Early retirement: Here’s to your health

March 24, 2023

Many people dream of early retirement, but unless that dream is matched with careful planning, it remains just that—a dream. Even with careful planning, things may not turn out the way you hope. As the old Yiddish proverb says: “We plan and God laughs.”

Early retirement is subject to a number of potential upsets, including things like lifestyle creep and unexpected health events that can draw down savings faster than expected. Drawing too much on savings early in retirement is pernicious because the marginal increase in costs may seem small relative to the large pool of funds sitting in your retirement accounts. However, every dollar you spend today means there is less money working to help pay for your needs tomorrow.

One big challenge you will face as an early retiree is paying for health insurance until you are eligible for Medicare. You generally have three options. First, if you leave a company with at least 20 employees, you can continue your health benefits through something called COBRA. Second, you can purchase a privately-issued individual insurance policy from an insurance company. Finally, you can purchase an individual policy on a public exchange.

COBRA gives workers who lose their employer-provided health insurance the right to maintain their health coverage for up to 18 months. You can extend coverage for an additional 11 months (for a total of 29 months) if one of your qualified beneficiaries (i.e., you, your spouse, or a dependent child) is disabled. This extension is granted to every covered member of the family. To qualify, the disabled person must be certified by the Social Security Administration as disabled before the 60th day of COBRA coverage.

COBRA benefits can also be extended if a retiring worker becomes eligible for Medicare within 18 months of retiring. In that case, a younger spouse or a dependent child can extend COBRA for up to 36 months after the date the retired worker became eligible for Medicare.

COBRA can be a huge benefit to those who suddenly find themselves without work. Continuing coverage is easy. It is guaranteed issue, requires no underwriting and can be terminated at any time. You don’t have to worry about pre-existing conditions and you already know what the benefits are since they are same benefits you enjoyed while employed.

While COBRA may be easy, it can also be expensive. Unlike group health premiums which are often subsidized by the employer, COBRA premiums are usually paid in full by the departing employee. Most people are shocked when they learn how much health insurance actually costs. Since the average employer covers more than 80 percent of the cost of an individual’s policy and more than 70 percent of a family policy, COBRA will likely cost 4 to 5 times what you were paying as an employee. In addition, most employers charge an additional 2 percent administration fee. If you qualify for an 11-month disability extension, the administration fee can be as high as 50%. In other words, extended COBRA coverage could cost you as much as 150% of the actual premium, or 7 ½ times what you paid while employed.

Non-COBRA options are usually much cheaper, especially those policies available through the public exchanges. These policies are generally pretty good and they cannot deny you coverage for pre-existing conditions. Even more beneficial may be the premium assistance tax credits available if you qualify as “low-income.” Please note that these policies are only available during the official enrollment period or within 60 days of another qualifying life event, including losing health insurance because of retirement. Open enrollment for 2024 for Covered California starts November 1, 2023 and continues to January 31, 2024. You can get more information on the California exchange by visiting CoveredCa.com.

After you leave your job you have 60 days to decide about COBRA. If you choose COBRA, the coverage is retroactive. If you need medical attention during those 60 days, you can opt in to COBRA and pay your retroactive premium. If you don’t, you simply sign up for a policy on a public exchange before the 60-day enrollment period ends. The net effect is that you maintain protection but you may not have to pay for coverage during those 60 days.

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Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to smerrell@montereypw.com.