Navigating Health Care Options If You Plan to Retire Early

There’s been a lot of hype and media attention around pursuing and achieving FIRE (Financial Independence, Retire Early). But there hasn’t been much focus on one important aspect of the FIRE journey: how to pay for your healthcare needs and expenses in early retirement.

The US spends more than other rich countries on healthcare per person. Among developed nations in the OECD, America spends over twice as much as the average, shelling out $5,437 per capita. On average, Americans pay up to around $13,000 each year for medical care, according to the Centers for Medicare & Medicaid Services.

One financial challenge with early retirement is that you’ll no longer have employer-sponsored health insurance. This likely means you’ll need to be prepared to pay insurance premiums, out-of-pocket costs, and deductibles, as well as potentially pay for unexpected medical expenses.

No wonder planning and navigating the world of healthcare options as an early retiree can be confusing. The earlier you retire, the longer you’ll have to cover healthcare costs out of pocket before government-provided programs like Medicare start kicking in.  

Here are some healthcare options you can explore as an early retiree.

1. ACA Marketplace Plans

The Affordable Care Act, or the ACA Marketplace (also known as Obamacare), is a good place to start. The ACA is a platform for individuals, families, and small businesses to explore and purchase health insurance plans. The cost of these plans can vary widely based on factors such as your age, location, and income, as well as the specific benefits and coverage levels of the plan.

You’ll want to study and understand these plans’ details, including their benefits and compliance standards. You’ll also want to consider the impact on your budget when choosing one plan over another. Here are some typical costs:

– For an unsubsidized 50-year-old, the average Silver plan rates in 2023 ranged from around $600 to 800 per month, depending on your zip code and tobacco usage.  

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According to ehealthinsurance, 2023 Deductibles for Silver plans under the ACA average around $4,500 for individuals. This amount must be paid before the plan pays its designated share of covered costs for the year, like 70% for Silver.

– Other potential expenses include copays for doctor visits ($50 to $75 on average) and prescription drugs, depending on the medication tier.

– Total annual costs for an ACA Silver plan, including premiums and potential out of pocket expenses, exceed $1,000 per month on average for a 50 year old enrollee.

2. Spousal or Domestic Partner Coverage 

If you’re married or in a domestic partnership where one person is still employed, taking advantage of being added as a dependent on a spouse or partner’s employer-sponsored health insurance is an ideal lower-cost way to cover your health care costs.

If you have the option to be added to your spouse’s or domestic partner’s plan, this will provide you with continued coverage and is likely a more cost-effective solution until your Medicare benefits begin.

You’ll want to understand the specific eligibility rules thoroughly. Many plans only permit covering spouses not actively engaged in work or until a certain age cutoff. Know the specifics of the plan, such as: cost-sharing responsibilities like premium portions, out of pocket limits, and coverage networks.

Of course, if your partner decides to retire and ends employment, then both of your coverages will end.

3. Short-Term Medical Plans

Short-term, limited-duration insurance (STLDI) plans are exempt from the Affordable Care Act’s (ACA) essential benefit coverage requirements and from prohibitions on medical underwriting. These health insurance plans provide coverage for a specific period, typically one year or less. 

These plans are typically much cheaper than traditional health insurance, coming in around 50% to 80% cheaper than ACA exchange plans, but they don’t have to cover pre-existing conditions or the ten essential health benefits required by the ACA, such as preventive care and mental health services. Since these plans are not ACA-compliant individual market coverage, they have more limitations, such as having fewer benefits, caps on coverage amounts, and needing medical underwriting for pre-existing conditions. 

Typical plans offer initial coverage periods of less than twelve months, which can then be renewed. Here are some key areas to be aware of:

• These plans typically exclude coverage for prescription drugs, maternity care, or hospitalizations from pre-existing conditions.
• A rule proposed by the Biden administration in July 2023 would significantly limit the length of STLDI plans. If finalized, the rule would limit the initial term of STLDI policies to no longer than three months. Though the rule would allow renewal of a policy, the total duration of a plan would be limited to four months, and a buyer wouldn’t be allowed to purchase another short-term plan from the same insurer within 12 months of their initial policy effective date.

4. Health Savings Accounts (HSA) 

Health savings accounts (HSAs) allow people with high-deductible health plans (HDHPs) to contribute pre-tax funds to savings accounts to cover qualified medical costs. They offer triple tax savings, where you can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free now or in retirement to pay for qualified medical expenses. If you’re planning early retirement and are still eligible to contribute to an HSA, you should max out your annual contributions to take advantage of these tax advantaged benefits.

If you are no longer covered under a qualifying plan, you won’t be able to continue making contributions to your HSA, but you can still hold the account, and your previous contributions can continue to grow tax free. 

