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Retiring before age 65? Whether by choice or by job loss, retiring early means you'll lose your employer's health insurance—and Medicare won't kick in until you're 65. If you retire before age 65, how will you pay for medical care? Health care options to consider include COBRA coverage, the health insurance marketplace, Medicaid and private insurance.
How Retirement Affects Health Care Before Age 65
When you stop working, employer-sponsored health insurance ends. Whether it ends immediately depends on your employer, federal law and state law.
If your company has 20 or more employees, under the federal Consolidated Omnibus Budget Reconciliation Act (COBRA), your employer must allow you to keep your health insurance for at least 18 months. (Your state may have comparable laws regulating smaller companies.) Within 14 days after you retire, your employer must provide written notice explaining how to accept or decline COBRA coverage.
COBRA coverage is convenient, but often costly. Fortunately, you have other choices.
Health Insurance Options
Other ways to pay for health care before age 65 include retiree health insurance, the public health insurance marketplace, Medicaid, private health insurance and your spouse's plan. Here's a closer look at each.
After receiving your COBRA notice, you typically have 60 days to accept or decline coverage, and 45 more days to make your first premium payment. Coverage can last up to 36 months in some cases.
Pros: With COBRA, you keep your existing insurance—no need to research other options or find new doctors, and no interruption in care.
Cons: Employers often pay the bulk of employees' insurance premiums, so what you're used to paying may be the tip of the iceberg. You'll generally have to pay the entire COBRA premium and possibly administrative fees of up to 2%.
Retiree Health Insurance
Employers sometimes offer health insurance for retired employees, either throughout retirement or until they qualify for Medicare. Some even pay part of the premiums.
Pros: Retiree health insurance is a valuable benefit, especially if your former employer foots part of the bill.
Cons: This may not be an option for you. In 2021, about one-quarter of large employers who provided health insurance offered retiree health insurance, the Kaiser Family Foundation (KFF) reports.
Public Health Insurance Marketplace
The federal health insurance marketplace at Healthcare.gov and your state's insurance marketplace offer health insurance that meets Affordable Care Act (ACA) requirements. Marketplace plans come in four levels (Bronze, Silver, Gold and Platinum). All plans within the same level provide the same coverage, but premium prices and out-of-pocket costs can vary.
Open enrollment (when anyone can purchase health insurance on the marketplace) runs from November 1, 2022, to December 15, 2022, for coverage starting January 1, 2023. However, when you retire and lose employer health coverage, you qualify for "special enrollment" and can buy insurance at any time.
Pros: Marketplace plans must cover pre-existing conditions and prescription medications—good news for retirees with chronic health conditions. Dental insurance is also available. You can choose the plan that fits your budget and health needs. Less expensive plans cover less of your health care costs; more expensive plans pay out more.
Marketplace insurance typically costs less than private health insurance. In 2022, the average annual premium for single-coverage employer health insurance was $7,911; the average marketplace premium for single coverage was $5,256, according to KFF. Premium tax credits and cost-sharing reductions can lower your bill even further. The American Rescue Plan Act of 2021 expanded eligibility for these subsidies; over 89% of people purchasing insurance on the marketplace qualify. The Inflation Reduction Act extended subsidies through 2025, which could be long enough to cover you until age 65.
Cons: To receive cost-sharing reductions, you must purchase a Silver plan, which might not have the coverage you want. If your annual income is higher than anticipated, you may have to repay excess premium tax credits at tax time.
Spouse's Health Insurance
Is your spouse still working? If their employer-provided health insurance allows, sign up for coverage under their plan.
Pros: This easy option offers the convenience of having both spouses on the same plan.
Cons: Not all employer-provided health insurance covers spouses. Your spouse must keep working to maintain coverage. If they're laid off or retire early, you'll lose coverage.
You may qualify for Medicaid, the federal health insurance program for low-income Americans. Each state administers its own Medicaid program (some states call it a different name). Federal law requires all Medicaid programs to cover certain benefits, including inpatient and outpatient hospital services, doctor visits, lab and X-ray services, home health care and nursing facility services. To see if you qualify, apply through your state's health insurance marketplace or the Medicaid website.
Pros: If you meet Medicaid's financial criteria, you're guaranteed coverage regardless of health conditions. Because Medicaid is designed for low-income individuals, it strictly limits out-of-pocket costs. People with Medicaid are just as satisfied with their care as those with private health insurance, KFF data shows.
Cons: Because covering some services is optional, Medicaid's benefits may not meet your needs. For example, states may not cover prescription drugs, eyeglasses, dental care and other services retirees often need. If your income changes during the year, you must report it, and could lose coverage if you earn more than Medicaid caps. This can interrupt coverage, forcing you to quickly search for alternatives or go without care.
Private Health Insurance
Health insurance sold by insurance companies, as distinct from government-run health insurance such as Medicare and Medicaid, is called private health insurance. Employer-provided health insurance is one type of private health insurance; so are plans sold on the marketplace. If you don't qualify for financial assistance on the marketplace, you can shop for private health insurance online or through an insurance agent or broker. Agents sell insurance from the company they work for; insurance brokers sell insurance from multiple companies and earn commissions.
Pros: You have the freedom to buy whatever plan you like and can afford. Although they don't have to comply with ACA regulations, private health insurance plans must typically meet government regulations ensuring they provide minimum essential coverage.
Cons: You can't get premium tax subsidies or cost-sharing benefits for private health insurance, so you'll pay the full cost. Premiums vary based on your age, location and type of coverage, but generally, older people can expect to pay up to three times as much as younger people. Not all private insurance plans are regulated, so be sure you understand what is and isn't covered.
Budget for Health Care Needs
Be sure to factor health care costs into your retirement budget. That includes insurance premiums, copays, coinsurance, out-of-pocket costs, eyeglasses, prescriptions and hearing aids. Health insurance premiums and qualifying medical expenses may be tax-deductible, offsetting your costs.
Keep your credit score healthy too. Good credit can make it easier to pay for medical care, travel or home remodeling or downsizing. Check your credit report and credit score regularly. Also consider signing up for free credit monitoring from Experian to keep an eye on your credit and still have plenty of time to enjoy retirement.