Health Insurance for Early Retirees (Before Medicare at 65)

Retiring before age 65 is a goal for many Americans, but it comes with a major financial challenge: health insurance. Medicare does not start until 65, and once you leave your employer, you lose access to group health coverage. The gap between retirement and Medicare eligibility can last anywhere from a few months to more than a decade, depending on when you retire. This guide walks through every option for covering that gap and helps you plan for the cost.

The Coverage Gap: Retirement to Medicare

Medicare Part A and Part B begin at age 65 for most Americans. If you retire at 60, you face a five-year gap without employer-sponsored health insurance. If you retire at 55, the gap is a full decade. During this period, you are responsible for finding and paying for your own coverage.

This gap is one of the biggest financial risks in early retirement. Health insurance for people in their 50s and 60s is expensive because premiums increase with age. A serious illness or injury without adequate coverage could deplete retirement savings quickly. Planning for this cost is essential before you set a retirement date.

The good news is that there are several options available. Each has trade-offs in cost, coverage quality, and flexibility. Understanding all of them helps you build a health insurance strategy that works for your specific retirement timeline and budget.

ACA Marketplace Plans

For most early retirees, an ACA marketplace plan is the primary option. The Affordable Care Act created health insurance marketplaces where individuals can buy coverage regardless of their health status. Plans are available in Bronze, Silver, Gold, and Platinum tiers, and all cover essential health benefits including hospitalization, prescriptions, mental health, and preventive care.

One of the biggest advantages for early retirees is that ACA plans cannot deny coverage or charge more for pre-existing conditions. Premiums are based on age, location, tobacco use, and plan tier only. No matter what health conditions you have, you can get coverage.

Enrollment is available during the annual Open Enrollment Period, typically from November through mid-January. Losing your employer coverage triggers a Special Enrollment Period that gives you 60 days to sign up outside of open enrollment.

ACA Subsidies for Early Retirees

Premium tax credits are income-based subsidies that reduce the monthly cost of marketplace plans. Eligibility is determined by your household income relative to the federal poverty level. Many early retirees qualify for significant subsidies because their income drops after they stop working.

For example, an early retiree with a modest pension and investment income of $40,000 to $60,000 per year could receive hundreds of dollars per month in premium tax credits. This can make a Silver or Gold plan very affordable compared to the unsubsidized sticker price.

The key is managing your income carefully. ACA subsidies are based on your modified adjusted gross income. By controlling how much you withdraw from retirement accounts, you can keep your income in a range that qualifies for larger subsidies. Roth IRA withdrawals, for example, do not count as income for subsidy purposes, making them a valuable tool in early retirement planning.

COBRA Coverage After Retirement

COBRA allows you to continue your employer's health plan for up to 18 months after leaving your job. It provides the same coverage, the same network, and the same benefits you had while employed. The catch is that you pay the full premium plus a two percent administrative fee, with no employer subsidy.

For early retirees, COBRA makes the most sense in a few specific situations:

• You are 63 or older and COBRA can bridge you to Medicare at 65.
• You are in the middle of medical treatment and need to keep your current doctors.
• You have already met your deductible for the year and want to preserve that progress.
• Your income is too high for meaningful ACA subsidies.

For most early retirees, especially those with lower retirement income, an ACA marketplace plan with subsidies will be significantly cheaper than COBRA. Always compare both options before making a decision.

Retiree Health Benefits from Your Employer

Some employers offer retiree health benefits as part of their retirement package. This is becoming less common, but it is still available at some large companies, government agencies, and unionized workplaces. If your employer offers retiree health coverage, it can be the most convenient and cost-effective option.

Retiree health plans work similarly to active employee plans, but the employer may share less of the premium cost. Some employers offer a health reimbursement arrangement (HRA) that gives you a set dollar amount to spend on health care or premiums each year. Others provide a traditional group plan with modified cost-sharing.

Before you retire, ask your HR department whether retiree health benefits are available, what the eligibility requirements are, how much the plan costs, and whether it continues until you are eligible for Medicare. Get all details in writing, because employers can change or eliminate retiree benefits.

Spouse's Employer Plan

If your spouse is still working and has employer-sponsored health insurance, you may be able to join their plan. Your retirement and loss of your own employer coverage typically qualifies as a life event that allows mid-year enrollment on your spouse's plan.

This can be an excellent option because employer plans often have broader networks and lower costs than individual market plans. However, adding a spouse to an employer plan increases the premium, and the employer may not subsidize the spousal coverage as much as the employee's own coverage. Check the cost of adding you to your spouse's plan and compare it with other options.

Health Sharing Ministries

Health care sharing ministries are organizations where members share each other's medical costs. They are not insurance and do not guarantee payment of claims. Monthly contributions are typically lower than insurance premiums, ranging from $200 to $500 per month for an individual.

Some early retirees consider health sharing ministries to save money. However, there are significant risks. Most ministries exclude pre-existing conditions for the first few years. They may limit sharing amounts for certain conditions. They often have religious lifestyle requirements. And because they are not insurance, they are not regulated by state insurance departments and do not have to follow ACA rules.

For healthy early retirees without significant medical needs, a health sharing ministry could reduce costs. But for anyone with ongoing health conditions or who wants guaranteed coverage, an ACA marketplace plan provides much stronger protection.

Short-Term Health Insurance as a Bridge

Short-term health insurance plans are temporary policies designed to cover gaps in coverage. They are inexpensive, with premiums often running $100 to $300 per month. However, they have significant limitations that make them a poor long-term solution for early retirees.

