What Are Your Health Insurance Options If You Retire Early?
Key takeaways:
Early retirement typically means leaving the workforce before you turn 65.
If you retire early, you’ll likely need to find health insurance to cover you until your Medicare benefits kick in.
You may qualify for free or affordable health insurance options through Medicaid or the Affordable Care Act (ACA) health insurance marketplace.
Table of contents
Retiring early may sound appealing, but it’s important to think about how you will manage your healthcare expenses if you decide to leave the workforce before turning 65. The good news is that there are many health insurance options that may be available to you, depending on your income, lifestyle, and healthcare needs.
What is considered early retirement?
In general, early retirement means leaving the workforce before the traditional retirement age of 65. For those who have job-based health insurance, it also likely means having to find a new source of coverage. Most people are not eligible for Medicare until they turn 65. And paying for private insurance without an employer’s help is too costly for many.
But going without insurance could mean paying a significant amount out of pocket for healthcare provider visits and other medical care. So it’s wise to look for insurance options that will provide affordable coverage until Medicare kicks in.
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What health insurance options are available if you retire early?
If you retire early, it’s important to find health insurance that fits both your medical needs and your budget. Below are 10 options that you can explore.
1. COBRA
The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law ensuring some people can stay on their employer’s health insurance plan after leaving their job. If you are eligible for COBRA, you can typically use your employer-based insurance for 18 months after leaving your job. If you already have COBRA and experience another qualifying life event, such as a divorce or the death of your spouse, who was the covered employee, you may be able to extend your coverage for up to an additional 18 months. However, a plan does have the option to offer coverage for longer than the law requires, which is a maximum of 36 months.
When you retire, your former employer must inform you if you qualify for COBRA with an “election notice.” You have 60 days from your last day of coverage — typically your last day of employment or the end of that month — or from the date you received the election notice (whichever is later) to either sign up for or decline coverage through COBRA. If you choose to decline, your family members may still be eligible for COBRA continuation.
Although you can use COBRA to stay on your employer’s health plan, it will cost significantly more than it did when you were an employee. You may be responsible for paying the entire monthly premium and a 2% administrative fee since your employer will no longer be contributing.
2. Employer-sponsored retiree benefits
Depending on the company you’re working for when you retire, you might be able to avoid the sticker shock of buying your own health plan. According to one survey, 21% of large companies that offer health benefits also offer retiree health plans for some employees. These policies are often similar to those offered to active employees through the company’s group health plans. Some employers may even still pay a percentage of the monthly premiums.
Once you are eligible to sign up for Medicare, you can keep the retiree plan from your former employer as a supplemental policy if you choose.
Using an HSA: Don’t let good money go to waste. You can use your Health Savings Account (HSA) funds during retirement if you have any left over after medical expenses.
Premium tax credits for health insurance: If you enroll in a marketplace health insurance plan, you may be eligible for a premium tax credit (PTC). A PTC can lower your monthly insurance costs or even reduce your tax bill at the end of the year.
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3. Health insurance marketplace plans
As an early retiree, you may be able to find affordable coverage through the Affordable Care Act (ACA) health insurance marketplace. This is possible even if you have a preexisting medical condition. All ACA plans must provide 10 essential health benefits, including preventive care, mental health services, and prescription drug coverage.
You can sign up for an ACA plan during the annual open enrollment period at www.healthcare.gov. Or, if you live in a state that has its own health insurance marketplace website, you can apply through your state’s site. You may also be eligible to apply for a plan during a special enrollment period if you lose your employer-based insurance outside the standard open enrollment period.
Depending on your income, you may be eligible for a premium tax credit to help with your monthly ACA insurance premiums or to offset your yearly taxes.
4. Medicaid
If your household income takes a dip after you retire, you may qualify for free or low-cost health insurance through Medicaid. All Medicaid plans must cover certain mandatory benefits, including home health, nursing facilities, and outpatient hospital services. Although individual states that run their own Medicaid programs offer different additional benefits.
Qualifying for Medicaid is not based on age. Although eligibility rules can vary between states, people typically qualify for Medicaid based on any of the following:
Disability status
Family status
Household size
Income
Most states have expanded their Medicaid programs so that many individuals qualify solely based on income. Whether you meet the requirements for Medicaid coverage may depend on whether your state has expanded its Medicaid program. In states with expanded Medicaid coverage, you should qualify if your household income falls below 133% of the federal poverty level. Currently, 41 states and territories, including the District of Columbia, have embraced Medicaid expansion.
