Early retirement and health insurance: What you need to know

Retiring early is appealing for a lot of reasons, like having more time to focus on your health, family, hobbies and travel. But you need to consider whether you’ve saved enough to afford it. That includes how you’ll cover your health care needs, especially if you’re currently relying on employer-provided coverage. For most people, Medicare eligibility begins at age 65, and gaps in your coverage if you retire early could lead to high out-of-pocket costs that could put a big dent in your retirement savings.

You have options, though, including using COBRA to extend existing employer coverage (if available – check with your employer), buying a new plan on the Affordable Care Act marketplace, opting for private health insurance and more. Here, we’ll take a closer look to help you navigate health care in retirement before Medicare.

Table of Contents

What are your health insurance needs and expenses?

What is COBRA? Is COBRA a good option for retirees?

Does the Affordable Care Act cover retirees?

What about private health insurance?

Special considerations for veterans

What are your health insurance needs and expenses?

As you consider ways to cover your health insurance gap before Medicare kicks in, it’s important to think about your current health care expenses. What are the terms of your current health insurance, like the premiums, deductibles and copays? How much do you pay for prescriptions? What you pay now can help you determine your budget and coverage needs in retirement before you become eligible for Medicare.

Factors to consider as you shop for insurance

When looking for an insurance plan to tide you over until you become eligible for Medicare, there are several things to consider so you find the best plan for your needs:

• Coverage: Make sure the things you need are included in potential plans, like prescription medications. What is covered and what isn’t? Look for a plan that can help limit your out-of-pocket expenses.
• Premiums and deductibles: Will the monthly premiums fit your budget? What about things like deductibles and copays? Make sure you’re looking for a plan that balances coverage and costs and that works with your retirement income.
• Network providers: Are your current doctors in-network? If you want to keep your doctors and specialists, making sure they take your insurance and are considered in-network can help you save.
• Who is covered: Does your plan need to include coverage for your spouse or dependents, like children? That can affect the cost of your premium. If your spouse plans to continue to work, can they get insurance through their employer, including coverage for dependents?

What is COBRA? Is COBRA a good option for retirees?

The Consolidated Omnibus Budget Reconciliation Act, or COBRA, is a federal law that provides eligible employees and their dependents the option to maintain their current health insurance coverage for a limited time if they lose their job or their hours are cut. Many states also have local laws similar to COBRA.

If you are retiring and will become eligible for Medicare in the next 18 months, COBRA may be an effective way to bridge the gap if available to you. Even if you’re a few years away from full retirement age, COBRA might be a helpful temporary measure to remain covered while you research and shop for other health insurance. Check with your employer regarding availability of COBRA.

How does COBRA change my cost and coverage?

While covered under COBRA, you’ll have the same benefits your former employer is offering to active employees, and any changes in the benefits for active employees will also apply to your COBRA plan. That includes prescription drug coverage, dental and vision, if available.

However, in most cases, your employer will no longer be subsidizing any of the premium. That means you’ll pay the entire cost of the policy for you and any dependents, like a spouse or children. Plus, your employer can add up to 2% in administrative fees. That means you’ll pay more for the same coverage you had as an employee. Keep in mind, COBRA might still be less expensive and have better coverage than other private health insurance, so it’s important to talk to a licensed health insurance agent to compare it to coverage available under the Affordable Care Act.

How long can I stay on COBRA?

A retired employee can get up to 18 months of health insurance coverage through COBRA. If you’re disabled or have a dependent, you may be able to extend for up to 36 months. Usually, you have at least 60 days to opt into COBRA coverage from the day you lose your traditional employer benefits, or your “qualifying event.”

It’s important to note that if you fail to pay your COBRA premiums on time, you will lose your coverage and you will not be able to re-enroll in the plan. If you voluntarily drop your COBRA coverage mid-year (for example, by not paying the premium or cancelling your policy), you will be unable to get coverage under an ACA Marketplace plan until the first of the year.

Does the Affordable Care Act cover retirees?

The Affordable Care Act was enacted in 2010 to comprehensively reform health care law in the U.S. Part of its goal was to make it easier for all uninsured Americans to shop for and afford health insurance. You can shop for plans, get a better understanding of insurance costs, and apply for coverage on the ACA Marketplace, or with the help of a licensed insurance agent.

When can I enroll in an ACA plan?

Most people enroll in plans or make changes to their coverage during an annual open enrollment period (OEP). However, when you retire and lose your employer-provided health insurance it doesn’t necessarily coincide with an OEP, so a special enrollment period (SEP) is available so you don’t have to go without insurance in between your retirement date and the annual OEP.

You must enroll in an ACA plan within 60 days of losing your employer-provided coverage after you retire. If you miss that SEP window, you will need to wait until the next OEP to enroll in a plan, potentially leaving you without health insurance for a bit.

How much does ACA health insurance cost?

Several factors are used to determine your premium cost for an ACA plan, including where you live, your age, how many people you’re covering, your income, etc. Plans can also vary on things like deductibles, coinsurance, copays and coverage levels. Some preventative services have no out-of-pocket costs, and some plans offer other services with no out-of-pocket costs. That’s why it’s important to consult an expert and carefully compare plans to find the one that’s right for your needs.

