The Healthcare Hurdle: What You Need to Know If You Retire Before 65

Over the past few years, I’ve met with several individuals and couples that have wanted to consider retirement sooner than later. However, there has been one common obstacle that has consistently deterred those plans – healthcare medical costs.

Recently, TD Ameritrade published an article that highlighted just this point. According to the survey of adults over 45 with at least $250,000 in investable assets were surveyed, the number 1 barrier to retiring early (by this definition, before the age of 65) is medical costs.

The struggle is real.

With medical-related expenses climbing rapidly, retirees need to be prepared more than ever for the hundreds of thousands of dollars needed to cover out-of-pocket costs over their lifetime. For those that are considering retiring before Medicare kicks in age 65, the financial strain can mount.

But worry not – there are several ways in which you can plan for this reality.

If you are considering early retirement, you need to understand what healthcare options you have before taking the big plunge:

  • Maintain coverage through COBRA: If you were covered by insurance when you left work, you might have the ability to continue your coverage for 18 months under your employer’s plan. This may be a great option if you have to “bridge” your health coverage for a few months between your retirement age and Medicare eligibility age. Be aware that COBRA coverage may be quite expensive, as you will be paying 100% of your premiums.
  • Seek out individual coverage: If continuation of coverage through COBRA is not the bee’s knees for you, then you could consider seeking insurance plans that are available in the private marketplace. Policies can be purchased directly through an insurer (e.g. Presbyterian, Lovelace, BlueCross BlueShield, etc.) or the state’s exchange (bewellnm.com). Going this route could allow you to choose a plan that makes sense for your coverage needs as well as your pocketbook. Also, you may qualify for subsidies that could further cut the cost down. You’ll want to consider the impact of timing of cash-flow with this. It may be wise to review the impact of starting that Social Security benefit early and those distributions from your IRA accounts.
  • Get covered through a spouse’s plan: If you have a spouse that is still working, and they are covered through their employer’s insurance plan, this may be your best approach. You’ll want to inquire as to what options you have and what costs will be associated with going this route. Every employer has different requirements and provisions with how they treat non-employee coverage.

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Understand the Medicare time-traps

As you march closer to the Medicare eligibility age of 65, you’ll need to remember to actually sign up for Medicare. The initial enrollment period for Medicare begins three months before you turn 65 and ends three months after your 65th birthday. In total, you have seven months (including the month your birthday falls in) to enroll.

If you fail to signup, the consequences will last a lifetime.

Late-enrollment penalties can be steep, with the most common penalty being assessed on Medicare Part B coverage. These penalties will increase your premiums by 10% for every 12-month period that you go without enrolling in coverage. The longer you wait, the more they take.

Fret not – there are special provisions in place if you’ve failed to enroll.

For those that are still working when they turn 65 AND have been covered under a qualifying group health plan (most employer health coverage is qualifying), you can sign up for Medicare at any time as long as you or your spouse is still working and you are still covered under the employer plan.

Yeah, but what if I retired after 65 and didn’t sign up for Medicare?

When you have finally retired from work, Medicare will allow you an additional eight-month special enrollment period that begins the month after your job ends. This should provide plenty of grace period for you sign up for coverage.

Consider allocating funds dedicated to healthcare costs

We all know that we have to face two facts of life – death and taxes. Well, there might as well be three. Healthcare costs will be incurred for life, and we need to be prepared for this reality.

A great way to prepare for these expenses is to consider opening up a Health Savings Account (HSA for short) while you are still working. HSA accounts can be a great way to sock away money for future medical-related expenses. Starting sooner than later with HSA savings will provide you with more money that can be withdrawn in retirement.

HSA accounts allow for contributions to be deductible, and withdrawals come out tax-free if covering healthcare costs. One caveat you to be aware of with HSAs – you need to be enrolled in a qualifying high-deductible health plan (HDHP).

If you’re not able to open up an HDHP, I encourage you to consider setting up a separate savings account to fund each year for future medical expenses. If you haven’t maxed out IRA contributions for the year, you may want to look into opening a Roth IRA account that will allow future growth and withdrawals to be tax-free.

Planning for these retirement realities may seem daunting and somewhat discouraging. If you’ve been neglecting the issue, it’s not too late to begin exploring your options. Sometimes just talking with someone about your concerns will help alleviate some of the stress that these issues can cause.

That’s why we’re here. Let’s make a plan. Preferably sooner than later.

-Written by David Hicks at Oakmont Advisory Group.


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