The standard retirement age in the United States is 65, generally because you become eligible for Social Security and Medicare. However, many Americans choose to retire earlier than 65, with a recent survey indicating the average retirement age being 61.
While taking an early retirement can give you more time to pursue your passions, it can complicate finding health insurance. However, because the standard Medicare age is 65, you may wonder what to do about health insurance in the interim. Read on to learn what healthcare options exist for people planning for retirement that aren’t yet eligible for Medicare.
Table of Contents
The Gap Between Employer-Sponsored Healthcare and Medicare
In theory, retiree health insurance is simple: When older adults retire at 65, they can seamlessly transition from their employer’s health insurance plan to Medicare, the federal health insurance program for people 65 and older. But this transition can be more complicated for people who retire early.
When employees retire, their employer-sponsored health coverage typically ends. Only 21% of large companies offered health plans for retired employees in 2022, so early retirees may have a coverage gap between leaving the workforce and becoming eligible for Medicare at 65.
Fortunately, several early retirement health insurance options could help early retirees pay for their medical needs in the months and years before they enroll in Medicare. Determining the best option for you varies depending on your budget, health needs, and lifestyle preferences.
Look Into Your Current Employer’s Retiree Options
Private-sector employers aren’t required to offer health benefits to retirees, but some companies offer this coverage voluntarily. In general, larger companies, trade unions, and public employers are more likely to offer retiree health benefits.
Retiree coverage may vary depending on the employer. Some retiree health plans offer coverage for various medically necessary services and could be a valuable source of early retirement health insurance. Other group retiree health plans are designed to supplement Medicare.
Pros and Cons
A significant advantage of this option is that employers may help cover the costs of the retiree health plans they offer. Therefore, for early retirees, an employer-sponsored retiree health plan could be more affordable than comparable options outside of work.
Employer-sponsored healthcare plans for retirees do have some downsides as well. Retiree health plans may have a length of service requirement, and early retirees who didn’t work for their employer long-term may not be eligible. Plus, employers may reserve the right to reduce or cancel the coverage at any time.
COBRA, or Continuing Your Employer-Sponsored Coverage
COBRA continuation coverage is a temporary health insurance option for people who’ve lost their job-based coverage for reasons other than gross misconduct. COBRA allows employees to stay on their former employer’s group health plan for 18 to 36 months.
Early retirees who left the workforce due to termination, layoff, or voluntary retirement could be eligible for COBRA. The cost of this coverage can vary depending on the employer’s group health plan. Retirees may be responsible for paying both the employee and employer share of the health insurance premiums, plus a 2% administrative charge.
COBRA coverage can help bridge the gap between job-based coverage and Medicare, but COBRA and Medicare don’t work together. When an early retiree enrolls in Medicare, their COBRA coverage ends.
Pros and Cons
Older adults may appreciate the convenience of remaining on a plan they’re familiar with until they reach Medicare age. Staying on the same plan also means retirees keep any progress toward their annual deductible or out-of-pocket maximum.
For some early retirees, COBRA might not be available. The program applies to private employers with 20 or more employees and state and local governments. When COBRA is available, it might be cost-prohibitive since the employer no longer subsidizes the coverage.
Join Your Spouse’s Health Plan
For early retirees with spouses still working, employer-sponsored spousal health insurance could be an option. The vast majority (95%) of companies that offer health insurance extend those benefits to employees’ family members.
This option could be worth considering even if you weren’t eligible to enroll in your spouse’s health plan in the past. Some companies don’t allow spouses to enroll if they can get coverage from their employer, but early retirees who no longer have coverage from another source could be eligible.
Pros and Cons
Employer-sponsored spousal health insurance could be more affordable than comparable options on the private market. As of March 2022, civilian employers paid an average of 67% of the cost of premiums for family coverage. Some retirees may also value the convenience of being on the same plan as their spouse.
It’s important to remember that job-based insurance plans typically end when the employee leaves their job. So if your working spouse is also planning an early retirement, this option may only serve as a temporary stopgap.
Enroll in Individual Marketplace Health Insurance
The Health Insurance Marketplace is a service that helps uninsured Americans shop for and enroll in health insurance coverage. Depending on where they live, early retirees may use the federal Marketplace at healthcare.gov or their state’s Marketplace.
Shopping for health insurance through the Marketplace is a relatively simple process. After inputting their ZIP code, age, and sex, future retirees can see the plans available in their area and estimated monthly premiums. Retirees can view details about each plan’s costs and covered services.
Open Enrollment in the Marketplace takes place from November 1, 2022, to January 15, 2023, in most states, though some use different deadlines. Americans who lose their job-based health coverage due to early retirement may be eligible to sign up outside this window through a Special Enrollment Period.
Health Insurance Subsidies
The federal government helps eligible Americans pay for Marketplace health insurance through two subsidies: the premium tax credit and cost-sharing reductions. Early retirees could be eligible for one or both of these.
