Early retirement and health insurance – how to manage?

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If you haven’t got your health, you haven’t got anything.

Count Rugen, The Princess Bride

Introduction

How do you deal with health insurance in early retirement? Volumes have been written on this topic and for sure, I’m not an expert. But not much hits much closer to home than ensuring you have ready access to the healthcare you and your family needs, right? Good healthcare coverage is also pricey, being high up on the list of expenses for early retirees in the United States. Given that most Americans under 65 get their healthcare insurance via their employer, it makes sense that this is a top concern. The key question here is what to do for health insurance prior to Medicare eligibility. There are a number of options available and this is something I started investigating a few years prior to my leaving the workplace. I can’t cover the huge breadth of this large topic here, but I’m hopeful that this post will serve as a useful introduction.

Continuing your workplace insurance via COBRA

The Consolidated Omnibus Budget Reconciliation Act of 1985 or COBRA is a law passed by Congress which among other things, mandated an insurance program. This program provides many employees the option to continue their existing employee-sponsored healthcare coverage for a period of time after leaving their job. Barring those working at very small companies*, this is typically an option that is available to you. For those eligible for it, COBRA typically provides for 18 months of continuing benefits, paid by you. The cost is generally the same as the total cost to the company (their share plus yours) and a small administrative fee. A benefit of this approach is that you can stay on a plan you like, with the providers and insurance company you already know – one fewer change among all the uncertainty of retirement!

This is obviously not a permanent option, but is one that many, including my family have initially selected. After investigating my other options (more below), I determined that my monthly COBRA premiums would be similar to plans with a similar level of coverage offered on the CA state exchange. However, the deductibles for the latter were a bit higher. This made the choice to elect COBRA an easy one for now. Besides, I could always change course in 2021 if desired once the enrollment period comes around. One tip: ensure you know the logistics of your company’s program and don’t miss the filing deadlines! A few quick calls to the Benefits department put my mind at ease and ensured our policy didn’t lapse. I highly recommend you do the same in your own situation.

*Some states like California have an additional program to provide coverage similar to COBRA for those in these small companies (those with 2-19 people in CA).

Private health insurance

This is the option with which many self-employed people or those at small companies are already very familiar. In other words, signing up for healthcare insurance on your own with providers. I did some comparison shopping on a variety of websites but didn’t elect to talk with any brokers. My research suggested that premiums were higher for the level of coverage I’d be seeking for my family, so I didn’t spend any more time on this option. But particularly for those willing to run a lot leaner on coverage – as many younger people do, this can be a good option to ensure you have “something” in place. Consider talking with a broker as there are quite a few options available and someone knowledgable can save you a lot of time in the end.

ACA / “Obamacare” / Public healthcare exchanges

Among other benefits, the 2010 Affordable Care Act aimed to provide affordable healthcare insurance to more people. One aspect of the ACA that is attractive to many early retirees, particularly those following a leanFIRE approach, is the opportunity for insurance subsidies depending on your income level.

The number and quality of options available to you varies based on your state of residence according to my research. In many areas (like mine), this is a great choice to consider as many plans are available with sufficient providers to cover the need. I knew that California’s exchange was regarded as good but had to establish that for myself as part of our decision making process regarding where to live. As I mentioned above, the monthly premiums for the level of coverage I wanted to maintain were similar to COBRA. Unless there are substantial changes to what comes out of the ever-active discussion in the federal government in the future, this is likely our next step prior to Medicare eligibility. From a good news perspective, California has stated their commitment to providing healthcare and so I’m reasonably confident there won’t be a downturn irrespective of federal changes that could potentially come. Here’s to optimism!

Health care sharing ministries & other shared plans

These types of plans come up often in blogs and YouTube videos by those in the FIRE movement. They are attractive due to the much lower “premiums” vs. a true insurance plan. Important to state is that these plans are not insurance. In essence, these programs facilitate voluntary sharing among subscribing members for eligible medical expenses. Members send in monthly shares (analogous to premiums) which are distributed to other members to defray medical expenses following program guidelines. These terms differ quite a bit between the 100+ plans that are out there, so I recommend you investigate them thoroughly if this is of interest to you.

My family is not religious so those types of affiliated plans were not applicable. But there are some secular plans as well, that are otherwise similar in nature. I investigated these but I wasn’t comfortable with the lack of certainty of coverage under these programs. My family is fortunate to be in good health, but both my wife and I have had surgeries in recent years and these things do happen – more so as we age! I’d rather pay higher monthly premiums and know that my healthcare will be managed in the way to which I am accustomed. I didn’t work hard to get to this place only to risk a huge hit to our funds due to inadequate coverage. On that point, you will find articles expressing concern about this approach, given the lack of regulation, no requirement to cover pre-existing conditions, among other reasons. But clearly many are participating in them and like the service they have received. This may be a good option for you but please consider the pros and cons!

It’s not only about premiums – other budget concerns

Most of this post has been about insurance premiums – the “known” part of your healthcare costs. But there is of course more to it! You need to ensure that you contemplate your deductibles, co-insurance costs, and any other out-of-pocket expenses that you might incur. Your budget must account for these potential expenses unless you like gambling a lot more than I do. For me, in addition to my six-month emergency fund, I make a monthly budget allocation into a sinking fund for routine medical expenses. I was “fortunate” to have surgery early in 2020 so that I already hit my out-of-pocket maximum by the day I left the workplace in June. This means my only in-network healthcare expenses will be for monthly premiums through end of the year. As a result, I’ll start 2021 with some buffer in my sinking fund to pay any healthcare costs prior to meeting my deductible and co-insurance limits next year.

Your health is not guaranteed and what your costs are one year will not necessarily tell you what another year will look like. All models (financial or otherwise) are wrong, of course! But looking back at your healthcare expenses over several years is a great way to work out how much you should plan to spend outside of your premiums. I strongly recommend you err on the high side when estimating what your healthcare expenses will be in retirement to ensure you have adequate resources available.

Looking into the crystal ball…

It’s hard to think of a more dynamic topic in Congress and elsewhere in the US government than healthcare. I don’t have any more clarity on where things will go than any of us, of course. I am pleased by the bright light that has been aimed at this topic in recent years, as like many, I believe it is much needed. But what will come of that attention remains to be seen. Should we see an administration change in the upcoming election, perhaps ACA will be replaced by something more attractive. On the other hand, if ACA is repealed or we otherwise have a downturn in the federal offerings, I feel pretty good that I’ll be OK in California. I’d be lying if I didn’t say that healthcare remains a topic of concern to me, but it isn’t keeping me up at night. There are good options available in the US (and elsewhere – a topic for another time), and we have budgeted for a variety of scenarios.

Cheers to each of you and to your good health!

photo credit: “Health Insurance” by 401(K) 2013 is licensed under CC BY-SA 2.0

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