December 6, 2022
All done with the typical 9am-5pm (or more like 7am-10pm?) You’ve arrived! Retiring before the standard age of 65 can be a liberating experience. You worked tirelessly through the years to culminate enough savings to adequately sustain your lifestyle. Retirement can have many benefits, whether you are able to spend more time with family and friends, travel, or pick up a new interest or hobby. It can also expose you to some additional financial costs, one of which is healthcare.
Healthcare costs can be a large burden on a new retiree, especially if they have not yet reached the age of 65 to be eligible for Medicare – a time period often called the “Medicare Gap.” In 2022, the average cost of medical premiums is $438 per month, as opposed to $170 per month for Medicare Part B premiums. While average medical premiums have slightly decreased from 2021 values, we are expecting to see a rise in costs of 5.5% next year and no expectations of slowing down.
In this article, we discuss the healthcare insurance for retirees under 65 that are not yet eligible for Medicare. While costs may be rising, there are options available for you to consider, based on your personal situation.
COBRA (Consolidated Omnibus Budget Reconciliation Act) allows former employees to keep their job-related health insurance for a specified period. If an employer has 20 or more employees, they are required to continue group coverage for former employees, although be sure to discuss with your employer whether this coverage is offered.
COBRA health insurance is activated with certain “qualifying events,” one of which is job loss, whether voluntary or involuntary. When you retire, you qualify to receive COBRA benefits for 18 months. Your spouse and dependents are also covered under this 18-month period. This period for dependents could be extended to 36 months should the retiree be eligible for Medicare. Currently, you can claim children as dependents on your health coverage until the end of the month in which they attain age 26.
Benefits remain the same under COBRA, which means you can continue to see your doctors. It is the same plan and benefits that were experienced under the group plan, which means you can continue to see your same doctor. If you elect this coverage, it is significantly more expensive than what you paid under your employer. Your employer may require you to pay 100% of the total premium costs of the plan, plus an additional 2% for administrative fee.
While generally recommended, COBRA may not fit every individual needs. When you retire, you have 60 days to decide whether to continue your employer plan under COBRA. If you do not elect this coverage, your health plan will terminate at the same time group coverage. Even if you do not elect COBRA, you still qualify under a special enrollment period to purchase health insurance from a broker or insurance provider. Once you elect COBRA, you must remain covered under this coverage until the 18-month period is complete to then qualify for a special enrollment period. Otherwise, if you end your COBRA coverage early, you could only purchase health insurance at the next open enrollment period.
If your 65th birthday is approaching while you have COBRA coverage, it is recommended that you sign up for Medicare during the initial enrollment period (3 months before you turn 65 and three months after). Doing so will avoid any potential late enrollment penalties and coverage gaps. Since going off COBRA does not qualify under the Medicare special enrollment period, we urge you to be mindful of the sign-up period.
Perhaps you retired before age 65 and you have a spouse who is still employed and has a group health plan under their employer. This can be a less expensive option than COBRA coverage or purchasing a health plan on the market.
Switching to your spouse’s health plan is relatively easy to accomplish. Just as with COBRA, retiring from your job qualifies you for a special enrollment period, so you can join your spouse’s plan outside of the general open enrollment period. Your spouse should speak with their employer first regarding eligibility to add a spouse to their work health plan.
You may also qualify under the special enrollment period for federal or state health plans offered through the Affordable Care Act. While generally less expensive than private medical insurance, federal and state plans aren’t as flexible and offer a limited amount of healthcare services.
Generally, a retiree who was on COBRA for 18 months but hasn’t reached Medicare eligibility would need to subsidize their health insurance through public or private offerings. Purchasing health insurance through a private medical provider is certainly the most expensive option yet can provide the greatest flexibility. You can choose a plan that allows you to stay with your current doctor or that covers other medical needs such as physiotherapy, optical and dental care.
Many plans tend to cover some, if not all your treatment, therefore staving off unexpected high medical expenses. The extent of coverage will depend on the plan, but generally speaking, the more coverage, the higher the premiums.
If you choose to purchase private health insurance, you should consider a high-deductible health plan and supplementing your plan with a health savings account (HSA). HSAs are a great option for tax savings as they offer a triple-tax benefit. Contributions to your HSA are tax-deductible, growth is tax-deferred, and distributions are tax-free so long as they are used for qualified medical expenses. If distributions are not made for qualified medical expenses, they are taxed at ordinary rates along with a 20% penalty if under the age of 65.
Once you reach the age of 65 and apply for Medicare, you can no longer contribute to an HSA. Any unused contributions can be made portable to a spouse or can pay certain Medicare premiums.
While retirement can be an exciting new beginning, it’s important to consider all of the financial impacts of your decision. Healthcare costs can be hidden, and they shouldn’t impact your leisure and enjoyment in retirement. You do have early retirement health insurance options, and it’s best to discuss these with your financial advisor as part of your overall financial and retirement planning.
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