How will I cover health insurance and medical expenses?

April 2, 2024 | David Edmisten, CFP®

How will I cover my health insurance and medical expenses if I retire early?

One question unique to those who are retiring early is figuring out how to cover health and medical needs. 

Corporate employees are generally accustomed to having a good health insurance plan provided as part of their employee benefits, at a fraction of the total cost of the policy due to the employer subsidizing most of the cost of the annual premiums. Many people who retire early are shocked to learn just how expensive an annual health insurance premium can be when they are paying the full premium themselves.

COBRA provides recently separated employees the options to continue to participate in their employers' health insurance plan for a period of 18 months following separation from service. However, the employee must pay both the employee and employer portions of the premium, which can increase the cost of coverage by 50-70% for most workers.

While this option may provide temporary continuity of coverage, most early retirees are generally searching for more cost effective and longer-term options for health insurance coverage.

Until one is eligible for Medicare beginning at age 65, there are generally 4 additional options for early retirees to consider.

A. Purchase an individual or family health insurance policy on the open market.

Early retirees can shop the health insurance marketplace for individual or family health insurance policies. Most major health insurance companies offer a variety of coverage options, including low and high deductible plans, with a variety of options, including PPO, HMO, prescription plans, etc. Some may offer bundled plans that include vision and dental coverage; early retirees can also shop and price out these options separately.

Although there is great variety to coverage options and flexibility to choose the exact health plan you'd like, premiums for individual direct coverage options tend to be fairly expensive compared to group coverage and some other options. 

It also requires the retiree to navigate and almost endless variety of plans and coverage options. Many retirees choose to engage the services of an independent health care insurance broker for assistance with narrowing down the coverage and pricing that makes the most sense for their situation.

B. Health care exchange coverage options.

Since it was enacted under the Obama administration, the government sponsored health care exchange at has generated some controversy, but it continues to provide a valid option for obtaining health insurance coverage for many early retirees. 

Qualification requirements were loosened considerably under President Biden's administration, and now most people can find coverage options that may meet their needs and are generally more affordable than purchasing private health coverage. 

However, to receive a larger subsidy credit to help reduce the cost of coverage, retirees are often required to have income below certain thresholds.  It is important to review expected income, especially in light of other financial planning opportunities, to fully understand how financial planning strategies may change your total income. 

For example, starting Roth conversions of pre-tax retirement accounts, or realizing a large amount of capital gains for the sale of securities in a taxable account could increase total income that may have an impact on how much subsidy one potentially qualifies for.

As the exchange plans are required to include (and exclude!) certain levels and type of coverage, it is important to review what is included and required for a particular plan. While a bit of research is required to find the best plan for one's specific needs, more and more early retirees are finding that the health exchange offers insurance options worth considering.

C. Health expense sharing groups.

While not technically insurance, many health expense sharing groups have emerged over the last decade or so to provide consumers with an alternative to traditional health insurance coverage. 

The concept of a health expense sharing group is that members commit to a monthly contribution into an "expense pool". The funds collected in the pool are overseen by the group's administrator, and then funds are paid out to reimburse members for large medical expenses as they occur. 

Typically, these groups do not cover expenses for routine medical expenses, such as wellness checks, maintenance care for minor issues, routine immunizations, low-cost urgent care visits, etc. But the groups will pay out for larger expenses due to more major or higher cost medical procedures. Members typically pay cash out of pocket for routine medical, and the plans generally do not qualify for members to contribute additional savings to an HSA account.

Many of the groups in the marketplace today are religiously affiliated and may have additional requirements for membership. This can include being a member of a specific religion, confirming membership in a local church, committing to certain lifestyle habits (such as not using recreational drugs, smoking, or participating in high-risk activities), and possibly not covering certain pre-existing conditions. 

There are a variety of levels and types of coverage available for both individuals, couples and families. Generally, the monthly "contributions" in these plans is lower (sometimes significantly lower!) than what a consumer would pay for monthly traditional insurance premiums. This savings can benefit an early retiree's financial plan. 

But it may come with additional responsibility...beyond the membership requirements to be accepted, these groups may require that members pay cash for routine medical needs, collect receipts and additional verification to submit expenses for coverage, and some medical providers may have additional requirements for these types of arrangements before agreeing to proceed with some types of medical care.

While they require more personal administration, many members report high levels of satisfaction with these groups, as well as significant savings versus traditional health insurance coverage.

D. Group coverage through other means.

For many early retirees, covering medical expenses with quality health insurance can be a high priority and stress inducing issue. After years of enjoy the benefits of group coverage from their employer, many early retirees struggle with the endless choices and idiosyncrasies of the alternatives described above. 

For that reason, many early retirees may choose to seek out group health insurance through other means. For a select minority, their former employer may provide a retiree health benefit that continues their former coverage until they reach Medicare eligibility.

Most other early retirees will need to see out a new group to join and qualify for coverage. This may include obtaining coverage under the existing family policy of a spouse who is still employed. Other early retirees may find coverage through various groups to whom they are affiliated. This could include professional associations, military or age-related membership groups, warehouse shopping memberships and other affiliations. 

Some early retirees may also consider obtaining new employment (generally part time or with much less responsibility) solely for the purpose of being able to participate in the new employers group health coverage. Although this prevents the worker from being "fully retired" it can provide some much-needed stability and coverage for what is often a large annual expense.

A well-designed financial plan can help early retirees assess and estimate their annual health care costs and needs. 

Each plan will be unique, as each person's health status, on-going care needs and feelings about health and coverage risks will dictate which options may be the best fit for their situation. In conjunction with a qualified independent health insurance broker or group sharing arrangement representative, an early retiree's financial planner can help develop a custom plan to cover these costs in the most suitable manner.

For a free assessment on how to prepare for early retirement, schedule a call with us.

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About the Author:

David Edmisten, CFP®, is the Founder of Next Phase Financial Planning, LLC, a financial advisor in Prescott, AZ. Next Phase Financial Planning provides retirement, investment and tax planning that helps corporate employees retire with both financial and lifestyle security.