Retiring early? Health insurance options for the early retiree

Alek Johnson |

Entering retirement can be both thrilling and intimidating at the same time. The thought of “hanging up the cape” and permanently leaving the workforce behind can be viewed as unburdening and relieving to one individual, but completely frightening to another. Regardless of the viewpoint you have on retirement, it will undoubtedly come with new challenges and troubles to overcome. Among the different problems to solve for retirement, one of the biggest challenges is that of health insurance.

Many of our clients at Peterson Wealth Advisors seek our advice on the best medical coverage available to them. For those age 65 and older, or certain younger individuals with disabilities, Medicare has you covered. Medicare is the country’s health insurance program managed by the federal government, and once you enroll initially, there is very little management that you have to do throughout retirement. But what about those who retire earlier than age 65? An early retirement is certainly achievable, but requires careful planning, especially when it comes to your healthcare. This blog will enlighten you on the different healthcare options available for early retirees, with a focus on the Marketplace. If you are not familiar with what the Marketplace is, don’t worry, we will get to the details soon in this blog.

What are the health insurance options for early retirees (pre-age 65)?

If neither you nor your spouse will be covered through an employer plan, fear not! There may be more options than you think. Below is a brief summary of a few options, I highly recommend speaking with your financial advisor about which route makes the most sense for you.

COBRA – A law that allows employees and their dependents to keep their group coverage from their former employer’s health plan. This coverage can last for 18 months after termination from the employer, but beware, as this can be very costly.

Medicaid – Though unlikely for some retirees to qualify due to the low-income requirements (i.e., in Utah, coverage is available for those with household incomes up to 138% of the federal poverty level), this may be the cheapest option for those that do qualify. However, many doctors don’t accept Medicaid, so you may have to change your primary providers if you qualify for coverage.

Christian Healthcare Ministries – This is not traditional insurance, but rather a Christian-based method of sharing the costs with others around you. Each member pays a monthly premium, and then those funds are used to help members cover their healthcare costs.

The Marketplace – Finally, we have the Marketplace, which tends to be the route most early retirees take. For this reason, I want to expound upon how the Marketplace insurance really works.

The Marketplace – What is it?

In March of 2010, the Affordable Care Act (sometimes called Obamacare) was passed with the goal of making health insurance more affordable. The law provides individuals and families with government subsidies (otherwise known as premium tax credits) that help lower the costs for households with an income between 100% and 400% of the federal poverty line (as a reference, in 2022, 400% of the federal poverty level for a retired couple is $73,240). The federal government operates the Health Insurance Marketplace, or “the Marketplace” for short, which is an online service that helps you enroll for health insurance. You can access the Marketplace at HealthCare.gov.

How does it work?

First and foremost, I recommend you work with a trusted, licensed health insurance agent to help you navigate the waters of the Marketplace, especially if you’ve only ever received health insurance through your employer. There is no additional cost to you to use an agent – they will be compensated by the insurance company directly. You can then tell the agent any specifics you are looking for with your coverage (such as certain doctors, hospitals, etc.) and they can help narrow the available plans down to your liking. That being said, let’s look at how this actually works.

You can enroll in health insurance during open enrollment, which generally runs from November 1st – December 15th for coverage starting January 1st of the following year. You also have the option to enroll during a special enrollment period, which is based upon major life events, such as a change in household or residence. As an early retiree, you’ll be rewarded a special enrollment period, so don’t feel like your retirement date needs to line up with open enrollment. During this special enrollment, you’ll have a 60-day window to enroll through the Marketplace.

During enrollment, you will fill out an application with basic personal information. Included with this application, you will give them your best estimate on what your income will be for the coming year (the Marketplace uses your Modified Adjusted Gross Income – MAGI – to define “income”). Please note that the Marketplace does not use your previous year’s income, but rather your projected income for the next year – an important distinction for retirees. If your projected income falls between 100% – 400% of the federal poverty level, you will qualify for a government subsidy to help cover the premiums associated with your insurance. If your income is above the 400% level, you will not qualify for a subsidy and will have to pay the entire premium yourself. For 2021 and 2022 ONLY, as part of the American Rescue Plan Act (ARPA), the subsidies were extended to those with income beyond the 400% poverty line, but unless more legislation is passed to extend these benefits, starting in 2023, the law will revert back to pre-pandemic rules.

One common question is what happens if your income doesn’t end up being exactly what you projected it would be on the application? The answer is that you will reconcile any differences when you file your taxes. If your income was less than what you projected, you’ll get a credit as you qualified for more of a subsidy throughout the year. If your income was more than what you projected, you will have to pay some of that subsidy back. Generally, this isn’t that big of an issue unless you projected your income to be less than 400% of the poverty level but it was actually more. In this case, you will be required to pay back the entire subsidy, even if your income was only $1 more than the threshold. For this reason, I suggest consulting with your financial advisor to pinpoint what your income will be through your early years of retirement.  I also suggest you speak with your advisor on potential planning strategies available to control your Modified Adjusted Gross Income, as there are certain strategies that can help you qualify for a subsidy while enjoying the income you desire throughout retirement. For an example of how this might work, my colleague Mark Whitaker wrote an article in 2020 describing a case study exploring some of these strategies.

As far as the plans that are available, the Marketplace ranks them in four different categories – Bronze, Silver, Gold, and Platinum. The Bronze plans typically tend to have the lowest premiums, but they are also more catastrophic plans, with high deductibles and out-of-pocket maximums. Gold and Platinum plans typically tend to be better plans as far as coverage but have higher premium costs. Again, working with an agent can help you navigate which plan is best for you.

Conclusion

There is much more to the Marketplace as well as to these other healthcare options mentioned than can be discussed in this article, but hopefully, this provides you with a framework of the options you have as an early retiree. An early retirement is certainly achievable for those who are prepared and who understand how their healthcare needs can be met.