Many investors dream of an early retirement so they can enjoy the activities that they never had time for during their careers. Most understand that it takes considerable planning to ensure you have enough money for an extended retirement. It will take significantly more savings throughout the years and likely tax diversification of your savings so you can access your money before retirement age. It takes planning to control your costs, like making sure you have refinanced with the most advantageous mortgage rate or making sure your children’s education is paid.
However, one area that many forget to plan for is health care. If you retire before age 65, the age at which you are eligible for Medicare, you are responsible for finding an alternate source of insurance coverage. Fidelity Investments estimates a couple who retire at age 62 will spend $17,000 out of pocket on health care each year until they are eligible to enroll in Medicare. Remember, health care is one of the fastest rising expenses at roughly 5% a year.
Investors have a few options to bridge that gap between employer-provided health care coverage and Medicare, albeit none of them cheap. Depending on when you leave your company and the size of your former employer, you may be able to extend your employer-offered benefits through the Consolidated Omnibus Budget Reconciliation Act (COBRA). You can generally continue your coverage for 18 to 36 months; however, you pay the premiums directly. The average premium for single coverage is close to $7,200 a year. With this option, you need to consider what benefits your coverage provides. For example, if your former employer offers a high deductible plan, you’re still paying for medical services out of pocket until you reach the deductible.
You can also purchase private insurance through the government’s Health Insurance Marketplace. Premiums will depend on what tier you choose, the provider network, your selected deductible, and whether you are eligible for a subsidy. If you are considering this route, keep in mind that IRA and 401(k) withdrawals are considered income, which may affect your eligibility for a government subsidy—especially if you have been saving and planning for early retirement. The average marketplace premium is around $5,700 a year.
Some private insurers may offer temporary short-term coverage plans to bridge the gap until other insurance goes into effect. Unfortunately, this type of coverage may be limited because of pre-existing conditions or it may not satisfy state-level requirements.
While there is no solution for every retiree, those in their 50s should work closely with their financial advisers to ensure their financial plan accounts for health care costs—in addition to the typically uncovered costs like dental, vision, or long-term care. Your adviser can help you coordinate with a health care broker to determine the cost of coverage and work those costs into your overall plan. Once you see the numbers, you may decide that working for an additional three years may be the most economical option.
Thankfully, we tend to see investors who planned to retire early but decided to keep working because they enjoyed what they do. Likewise, others planned to work until age 67 or later who end up “being retired” by company layoffs or other economic reasons. Therefore, it is better to put forth the effort to create a plan so that your finances are not the deciding factor for what happens in your next stage of life.
If you have questions on how to incorporate health care costs into your financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166