By Justin D. Smith, CFA
Health insurance is costly and complicated, yet critical for your physical and financial wellbeing. Most people rely on employer-provided health insurance until they qualify for government-provided coverage, most commonly Medicare, at age 65.
This presents a problem for people in their 50s and early 60s who are leaving the traditional workforce. Whether they’ve been displaced from the workforce, are retiring early, or blazing their own trail, obtaining health insurance coverage will now fall on their shoulders.
Here are six common alternatives to employer-provided health insurance plans for early retirees:
If your employer-provided health insurance coverage ended due to a qualifying event (such as termination, resignation, or retirement), a provision of the 1985 Consolidated Omnibus Budget Reconciliation Act (COBRA) includes the ability to continue that coverage for 18 months post-termination. This can provide a critical short-term bridge as you look for longer-term solutions. Typically, you will be responsible for paying the full amount of the policy premiums. This means the monthly cost could increase substantially as your employer is no longer paying a portion. To estimate how much your COBRA premiums might be, request that information from your HR/Benefits department. You can also look at your W-2 Box 12 Code DD to get an estimate for the total cost paid by both you and your employer for your coverage.
For those approaching age 65, COBRA can potentially be a strategic component of an early retirement plan. If you retire between ages 63 1/2 and 65, you can rely on COBRA to bridge you until Medicare eligibility at 65. However, be aware of the additional costs you will likely incur. A special provision also exists for extended spousal COBRA coverage for up to 36 months in certain situations when the primary insured attains Medicare eligibility before a younger spouse.
2. Spousal or Domestic Partner Coverage
If your spouse or domestic partner will continue to have employer-provided coverage, that can be a great option for you as well. Be sure to review the costs to determine whether your spouse or partner’s employer will contribute the same amount toward non-employee coverage. You will need to get added to the policy during open enrollment or during a special enrollment if you have experienced a life-changing event, such as job loss or retirement.
3. Affordable Care Act Policies
The 2010 Affordable Care Act (also known as ACA or “ObamaCare”) created a standardized framework and marketplace for health insurance with the aim of making coverage more attainable and affordable. Each state and locality has a unique offering, with HMO, PPO, and other plan types available, including plans that meet a national standard.
Policies are categorized as Bronze, Silver, Gold, or Platinum. These categories have nothing to do with the quality of care or access to care; they only categorize how the costs are split. With a Bronze plan, for example, the average policyholder pays 40% of all costs, with the insurer paying the remaining 60%. Silver, Gold, and Platinum policyholders pay an estimated 30%, 20%, and 10% of their costs, respectively. In exchange for higher levels of coverage and cost-sharing, premiums increase as you move from Bronze to Silver, Gold, or Platinum.
The most impactful component of ACA policies is that purchasers may qualify for subsidies. The Premium Tax Credit can be taken in advance to reduce monthly premiums, or it can be refunded on a tax return. To qualify for the Premium Tax Credit, your household income will need to fall into specific annual income ranges that are between 100% and 400% of the amount of federal poverty limit. To learn more about ACA policies, the Premium Tax Credit, or to start your enrollment, visit Healthcare.gov.
4. Part-Time Work
In recent years, it has become more common to see employers offer health insurance to employees working part-time. Starbucks and Home Depot are notable examples of large companies that provide coverage to part-time workers. These companies have attracted a significant number of potential employees with this benefit. Smaller employers may also make coverage available to part-time employees, but a more thorough search may be required to find the right fit. Some employers will also be willing to negotiate insurance coverage as part of your part-time compensation package. Whichever route you chose, be sure to gain a thorough understanding of the insurance coverage and costs to ensure you are getting a fair value in exchange for your labor. Also, make sure the job fulfills your personal, professional, and financial needs beyond just your need for health insurance.
Once you do hit age 65, you can rely on Medicare for coverage, but that doesn’t mean you’re done planning. First, you need to prepare for your initial enrollment window, which opens three months before the month of your 65th birthday and extends three months after. You must work through your initial enrollment during this seven-month window even if you still have other coverage. Failure to do so could result in permanently higher premiums, due to penalties or lack of access to certain coverage types in the future. Each year, you should review your coverage needs during your annual enrollment to ensure you maintain the right fit for your unique situation. Lastly, be aware that your Medicare premiums may be subject to increase if your income reaches a certain threshold. These increases are called the Income Related Monthly Adjustment Amounts (IRMAA) surcharge. With strategic tax planning, you may be able to reduce these surcharges. To learn more, visit Medicare.gov.
6. Private Policies
Private policies outside of the ACA parameters may also be available. These may include catastrophic plans or other coverage types. Take care to review what’s covered to ensure you get the protection you need.
No matter which route you take, it’s often valuable to get help from a professional health insurance agent. I encourage my clients to work with an agent who specializes in the type of coverage they need (ACA, Medicare, etc.). The good news for consumers is that agent commissions are typically embedded in your premium even if you don’t use an agent, so there is no increase in the amount you pay. To find an agent near you, visit NAHU.org.
About the Author: Justin D. Smith, CFA®, CFP®
Justin D. Smith, CFA®, CFP®, a financial advisor at Savant Wealth Management, specializes in helping executives and successful professionals in their 50s and 60s who have been displaced, or who are just thinking ahead, plan their next chapter. Whether they want to stay in the corporate world, retire, or blur the lines to get the best of both worlds, Justin helps them explore what’s possible and guides them on their journey.
Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois. Past performance may not be indicative of future results. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant.
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