Retiring Before 65? Make Sure to Know Your Healthcare Options
Feb 07, 2024
Leaving work four years before
starting Medicare can drain $100,000 or more from retirement savings. It pays
to consider all the possibilities.
Retiring before 65, whether by design or dictated by circumstance,
is a reality for many Americans. And health insurance for these early retirees
is often more costly than they think—and a reality check.
For a
couple, premiums for coverage can run from $1,700 to $2,200 a month depending
on where they live, their age and the source of the insurance. And besides
premiums, there are deductibles, copays and prescriptions and coinsurance
costs—potentially adding thousands of dollars more in extra costs.
The upshot: Leaving work just four years before starting Medicare
at age 65 can easily drain $100,000 or more from retirement savings.
What’s more, some insurance options have a limited local network
and might not include preferred doctors or allow participants to see a
specialist without a referral. And many don’t cover expenses incurred out of
state unless it is an emergency, a potential deal breaker for a retiree who
wants to spend winters in a warmer climate.
“It’s a real shock for people,” says Milwaukee financial
planner Ben Smith. “They naively think their health insurance will be
identical to what they had at work.”
For those who can’t return to work, Smith adds, “the reality of a
huge new expense leads to some very challenging conversations” about running
short of money or cutting out retirement luxuries like travel and
entertainment.
Here are some options for early retirees to get the level of care
they desire and to minimize health-insurance costs early in retirement before
Medicare kicks in.
Employer coverage
The cheapest option for a couple is to stagger retirements and
have one keep working so both can rely on a workplace plan until Medicare
becomes an option at 65. Workplace plans tend to be subsidized, with the
employer paying about 83% of the cost of coverage for the employee on average,
according to the Kaiser Family Foundation. For family coverage, the employee
must pick up an additional share of the expense.
Workplace plans typically also have more extensive coverage
options than buying private insurance as an individual.
But that approach isn’t always feasible if you’re single or if
neither partner wants to delay retirement. So another way to stay on a
workplace plan and stay retired is through so-called Cobra coverage, which
allows workers at many companies the right to continue health benefits for as
many as 18 months if they leave their job under certain circumstances such as
voluntary or involuntary job loss, reduction in hours worked or other life
events.
Cobra coverage will cost more than if you are employed, with many
employers requiring such plan participants to pay full fare, plus a 2%
administration fee. However, the Cobra option will allow you to keep your
preferred doctors as you consider what to do next.
The average Cobra premium for a family recently ran about $25,000
a year, including the 2% fee, according to the Kaiser Family Foundation. That
compares with an average of $6,775 a year the employee was accustomed to paying
through paycheck deductions.
The Cobra coverage option can also make sense for those who leave
a job midyear or later and have already paid a significant portion of their
annual deductible, says Jennifer Chumbley Hogue, a health-insurance agent
in Dallas. Otherwise, you may incur a new deductible and other costs for the
same year under a new insurance plan.
ACA coverage
While
using Cobra may be a good stopgap, moving to insurance through the Affordable
Care Act marketplace is usually far less expensive because most people qualify
for subsidies thanks to recent regulatory changes by the Biden administration
to guide more people onto the program. Even people with more than $200,000 in
income qualify in some parts of the country, and income typically plunges after
leaving a job.
The
ACA program includes four tiers of coverage: platinum, gold, silver and bronze.
The bronze plans have the lowest premiums, silver next, then gold and platinum.
Financial
planners sometimes say silver is the best value, but that isn’t always the case
once all potential out-of-pocket costs are compared, says Chumbley Hogue.
Subsidies can be examined with the Kaiser Health Insurance Marketplace
Calculator.
Nationally,
the average 63-year-old couple with a $150,000 income would get a $13,689
subsidy to significantly reduce the $26,439 premium on a silver plan.
Subsidies
vary by location and income. A family of four with an income up to $45,000
wouldn’t have to pay a premium for a silver plan. In New York City, a
63-year-old couple with an income of $250,000 could qualify for a small subsidy
to reduce their premium.
Beyond
cost considerations, ACA plans are more user-friendly than other private
options because they won’t disallow coverage based on pre-existing conditions
and can’t deny coverage or boot policyholders if they become sick after buying
the insurance.
Still,
retirees who choose this route aren’t home-free after paying premiums. The
plans have deductibles and other requirements like copays and coinsurance for
doctors, hospitals and prescriptions.
For
example, the 63-year-old couple in the average $26,439 silver ACA plan could
have to pay additional doctor and hospital charges up to a maximum of $18,900 a
year. If they want to go outside their network for a specialist or hospital
that is highly rated for specialized care, their out-of-pocket expenses could
be much more.
Marisa
Bradbury, a financial planner in Lake Mary, Fla., had a client who had depended
on a particular cardiologist for a heart problem, but the ACA insurance plan he
bought when he retired in his early 60s wasn’t going to let him see the
specialist.
If he
continued to see his cardiologist, she says, “he would have had to pay on his
own” and that threatened to upend his retirement-financial plan. He decided to
switch to the cardiologist his plan would allow, and then switched to a pricier
plan that included his preferred cardiologist at the end of the year when the
ACA system allows people to pick another plan.
Private coverage
Early
retirees who don’t qualify for a subsidy can still buy private insurance
through the ACA marketplace, and it is smart to do so even though it will cost
full price and is likely more expensive than non-ACA private insurance, says
St. Petersburg, Fla., insurance agent Peter Motzenbecker.
