Retiring early: The health care conundrum
August 26, 2013
For many who dream of retiring early, securing affordable health insurance is a major hurdle. If you're contemplating an early exit from the working world, experts suggest you begin exploring your health care options at least a year before you hope to retire.
Most people don't become eligible for coverage under Medicare, the federal health insurance program, until they turn 65. (People who have been disabled for at least two years may qualify for Medicare at any age.) Furthermore, the percentage of employers offering retiree health benefits has been declining, and the benefits offered are less generous. Because early retirees don't have any guaranteed source of health insurance, they're on their own when it comes to finding coverage for the period before they become eligible for Medicare.
"If you want to retire before age 65, you have to consider how you'll pay for health insurance, where you can obtain it, and whether you can afford the coverage," said Theresa O'Hara, a senior wealth planner with Vanguard Asset Management Services™.
And it's important to remember that insurance won't cover everything: You can count on many out-of-pocket payments. With health care costs rising faster than inflation, the importance of saving for the medical expenses you'll incur later in life can't be overstated.
Protecting your assets
For many early retirees, health insurance is critical not only to help cover their medical expenses but also to safeguard their retirement assets. If you don't have insurance, an unexpected illness could easily result in medical bills that could wipe out your savings, putting a comfortable retirement out of reach.
With or without insurance, health care doesn't come cheap. For individuals between 50 and 64, health care costs now account for about 9% of their total spending, according to the Employee Benefit Research Institute (EBRI), which surveyed 800 individuals in July 2012.
"Before you can seriously consider retiring, you need to make sure you add medical costs into your budget," said Ray Querey, a financial planner at Vanguard. "If you are barely making it, and you have not included health care costs, then that's not a good sign."
The new law: Changes that affect early retirees
Starting next year, the much-debated Patient Protection and Affordable Care Act is expected to dramatically change the health care landscape. Most people will be required to have health insurance or pay a penalty.
For early retirees, the new law will mean more opportunities to shop around for insurance without fear of being denied coverage because of a preexisting condition or their age. There will also be subsidies in the form of tax credits for individuals with limited income.
Depending on what state you live in, "health care exchanges" will be set up. These exchanges will certify health plans, allow you to compare plans, and help ensure that you understand your options.
But the law has been fraught with controversy. Implementation of some parts of it has been postponed. So if you're planning to retire within the next 12 months, don't assume the debate is over.
"Be aware of it, know what they are aiming for," said Ms O'Hara. "But until we see it in place, I wouldn't bank on it."
Mr Querey suggests that prospective early retirees who are uneasy about their finances consider working part-time—just enough to get medical coverage—until they are 65.
You'll continue to have out-of-pocket medical expenses even after you're eligible for Medicare—which generally only covers about 60% of your health services, and doesn't include dental, vision, or long-term care. For Medicare beneficiaries ages 65 to 84, out-of-pocket expenses could range from 12% to 15% of total medical costs, according to EBRI.
What follows is an overview of some health care options that might be available.
Your employer's coverage
Don't assume your employer's health plan will cover you: Only about 25% of large employers (those with 200 or more employees) offered health insurance to retirees in 2012, compared with 66% in 1988, according to the Kaiser Family Foundation.
Be sure to find out well ahead of time if your company offers any retirement health benefits and whether you qualify.
COBRA for short-term coverage
The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a law that requires companies with 20 or more employees to provide retirees the option to continue their employer's health plan for up to 18 months.
Depending on how close you are to qualifying for Medicare, and on your particular health situation, you may want to talk to your employer about signing up for COBRA. Keep in mind, however, that you'll be expected to pay 100% of the cost plus an administration fee; employers don't cover a portion of the premiums as they typically do when you're working.
Other group health coverage
Before you shop for individual coverage, which is more expensive than group insurance plans, make sure you've looked into other options. For example, if spousal coverage is available, it will most likely be cheaper than coverage you'll find on your own.
Group health plans are offered by many professional societies, civic groups, and community organizations. If you're a member, you can participate at the discounted group rate.
Shopping for an individual health plan requires more research. You can go about it on your own or through an insurance broker. Either way, you may find yourself suffering from sticker shock.
Even so, you should get the best coverage that you can afford. "Don't scrimp on your coverage," said Ms O'Hara.
For example, high-deductible plans may have lower monthly premiums—but they also have limited coverage when it comes to certain health conditions or prescriptions. If you are not in good health, or if you tend to visit the doctor frequently, this may not be the best type of plan for you.
"You want to make sure you have coverage for the big expenses that can threaten your wealth—like hospital stays," added Mr Querey. "Paying for that could deplete your assets very quickly."