Whether you plan for early retirement or experience an unexpected and premature end to your work career, one of the must-haves in your new chapter of life is health insurance. If you retire before age 65, you are most likely not eligible for Medicare, and you will need to purchase health insurance on your own. While finding affordable health insurance plans can seem overwhelming, it is not a difficult process if you know where to look.
The first task as an insurance shopper is to overcome the complexity of choosing coverage in the individual marketplace. Where do you start? Health insurance for individuals can be purchased on a state-based exchange or the federal marketplace, and directly through a health insurance company. There are also temporary solutions like short-term medical insurance, which can provide early retirees extra time to weigh their options before deciding what type of permanent insurance plan to purchase.
It’s good to understand that early retirement is considered a “life circumstance” that allows individuals to enroll in an affordable health insurance plan outside of the November 1 – December 15 open enrollment period (the open enrollment period is longer in select states). This applies to both state and federal marketplaces and the private health insurance sector. Individuals are able to apply for health insurance during the special enrollment period up to 60 days following their official retirement date. Temporary health insurance can be purchased anytime during the year, no matter what the circumstance.
If you are unfamiliar with the health insurance plans available, it’s wise to look at all of your options.
Summary of Obamacare Health Insurance
The Affordable Care Act, also known as Obamacare, was signed into law in 2010, and individuals and families began signing up for health insurance on state-based exchanges and the federal marketplace in 2014. The marketplace was created with the goal of lowering health insurance costs for millions of Americans; both those struggling with high monthly premiums and the uninsured who could not afford health care insurance without financial assistance. Today plans on the marketplace are eligible for tax subsidies that provide cost assistance to those who have a household income between 100–400% of the federal poverty level (138% in states that didn’t expand Medicaid).
Results of Obamacare have been mixed. While more than 90% of Americans now have some form of affordable health insurance, monthly premium costs and medical deductibles have risen faster than inflation. Of everyone with health insurance, 9.4 million people receive a cost assistance tax subsidy to help contain the cost of their health insurance. That means the average person pays just $95 each month for their health insurance plan.
The caveats for accepting a tax subsidy to help lower monthly payments are:
- Cost assistance is only available on marketplace plans.
- Marketplace plans typically have narrower provider networks, reducing a consumer’s choice of doctors and hospitals.
- There are fewer plans to choose from on the marketplace.
Private Health Insurance Not Available On The Obamacare Exchange
If you do not qualify for a tax subsidy to lower the cost of your health insurance, you can purchase health insurance outside of your state exchange or the federal marketplace. There are more plans and deductible options available, larger provider networks, and you can purchase online, directly from an insurance company or through an insurance broker.
Short-Term Medical Insurance Alternative
If you need more time to make a decision about your permanent health insurance purchase, short term medical insurance can serve as an alternative to individual health insurance. Short-term health insurance, also known as temporary health insurance, is available anywhere from one month to 364 days, depending on your state of residence. Short-term medical operates similarly to permanent health insurance, which means monthly premiums, deductibles, coinsurance, copays and out-of-pocket maximums apply. Short-term health insurance does require consumers to answer medical questions in the application, as some pre-existing conditions disqualify an individual from applying. If you plan to purchase individual health insurance before your retirement date, short-term medical insurance is an affordable option to resolve your gap in coverage until that date occurs.
Shop by Need, Not Cost
For those who have spent entire careers on group health insurance plans, purchasing individual health insurance for the first time can be confusing. No matter what type of health insurance coverage you purchase, there are specific features within each plan to compare before buying, including the following:
What is a Monthly Premium?
Each month, you are required to pay a predetermined dollar amount for your health insurance based on your age, state of residence and tobacco use. This premium keeps your health insurance current. It does not help pay down your deductible or help lower other medical costs. Failure to pay your monthly premium results in coverage being terminated by your health insurance company.
What is a Deductible?
Before your health insurance company will begin paying for most health care services, you must meet your medical deductible. If you see a specialist and go to the hospital once a year, paying more each month for a health care plan with a lower deductible could reduce your overall out-of-pocket expenses during the year. If you are healthy and only use preventive services, which are covered 100% by your insurance carrier, enrolling in a lower cost, higher deductible plan could help your budget. Do the math when comparing plans—don’t automatically select the lowest cost plan if you have health concerns. It could affect your wallet in the long run.