That
is because there are few private plans available anymore outside the ACA
system, and those that remain often don’t have the pre-existing condition
coverage provisions that ACA plans do. In other words: ACA plans don’t screen
people for their health before insuring them. And whenever people are insured
through the ACA marketplace, they will be covered even if an illness stems from
a past condition.
Private
plans frequently deny coverage if they determine a person’s malady stemmed from
a condition that existed before they bought insurance.
Motzenbecker
says he doesn’t think the lower monthly premiums on private plans without ACA
backing are worth the risk of getting denied later. Yet, he adds, low premiums
can attract healthy people willing to bet they will stay healthy.
He
compares two plans with similar coverage but different premiums. A United
Healthcare private plan in Florida has a monthly premium of $1,464, while a
similar Blue Cross/Blue Shield ACA plan charges $2,347. They have similar
deductibles—over $14,000 for couples.
But
the private UnitedHealthcare plan is available only to people who join the
Federation of American Consumers & Travelers, a group that negotiates discounts
on an array of products. And the insurance plan states that it can consider
pre-existing conditions and that it will also stop paying patient bills if
charges go over $2 million over a lifetime. That is a high amount, Motzenbecker
says, but possible in the event of a serious accident or illness like cancer.
ACA plans never stop covering care.
“That’s
why I don’t recommend non-[ACA] marketplace plans for anyone in their 60s,” he
says.
The
denial-of-care risk also applies to private plans that last for only a few
months, says Christine Simone, chief executive of Caribou, a firm that
helps financial planners compare health plans. Such plans are called
“short-term” or “skinny” policies, and people sometimes buy them when they lose
a job and need insurance for just a few months before taking a new job or going
on Medicare.
Short-term
plans are far less expensive than Cobra coverage as a stopgap for someone who
leaves the workforce unexpectedly, Simone says, but she calls them “a gamble.”
Although you have to pass a health screening to qualify for a short-term plan,
a provider could refuse coverage for a condition by deeming it
pre-existing.
Depending
on the short-term plan, there can also be caps on coverage, such as $1,000 for
a hospital stay. That can leave an individual short of what will be needed if,
for example, he or she has a heart attack and has to be hospitalized at a cost
that can easily be in the tens of thousands of dollars.
“It’s
a misconception that private insurance outside the [ACA] exchange is better,”
says Chumbley Hogue, the Dallas health-insurance agent,
Last resorts
Another
route to reduce coverage costs for those who have lost their job for health
reasons could be through a Social Security disability designation.
Such a
designation would allow a person to get Medicare coverage before age 65, but
Chumbley Hogue warns that the process can take months and Medicare often
doesn’t start until 24 months after a person is deemed disabled.
One
other alternative advisers suggest is to find work at a business that provides
health insurance to part-time workers. Such companies include Starbucks and Trader
Joe’s, according to career website Indeed.com.
Given employers’ typical contributions to health insurance, an
individual working part time for a large company might have to pay about $119 a
month for health insurance, according to Kaiser Family Foundation Vice
President Cynthia Cox.
This
strategy worked for one client of Dallas financial planner Jennifer Grant.
The client, a banker in his mid-50s, wanted to retire early but was advised
that paying for health insurance on his own for about 10 years could harm his
retirement portfolio’s ability to last—especially if a bear market
struck.
His
solution: He loved running and went to work part time selling running shoes at
an REI store that provided insurance.
“It
was like a hobby for him,” she says. “He socialized, talked with people about
running and there was no stress.” And he got affordable insurance to bridge the
gap to Medicare.
WHAT
TO CONSIDER WHEN PICKING A PLAN VIA THE ACA
For early retirees seeking healthcare coverage before going on
Medicare at age 65, the best route may be the least understood—the Affordable
Care Act marketplace.
Many people think the ACA exchange is for low- to middle-income households to
get subsidized healthcare coverage, but insurance experts say the exchange has
become the predominant provider of private health insurance for even
higher-income Americans as many insurers have stopped selling directly to
consumers.
And although higher-income policyholders might not get a subsidy, they do get a
guarantee that won’t come with private insurance purchased outside of the ACA:
no denied care for pre-existing conditions.
“It’s a misconception that private insurance outside the [ACA] exchange is
better,” said Jennifer Chumbley Hogue, a Dallas health-insurance agent.
Start any search for an ACA plan by asking your doctor what insurers cover his
or her care. Don’t rely on lists of networks on insurers’ websites since they
often are out of date.
Keeping a specialist can be especially tricky because most ACA plans don’t
allow a patient to see one without a referral and networks of specialists are
limited.
To find a marketplace plan, Chumbley Hogue suggests using HealthSherpa.com,
which is integrated with the official government site, HealthCare.gov, and she
says is more user-friendly.
And if a person wants help, she suggests finding an independent agent or broker
with the right to sell clients “all plans”; many brokers represent only a few
insurers and in such instances clients may not be offered the best plan at the
lowest price.
One way to bolster the chance of keeping a preferred specialist is
to pick an ACA plan that includes a top-rated hospital, says Los Angeles
insurance broker Tyson Lester. Usually that means patients will get referrals
to top specialists because they are associated with that hospital, he says.
Still, he adds, the strategy isn’t guaranteed to work because many ACA plans
don’t include premier hospitals.
When searching for an ACA plan, insurance experts say it is
essential to scrutinize five key points besides premiums.
·
Is your doctor
covered?
·
Is a reputable
hospital covered?
·
Are your
particular drugs covered?
·
Can you see a
doctor out of your primary state? This is particularly important for retirees
who live in more than one home during the course of the year.
·
Since you could be
picking up a lot of charges besides your premiums, what is your maximum out-of-pocket
charge?
Source: Wall Street Journal