify. 

Who should consider purchasing an individual health plan from the Marketplace?

Clients whose selected Marketplace plan would be less expensive than COBRA or (if applicable) their spouse's health plan.

• Clients who need coverage to extend beyond COBRA's 18-month limit.
• Clients who want an HSA-compatible plan.

True comprehensive financial planning includes discussing health care as part of retirement planning. Set up a meeting with your client to discuss the details of their early retirement. After talking about their situation, retirement plans, health care needs and preferences, it will be much easier to determine which health insurance option will work best for them.