For many, early retirement is its own reward. Being freed from the “rat race” of long commutes, deadlines, workplace stress and continual attempts at work-life balance makes the leisurely pace of retirement just that much sweeter. Also, having the time to dedicate to a healthier lifestyle — exercise, eating well, getting enough sleep — is generally understood to contribute to a sense of well-being. The logic, then, suggests that retirement might positively influence a retiree’s health and wellness.
While the potential impact of early retirement on someone’s physical health may be appealing, the implications on one’s financial health also needs to be considered. This is especially relevant for those who may have been forced to consider retiring earlier than anticipated due to recent economic events resulting from the pandemic.
Simply put, there’s one health-related topic that clients considering early retirement could find less than ideal — and that’s paying for health insurance.
What About Medicare Benefits?
For most, the minimum eligibility age for Medicare is 65, so those who wish to retire before they reach age 65 are left to find and finance coverage during the “in-between” years, however long that may be.1
Generally speaking, early retirees in this situation have some options, although each has its drawbacks:
- COBRA insurance may be available for a limited time (generally 18 months) through the employer from which the person retires.2 However, the continuation coverage may be costly and is rarely subsidized by that employer. It’s also important to note that Medicare doesn’t qualify COBRA and retiree health plans as coverage based on current employment, so participants aren’t eligible for a special enrollment period when that coverage ends.1
- A spouse’s health plan could be a viable alternative, although not all employers offer the benefit, or it may come with an expensive surcharge or special rules.
- The Affordable Care Act (ACA) is income-based coverage, and not everyone qualifies for it.
- Private insurance can be a pricey out-of-pocket spend.
Early Retirees Need to Plan Ahead
Regardless of potential advantages or disadvantages, all of these insurance coverages share one thing in common — they all cost money. Those who retired early without fully contemplating this necessary expense may be feeling the sting of exorbitant monthly premiums depending on their health, where they live and other factors.
This potential oversight brings up an important opportunity for financial advisors. You can help your early-retiring clients develop a strategy to save for pre-Medicare insurance coverage while they are still working:
- Leverage Health Savings Account (HSA) benefits. Working clients covered under a high deductible health plan can stash money for future health care costs into an HSA. They’ll not only be proactive about saving, HSAs also offer triple tax advantages — they lower current taxable income, grow tax-deferred, and withdrawals are tax-free provided the funds are used for medical expenses.3 A person can even claim a tax deduction for contributions made to an HSA even if they don’t itemize their deductions.3 Note, however, that clients should stop contributing to their HSA six months prior to enrolling in Medicare to avoid tax penalties.1
- Increase cash reserves. The standard benchmark of having three to six months of living expenses set aside in an emergency fund may skew low for clients considering early retirement. Building short term liquid savings may offset health care costs without derailing their retirement plans or budget.
- Create a retirement budget plan. Being realistic about the amount of money it will take to maintain a desired retirement lifestyle quickly puts the impact of expenses that were partially or fully paid for by a previous employer — specifically health care — into perspective. Confronting the reality prior to early retirement may help clients adjust their expectations, if necessary.
Early retirement may lead to a long, happy and healthy life provided your clients aren’t caught off guard about how to fund those extra non-working years. Health is just one of the fears about the future that is stressing people out. Gain a better understanding of where your clients are at and which fears may be driving their retirement decisions in our online resource, Overcome Your Fears About the Future
Also consider how tools like income annuities may help your clients manage retirement income and pay for healthcare expenses so they don’t run out of money, along with bridging the gap between retirement and Social Security benefits.
1Medicare, Part A & Part B sign up periods, undated.
2Medicare, COBRA: 7 important facts, undated.
3Internal Revenue Service, Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans, undated.