• They typically exclude pre-existing conditions.
• They do not have to cover essential health benefits like prescriptions, mental health, or maternity care.
• They often have low benefit maximums that may not cover a serious illness.
• They are not available in all states, and duration limits vary by state.

Short-term plans might make sense for a very brief gap, such as waiting a month or two for marketplace coverage to start. They are generally not a good choice for early retirees who need reliable coverage for years.

Cost Considerations for Early Retirement Health Coverage

Health insurance is one of the largest expenses in early retirement. Understanding the full cost picture is important for planning.

• Premiums. Without subsidies, ACA marketplace premiums for people aged 55 to 64 can range from $500 to $1,200 per month or more for individual coverage. With subsidies, costs can drop to under $200 per month.
• Deductibles and out-of-pocket costs. Beyond premiums, you will pay deductibles, copays, and coinsurance. A Silver plan deductible might be $2,000 to $4,000 per year. Budget for both premiums and out-of-pocket expenses.
• Premium increases with age. ACA plans can charge older adults up to three times more than younger adults. Your premiums will rise each year as you get closer to 65.
• Prescription drug costs. If you take regular medications, check the formulary of any plan you consider. Drug costs can vary widely between plans and can be a significant part of your total health spending.

Many financial planners recommend budgeting $10,000 to $20,000 per year per person for health care costs in early retirement, including premiums and out-of-pocket expenses. If you retire as a couple, that could mean $20,000 to $40,000 per year until Medicare begins.

Managing Income to Maximize ACA Subsidies

One of the most powerful strategies for early retirees is controlling income to qualify for ACA premium tax credits. Subsidy eligibility is based on your modified adjusted gross income, which includes wages, pension income, traditional IRA and 401(k) withdrawals, investment income, and Social Security benefits.

Here are strategies early retirees use to manage their income for subsidy purposes:

• Draw from Roth accounts. Roth IRA and Roth 401(k) withdrawals are not counted as income for ACA subsidy purposes. If you have Roth savings, using them in early retirement can keep your reported income low.
• Limit traditional IRA and 401(k) withdrawals. Each dollar you withdraw from a traditional retirement account counts as income. Withdraw only what you need to stay within subsidy thresholds.
• Delay Social Security. Social Security benefits count as income. Delaying your benefits until after Medicare starts at 65 keeps your income lower during the pre-Medicare years.
• Manage capital gains. Selling investments in taxable accounts generates capital gains that count as income. Plan asset sales carefully to avoid pushing your income above subsidy thresholds.

Working with a financial planner who understands ACA subsidies can save you thousands of dollars per year on health insurance premiums. The difference between qualifying for subsidies and not qualifying can be $5,000 to $15,000 or more per year.

Planning Your Retirement Health Coverage

Health insurance planning should start well before your retirement date. Here is a timeline of steps to take.

• Two to three years before retirement. Research your options. Check whether your employer offers retiree health benefits. Estimate your retirement income and run subsidy calculations on HealthCare.gov. Consider building Roth savings for subsidy management.
• Six months before retirement. Get specific premium quotes from the marketplace. Compare COBRA costs from your employer. Identify which doctors and prescriptions are covered by the plans you are considering.
• At retirement. Enroll in your chosen plan within the 60-day Special Enrollment Period triggered by losing employer coverage. Make sure there is no gap in coverage between your last day of employer insurance and your new plan's start date.
• Each year until Medicare. Review your plan during open enrollment. Marketplace plans change premiums, networks, and formularies each year. Shopping annually ensures you always have the best option.

Common Mistakes Early Retirees Make

Avoiding these common pitfalls can save you money and stress.

• Choosing COBRA without comparing marketplace options. COBRA is familiar but expensive. Many early retirees automatically choose COBRA and miss out on marketplace plans that could save them hundreds per month.
• Not managing income for subsidy purposes. Taking a large 401(k) withdrawal in the same year you retire can push your income above subsidy thresholds and cost you thousands in lost credits.
• Forgetting to account for both premiums and out-of-pocket costs. A low-premium Bronze plan may look cheap, but its high deductible and coinsurance can make total costs higher than a Silver plan with moderate premiums.
• Missing enrollment deadlines. You have 60 days from losing employer coverage to enroll on the marketplace. Missing this window means waiting until open enrollment, which could leave you uninsured for months.
• Assuming short-term insurance is adequate. Short-term plans have significant gaps in coverage that can be financially devastating for someone in their 50s or 60s with a higher risk of serious health events.

Comparing Your Options Side by Side

Here is a quick comparison of the main coverage options for early retirees.

• ACA marketplace: Comprehensive coverage, subsidies available, covers pre-existing conditions, choose your plan tier. Best option for most early retirees.
• COBRA: Same employer plan, 18-month limit, very expensive, no subsidies. Best for short bridging to Medicare or mid-treatment continuity.
• Retiree health benefits: Employer-provided, not available everywhere, terms vary. Best option if your employer offers it.
• Spouse's employer plan: Good coverage and network, cost depends on employer's contribution, requires spouse to be working.
• Short-term plans: Low premiums, limited coverage, excludes pre-existing conditions. Only for very brief gaps.

The Bottom Line

Health insurance is one of the most important and expensive parts of early retirement planning. The gap between leaving your employer and qualifying for Medicare at 65 requires careful attention. For most early retirees, an ACA marketplace plan with premium tax credits offers the best combination of comprehensive coverage and manageable cost.

Start planning at least two years before your target retirement date. Research all your options, estimate your costs, and develop a strategy for managing your income to maximize subsidies. The effort you put into health insurance planning can save you tens of thousands of dollars over the years between retirement and Medicare, and it ensures you are never without the coverage you need.