The premium tax credit helps reduce monthly health insurance premiums. Early retirees can see their estimated tax credit when they apply for coverage. Cost-sharing reductions are often called “extra savings” since some people get them in addition to the premium tax credit. They help reduce out-of-pocket costs but only work with Silver-tier plans.
Beware of High-Deductible Plans
Some Marketplace plans combine relatively low monthly premiums with very high deductibles. The low premiums can be tempting, but a higher deductible means enrollees pay more of their medical costs before the insurance plan starts to pay.
High-deductible plans might appeal to healthy people who rarely see a doctor but want coverage for unexpected medical emergencies. But older adults with ongoing health needs may prefer a low-deductible plan that helps cover more of their routine care. Carefully consider your current and expected health needs when choosing a plan.
Pros and Cons
The Marketplace makes it possible for retirees to compare many plans available in their area in one place and choose an option that suits their needs. These plans can provide affordable health insurance for early retirees with the premium tax credit and/or extra savings.
On the other hand, some retirees may feel overwhelmed by the dozens or hundreds of plan options available to them. Those who aren’t eligible for health insurance subsidies may find Marketplace plans unaffordable compared to other options.
Find Employer Coverage with a Part-time Job
After retiring from their full-time careers, some people may choose to work part-time. A part-time job can help early retirees stay busy, remain socially active, or earn extra money. With the right employer, part-time work can also provide health insurance.
Among large companies that provide health benefits to full-time workers, 26% also offer benefits to part-timers. These benefit packages can vary. At some companies, part-time and full-time workers may receive similar health benefits. But at other companies, the part-time health plan may be limited to preventive care. Be sure to research a company’s health plans before applying.
Pros and Cons
Since employers typically cover part of their employees’ health insurance premiums, getting coverage from a part-time job may be more affordable than comparable private plans. Signing up for coverage is simple since the employer has researched and selected a plan.
There are also some downsides, including an employer’s requirements for part-time eligibility. Health benefits might be limited to people who work at least 10, 15, or 20 hours a week, which may be more of a time commitment than some early retirees want.
Enroll in Short-term Health Insurance
Short-term health plans, also known as temporary insurance, are an alternative type of health insurance that can offer coverage for less than 12 months. This variety of plan could appeal to people who retired a few months too early for Medicare coverage.
In states where insurers can sell short-term plans, this temporary insurance could help early retirees pay for unexpected injuries and accidents. However, short-term plans might not cover prescription drugs, preventive care, or other routine medical needs.
Since this coverage is designed to be temporary, retirees can apply at any time of the year. Some insurers advertise short-term plans with coverage starting as soon as the day after the application is submitted.
Pros and Cons
Short-term plans offer convenience and flexibility that isn’t available with other types of health insurance. Depending on the insurer, early retirees may be able to get temporary early retirement health insurance to bridge a coverage gap as short as one month.
Unlike traditional health plans, the Affordable Care Act doesn’t regulate short-term plans. That means they aren’t required to offer comprehensive health benefits and can consider an applicant’s health when selling plans. Insurers may refuse to sell short-term health insurance to early retirees with health issues.
Enroll in Medicaid
Medicaid is a state-federal program that provides free or low-cost health insurance to eligible low-income people. The income cutoff varies from state to state, but many states have expanded Medicaid eligibility to all adults under 65 with incomes up to 133% of the Federal Poverty Level.
In each state, Medicaid offers coverage for certain core health benefits, including hospital services, physician services, and lab tests. Some states choose to cover additional health benefits. Retirees can contact their state’s Medicaid agency for details about covered services and eligibility requirements.
Low-income retirees may be able to keep their Medicaid coverage after they enroll in Medicare at 65. Having both plans can be beneficial because Medicaid may cover healthcare costs that Medicare doesn’t.
When Can You Join Medicare?
Early retirees can generally enroll in Medicare when they turn 65. However, people who retired early due to health issues might be eligible before 65 if they have End-Stage Renal Disease or receive Social Security Disability Insurance (SSDI) benefits.
Retirees become eligible for Medicare at age 65 if they meet the program’s citizenship and residency requirements. The Initial Enrollment Period (IEP) for Medicare starts three months before you turn 65 and lasts seven months.
People who took early retirement from Social Security are automatically enrolled in Medicare when they turn 65. People who receive SSDI are automatically enrolled after receiving disability benefits for 24 months, regardless of age.
If you aren’t automatically enrolled, mark your IEP on your calendar. Retirees who don’t sign up for Medicare when they first become eligible might face late enrollment penalties in the form of higher premiums.
How to Enroll in Medicare
The Social Security Administration handles enrollment for Original Medicare (Parts A and B). Medicare-eligible people can enroll online at ssa.gov, in person at their local Social Security office, or over the phone by calling 1-800-633-4227 (TTY:1-877-486-2048).
Medicare members may opt for coverage from a Medicare Advantage plan sold by a private company. These plans may cover services that Original Medicare doesn’t, but the cost and rules differ. Retirees can switch between the two coverage options during Open Enrollment, which runs from October 15 to December 7 each year.