What is Coinsurance?
After your deductible is met, you aren’t off the hook. You and your health insurance company will begin paying “coinsurance.” That means your carrier is responsible for a percentage of the medical bills and you are also still responsible for part of the payment. If you have an 80/20 plan, your insurance carrier will pay 80% of your medical expenses and you are responsible for paying the remaining 20%. Be sure to figure coinsurance into your overall retirement expense plan, even if it’s just an estimate.
What Are Copayments and Drug Deductibles?
Other out-of-pocket expenses to compare are physician copays and prescription drug deductibles. Do you need to pay as little as possible to see a specialist? Look for plans with a copay, which is a flat fee typically a fraction of the cost of a full price office visit. If there is a need for rich drug benefits, it could be worth the investment to pay more for a health care plan that offers a low drug deductible and flat-fee copays for generic and brand name prescriptions.
What Are Maximum Out-of-pocket Expenses?
For your insurance company to start paying for 100% of your medical expenses, you must meet your yearly maximum for coinsurance out-of-pocket expenses. For example: If you chose a plan with a maximum of $10,000 out-of-pocket expenses you will pay for all medical services until you meet your 100% of your deductible out of your own pocket. Then, once you meet your deductible, you will then pay the percentage of medical bills laid out with your coinsurance. You will continue paying coinsurance until you’ve paid an accumulative $10,000 out of your own pocket for medical expenses. Note, out-of-pocket expenses do not include your monthly premium. This number is an important factor if an unexpected illness arises. Can your retirement savings take a large financial hit that you are not expecting?
Cost of Health Care in Retirement
According to industry experts, health care for an age 65 individual will cost an average of $245,000 in retirement if they retire today, not including out-of-pocket costs and long-term care. And the cost of health care is expected to continue to go up. Fidelity Investments estimates the cost of care last year increased 11% alone.
When planning for early retirement, health care will be one of the costliest factors in deciding when to actually retire. Will you have enough? The Social Security Administration life expectancy calculator is a great tool for estimating how much money you might need to make ends meet based on your retirement age and saved income.
Depending on Social Security
Social Security can also help buoy your retirement income if you are planning to retire in the next few years, but individuals retiring before age 62 will have to wait their turn before receiving any benefits.
If you were born after 1960, Social Security will pay:
- Age 62: You will get 70% of your monthly benefits
- Age 65: You will get 86.7% of your monthly benefits
- Age 67: You will get 100% of your monthly benefits
However, based on the Social Security Administration’s 2015 report, funds are on course to be depleted by 2034. At that point in time, benefits will be paid at 79% instead of 100%. That projection is set to shrink to 73% by 2089. Others project the Social Security fund will be depleted far sooner, perhaps as soon as 2025. If you are in your 40s and hoping to retire soon, sole dependence on Social Security after age 62 could be risky.
Millennials Who Consider Very Early Retirement
A retirement trend is beginning to emerge among millennials who want to ditch corporate life as soon as possible and live simply on little means. Experts estimate 72% of millennials are saving for retirement, and they have realistic expectations about their standard of living. That said, 41% report having less than $5,000 in savings, meaning they couldn’t pay for a large, unexpected medical bill, let alone retire anytime soon. Moreover, millennials who want to retire early need to save a minimum of somewhere between 15–22% of their income from age 25 until age 67 to live comfortably through their retirement years.
For young millennials who have the bank account to take a break from working, there is one cost-effective health insurance option available until the age of 30. Catastrophic health insurance plans sold on the state exchanges and federal marketplace are open to adults in their 20s who are no longer on their parent’s health insurance policy. The insurance coverage is geared toward the healthy since monthly premiums are low and medical deductibles are high—$6,850 in 2016. Catastrophic plans are not eligible for a tax subsidy even though they are offered on the exchanges. Any millennial looking for a permanent health insurance plan can price compare catastrophic insurance plans against other marketplace and private insurance options to see which coverage makes the most sense for their budget and lifestyle.
Beyond moving to a new state to receive tax incentives on Social Security or pension benefits, affording health care 10, 20, or 30 years from now is a serious factor when planning for retirement. The individual health insurance you purchase to help protect you from large medical bills can be the saving factor to avoid drastic financial difficulties in your later years.