Depending on your income and household size, you may be able to lower your premium payments and out-of-pocket costs with an ACA premium tax credit.‍ ‍ ^{See note 1} Those with lower incomes can receive larger credits. Those tax credits are typically taken upfront and paid directly to your health insurance company each month to reduce the amount you pay for your premium, instead of claiming it on your tax return each year.

Enhanced premium subsidies made available as part of the Inflation Reduction Act in 2022 have reduced premium payments by an estimated $705 a year for millions of Americans. However, those enhanced subsidies are scheduled to expire at the end of 2025, meaning premium prices for ACA Marketplace plans could increase substantially for everyone.‍ ‍ ^{See note 1}

What do ACA health insurance plans cover?

All ACA Marketplace plans cover prescription drugs, emergency services, hospitalization, lab services and mental health services. They also must cover pre-existing conditions. Plans might offer additional benefits like limited dental and vision benefits, medical management programs for conditions like diabetes and weight management, and other services and procedures. A licensed health insurance agent can help you find the plan that best meets your health needs.

What about private health insurance?

You can purchase a private, non-Marketplace health insurance plan by contacting insurance companies directly or working with a licensed health insurance agent, instead of opting for COBRA or an ACA Marketplace plan. Some companies offer short-term insurance solutions that could help you maintain limited coverage until you become eligible for Medicare.

Consider a high-deductible plan tied to an HSA.

Whether you’re purchasing an ACA Marketplace or private, non-Marketplace insurance plan, you could weigh the costs of a high-deductible plan that meets federal tax standards and makes you eligible to contribute to an HSA, or a health savings account.‍ ‍ ^{See note 1} The plan’s high deductible means you’ll pay more out of pocket before your insurance starts to pay, but you’ll be able to save tax-free to cover some of those costs.

HSAs are only available with high-deductible plans but can be used to pay for qualified medical expenses not covered by your insurance. Your balance rolls over from year to year, so you can continue to save. Eligible contributions and distributions are tax-free, and any interest or other earnings on your balance are also tax-free. The IRS limits the amount you can contribute each year to your HSA.‍ ‍ ^{See note 1}

Before signing up for a high-deductible plan, consult with a licensed health insurance agent to be sure that premium and tax savings from your HSA are enough to offset the higher plan deductible. And once you become eligible for Medicare, you can no longer contribute to an HSA, so it’s a good idea to stop contributing to your HSA six months before you become eligible for Medicare to avoid potential costly penalties. However, you can continue to tap that account to pay certain Medicare premiums and out-of-pocket costs tax-free.

What are health share plans?

A lesser-known option for health insurance is health sharing, also known as health share ministries or medical cost sharing. These plans aren’t health insurance; however, they’re a group of members who pool their money to cover the costs of medical care for everyone in the group.

As part of a medical cost sharing group, you’ll pay in a certain amount each month (like a premium), plus an annual amount for your own expenses (like a deductible). You must meet that annual amount before the group will start sharing the cost of your medical expenses. Many are run by faith-based organizations, and you may need to sign a statement of faith or agree to a moral or healthy lifestyle to participate.

Generally, these sharing groups limit coverage to basic health care and catastrophic care, but could be a solution for people who are generally in good health, don't require a lot of care and can’t afford COBRA, ACA or other private health insurance premiums.

Other options

If your spouse has health insurance, they may be able to add you to their plan as a dependent. The policy premium will likely increase, so do the math to see if joining your spouse’s plan makes more sense than buying your own.

Special considerations for veterans

Retiring service members and their families can continue their TRICARE® coverage. Some of the most common options include:

• TRICARE Prime®: The same managed care you received in the military, though now you’ll be paying an annual enrollment fee and network copays.
• TRICARE Select®: A preferred provider organization plan that allows you to see any TRICARE-authorized provider. Depending on your military status, you may pay an annual enrollment fee or annual premium.
• TRICARE Retired Reserve® (TRR): Available to those retiring from the National Guard or Reserve who are younger than 60. You’ll pay a monthly premium and have an annual deductible but can see any TRICARE-authorized provider. At age 60, you become eligible for the same TRICARE benefits as other retired service members.

Should you consider TRICARE?

If you’ve already been using TRICARE, staying with a TRICARE Prime or TRICARE Select could be an easy way to maintain your coverage until you become eligible for Medicare. But with TRICARE Prime, you may have limited provider choices and it may only be available in Prime Service Areas, usually around military installations.

With TRICARE Select, premiums are usually much lower than private health insurance, but your out-of-network expenses might be higher.

The bottom line

Congratulations on retiring early! That’s a big goal and requires a lot of hard work and careful planning. It would be a mistake to let unexpected medical costs eat away at your enjoyment because you lost health insurance.

USAA has partnered with IHC Specialty Benefits‍ ‍ ^{See note 2} to help you carefully compare the costs and coverage of your health care options to find the right plan for your needs to fill the gap before you become eligible for Medicare. The option that is best for you will depend on your specific circumstances, so you should also review your plan with an expert each year before open enrollment to make sure it’s still working for you.