Check with your state’s Medicaid program to determine eligibility, costs, and benefits.
5. Insurance through a part-time job
If high insurance premiums are a concern, you may consider taking on a part-time job after you retire. Some companies offer health insurance to part-time workers, though employers are not required to do so.
If your employer does offer insurance to part-time workers, you still may need to meet a few criteria to qualify for benefits, such as:
Completing a probationary work period
Committing to working a minimum number of hours, typically 20 hours per week
Even if your employer offers health insurance with your part-time job, you could still be eligible for a lower cost health plan through the ACA marketplace if the employer’s coverage does not meet these two criteria:
Definition of affordability: Health insurance is considered affordable if your monthly premium for the most affordable plan available does not exceed a certain percentage of your income. In 2024, monthly premiums are considered affordable if they are less than 8.39% of your household income.
Minimum value standards: Generally, the insurance plan must cover at least 60% of healthcare expenses. It must also offer substantial coverage of healthcare providers and hospital services to meet the requirements for the basic level of coverage.
6. Private health insurance
You may be able to find a private health insurance plan, also known as a commercial policy, that fits your budget and medical needs. In general, however, these plans can be expensive, especially when you don’t have cost-sharing benefits through an employer. And you won’t have potential access to premium tax credits (subsidies) like with an ACA plan.
7. Short-term insurance plans
Short-term insurance plans provide temporary medical coverage, which can last less than 3 months or as long as 3 years, depending on your state. Although these plans are often less expensive than ACA plans, they also typically offer fewer major medical benefits. However, purchasing one may be a good option if you have a short gap between your retirement and the time you are eligible for Medicare.
8. Spousal insurance
If you have a spouse who has an employer-sponsored health plan, they might be able to add you to their plan once you retire and your coverage ends. Keep in mind that different companies have different rules for eligibility and enrollment. So it’s a good idea to learn about the details of your spouse’s health insurance plan before you retire.
9. Membership organization benefits
Membership organizations typically provide resources and exclusive benefits to their members. These benefits, which are based on your membership rather than your employment status, can include access to affordable health insurance coverage and discounts on healthcare services.
Some examples of membership organizations that offer some form of these benefits include:
AARP
Alliance for Affordable Services
Freelancers Union
You can start by asking any organizations where you are currently a member if they offer any health insurance options. Just make sure the benefits meet ACA compliance standards.
Can I use my HSA if I retire early?
If you have funds in a health savings account (HSA), you can use them to pay for qualified medical expenses at any time, including after you retire early. Your HSA can also help you pay for deductibles, copays, and coinsurance with tax-free dollars. Generally, however, you can’t use your HSA to pay for health insurance premiums unless you have coverage through:
Health insurance you receive while collecting federal or state unemployment benefits
Keep in mind that you will not be able to make additional contributions to your HSA after you retire, unless you maintain a high-deductible health plan (HDHP).
Can I get AARP health insurance if I retire early?
While AARP does not offer comprehensive health insurance for retirees who are not yet eligible for Medicare, there are various health-related benefits you can get through the organization, such as coverage for:
Dental
Hearing
Long-term care
Vision
Is health insurance cheaper for retired people?
If you retire early, your health insurance costs can vary based on your location, income, and the type of insurance you choose. If you aren't eligible for Medicare, you may be able to find affordable health insurance through the ACA marketplace. Depending on your income, you may be eligible for premium tax credits to lower the cost of your health insurance through the marketplace.
Medicaid also offers health insurance that is based on income. If you qualify after retiring early, you could have low monthly premiums or none at all. Generally, Medicare premiums cost less than private health insurance plans.
The bottom line
If you are thinking about retiring early, it’s important to know what health insurance options are available to you. You should look for coverage that meets both your healthcare needs and your budget since your employer will no longer be helping with your monthly premium. You may qualify for low-cost or free health insurance through the Affordable Care Act (ACA) marketplace or Medicaid. You may also have the option to be added to your spouse’s employer-sponsored plan.
Why trust our experts?
References
Employee Benefits Security Administration. (n.d.). COBRA continuation coverage. U.S. Department of Labor.
KFF. (2022). 2022 employer health benefits survey.
KFF. (2022). Health insurance coverage of the total population.
Medicare.gov. (n.d.). Retiree insurance.
Medicare.gov. (n.d.). When does Medicare coverage start?
Medicare Made Clear. (n.d.). Retiree health coverage and Medicare. United HealthCare Services.
