This is the second blog in our Plan Ahead series. Here at Dixon Financial Group, LLC, it is our job and pleasure to help you plan and implement your retirement goals.
Planning for retirement involves carefully considering various factors, and one crucial aspect to address is health insurance coverage. While working until at least age 65 provides the advantage of transitioning from employer insurance to Medicare seamlessly, many individuals choose to retire earlier. Understanding their health insurance options becomes essential for these early retirees before Medicare eligibility. This blog post will explore different health insurance avenues available to early retirees and provide insights to help make informed decisions.
Exploring Employer-Sponsored Retiree Plans: Traditionally, retiree plans offered by employers have been a reliable option for continued health insurance coverage. However, such plans have become increasingly rare, with only 21% of large employers offering them, according to KFF's 2022 Employer Benefits Survey (down from 27% in 2021). While an employer may not provide coverage to retirees over 65, they might extend it to those retiring before 65. An employer-subsidized retiree plan should be the preferred choice for early retirees.
Understanding the Cost of Health Insurance: When considering early retirement, assessing the cost of health insurance once the employer subsidy ends is crucial. Many employees need to be made aware that their employers subsidize a significant portion of their health insurance premiums. On average, workers only pay around $110 per month, while the total average premium for single coverage amounts to $659, leaving the employer to cover the remaining $549 difference (as per the KFF 2022 Employer Health Benefits Survey). Upon retirement, without another employer agreement in place, the retiree will be responsible for the total cost of health insurance, which may prove more expensive than the employer group plan. This realization alone may prompt the client to reassess their decision to retire.
Considering Spousal Insurance: If the retiree's spouse is still working and has employer-sponsored insurance, it presents a potential solution. By joining the spouse's plan, the retiree can benefit from relatively good coverage at a lower cost than options like COBRA or individual marketplace insurance. Although family coverage costs may increase, it usually remains more affordable than alternative options. Once the retiree turns 65, they can transition to Medicare and explore supplementary plans or Medicare Advantage.
Exploring COBRA as an Option: COBRA, designed for such situations, allows the client and their covered family members to maintain the same coverage post-retirement. However, the retiree will be responsible for the entire premium cost, which can be pretty expensive. On average, family coverage under COBRA costs $1,872 per month, with the employee paying only $508 while employed (as per KFF data). While some employers may offer to pay the COBRA premiums for the first 18 months after retirement, it's crucial to remember that COBRA serves as secondary insurance to Medicare once the retiree turns 65. Enrolling in Medicare is necessary to ensure proper coverage and payment of medical bills.
Considering Marketplace Insurance: For individuals facing the total cost of COBRA, exploring health insurance policies through the marketplace may be a viable option. While not inexpensive, marketplace plans offer subsidies and lower-cost alternatives that may be preferable to COBRA. Utilizing resources such as the KFF Health Insurance Marketplace Calculator can provide insights into the cost of different plans. Evaluating available subsidies, a 63-year-old retiree earning $100,000 per year may find a Silver plan costing $708 monthly after a $345 premium tax credit. Conversely, a $200,000 income would disqualify the individual from subsidies, resulting in the full $1,054 payment. If costs are still prohibitive, downgrading to a Bronze plan is an option, albeit with higher out-of-pocket expenses.
Exploring Private Insurance: Private insurance is an alternative for those willing to explore all possibilities. These plans, not offered through the public marketplace, do not include subsidies. However, individuals who wouldn't qualify for subsidies might find private insurance suitable for customizing coverage terms. The options are diverse, from catastrophic coverage with lower premiums but higher deductibles to expanded Bronze or Platinum plans with varying coverage and costs. Selecting the most appropriate private insurance plan depends on factors such as current health status, expected healthcare usage, and tolerance for unexpected expenses.
Health insurance is a critical consideration for early retirees. While working until age 65 ensures a smoother transition to Medicare, evaluating health insurance options for those retiring earlier is essential. Employer-sponsored retiree plans are becoming increasingly rare, prompting individuals to explore other avenues such as COBRA, marketplace insurance, or private insurance. By understanding the costs, assessing spousal coverage, and considering various factors, early retirees can make informed decisions about their health insurance coverage during the pre-Medicare period. Remember, each individual's health situation is unique, and seeking guidance from experts and healthcare providers can help tailor a plan that meets specific needs and budgets.
Contact our LPL Financial Advisors at Dixon Financial Group, LLC, today with any questions or concerns at firstname.lastname@example.org or call 702.982.2479. Make sure to share this information with family and friends so they, too, can start planning.
David S. Dixon, CFP®
Jacob S. Bierstedt, CFP®, ChFC