HSAs can be a great tool as an early retiree when it comes to paying medical expenses because: 

1. HSA contributions can be made pre-tax through payroll deductions to lower your taxable income.
2. Money in your HSA grows tax-deferred and can be invested in ETFs and funds, similar to an IRA.
3. Unlike Flexible Spending Accounts (FSA), HSA balances rollover year to year and can be invested for continued growth. 
4. Withdrawals remain non taxable when used for eligible expenses like deductibles, prescriptions, dental care and vision. 
5. Early retirees who previously utilized HSAs through employment may continue contributing up to the annual limit. The 2024 individual limit is $4,150, and if you’re 55 and older, you can contribute an additional $1,000 as a catch-up contribution. $8,300 is the 2024 limit for family coverage.
6. Contributions are tax deductible and investment earnings accrue without taxes. The best part is that account holders maintain access to funds indefinitely.
7. Your HSA can be used as an active supplement along with other plans to pay for your ongoing healthcare needs.

Keep in mind that withdrawals from an HSA used for non qualified medical expenses are considered taxable income after age 65. And prior to age 65, non-medical withdrawals from an HSA are subject to both income taxes and an additional 20% penalty.

5. COBRA Continuation Coverage

The Consolidated Omnibus Budget Reconciliation Act, or COBRA, requires employers to allow employees and their covered dependents to temporarily continue group health insurance when you leave your employer.

If you’re retiring early and leave your job before Medicare eligibility, COBRA lets you maintain  your existing employer plan as a bridge. The maximum coverage period is typically 18 months from the qualifying date. But COBRA is also one of the most costly health care options. You’ll pay the full premium amount that includes both the employer and employee shares, plus a 2% administrative fee. 

For a family plan, premiums averaging $1,564 per month or more are common. So even though COBRA can provide a seamless transition, the full-premium structure makes COBRA an unattractive solution for the long term.

6. State Specific Options

A few states have programs tailored for providing affordable healthcare prior to Medicare eligibility. Coverage is typically extended to former state government employees, public school system workers and other public servants.

For example, in California the CalPERS health insurance program allows people retiring with 10 plus years of public service under the age of 65 to purchase plans at group rates. Over 365,000 Californians are enrolled. New York’s retiree program insures over 220,000 former state and municipal employees and dependents under 65 years old. 

Eligibility rules include holding a pension from the state and meeting minimum service period requirements. The key benefit is that premium costs are often much lower than comparable private individual policies. Some other states like Pennsylvania offer programs on a more limited basis. 

If you’re a state government employee, you can contact your public retirement system offices or state health departments to see if you’re eligible for retiree coverage options. 

7. Membership Based Group Health Plans

A lesser known option for early retirees seeking affordable care is membership in a health sharing ministry (HSM). Unlike traditional insurance, HSMs function as non profit cost sharing platforms where members voluntarily contribute monthly funds into a collective escrow account. 

Through this pooled escrow, HSMs help cover members’ medical bills based on established sharing guidelines. This usually includes things such as primary care, preventative services, and chronic condition management. But they’ll typically exclude pre-existing illnesses. 

Keep in mind that HSMs do not guarantee payment for any medical costs. Members also agree to live according to organization values, sometimes requiring a faith-based statement of adherence. You’ll also want to carefully research HSM coverage details, eligibility periods for cost sharing, unpaid liability risks if funds run dry, and any other membership criteria. Some plans may also impose waiting periods before accessing cost share funds as a new joiner as well.

8. Barista FIRE: Part Time Work for Healthcare

An emerging solution in covering your health care expenses as an early retiree is known as Barista FIRE. 

Barista FIRE involves taking a part-time, low-stress job not for income, but primarily for the healthcare benefits. Some popular options include jobs at coffee shops, bookstores, pharmacies, and employers that hire retirees on a limited or part-time basis. 

The advantages are that working ten to twenty hours per week gives you the benefit of securing employer sponsored health coverage for a reasonable premium share. 

Barista FIRE can allow you to set up tailored working arrangements in order to get healthcare access. Plus, it still lets you preserve larger chunks of time for adventures, hobbies and family versus full-time jobs. But drawbacks include less flexibility than full retirement and obviously,  having some work obligations. 

Prioritize Preventive Care and Final Thoughts 

One of the best ways to plan for your health care is to prioritize preventive care. This isn’t just about staying healthy; it’s also smart financial planning. That’s because a huge potential benefit of preventive care is its potential to reduce your overall healthcare expenses over time. 

If you’re able to identify health issues early on, this can go a long way in helping avoid more costly medical needs like hospitalizations, surgeries, and long-term medications. 

Some steps you can start now in prioritizing preventative care include: preventive services like screenings, vaccinations, routine check ups and other recommended preventive services to promote your overall physical health. 

Planning and working towards early retirement can be exciting. But like planning other important aspects of your life, such as your investments and retirement savings, you’ll also need to have a comprehensive plan for covering your health care. By removing the major financial uncertainties, you’ll be able to focus on enjoying your retirement lifestyle knowing that your medical and health care plans are fully covered for.

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