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There are two main health insurance options for those who want to retire early, before age 65: The Affordable Care Act and healthshares.

By Amy Shepard, CFP, RMA

As a retirement planner, when I talk with clients about “retiring early” I am referring to retirement before age 65. Age 65 has long been considered a “normal retirement age,” primarily because that’s when Medicare eligibility begins. 

There are plenty of people who will work until 65 or even beyond, but for those who want to retire before being eligible for Medicare, health insurance is often one of the biggest concerns and expenses during that transition from employment to retirement. For those who are fortunate to have retiree medical benefits, the transition may not be too stressful. With fewer and fewer companies offering medical benefits to retirees, there are two main healthcare options I explore with clients who need health coverage prior to age 65 due to an early retirement:

1. Healthcare.gov – This website was created as part of the Affordable Care Act and allows you to shop for health insurance and apply tax credits (if eligible) to reduce your monthly premiums. It is often referred to as the healthcare “marketplace.” By entering your zip code and some basic household information, you can browse medical, dental and vision plans available for direct purchase. (Depending on which state you live in, you may be redirected from healthcare.gov to your state’s individual health insurance website, but the process is similar.)

It can sometimes be overwhelming to choose from the many options that are available — there are sometimes more than 100 plans! — but the website does allow you to filter based on things like price, deductible, insurance company, health savings account (HSA) eligibility and other specifics.

The two main benefits of using healthcare.gov to shop for insurance are:

• Using healthcare.gov provides the possible opportunity to qualify for premium tax credits — these are tax credits that could lower your health insurance premiums based on your income and family size. We help many of our clients manage their income in a way that allows them to obtain lower premiums. To do this most effectively, you typically need to have a fair amount of savings outside your retirement plans either in bank accounts or taxable brokerage accounts.
  • Keep in mind that there are always trade-offs — we often have to decide between the premium tax credit or doing a Roth conversion by weighing the short-term insurance savings with the long-term potential tax benefits. This is because doing Roth conversions increases your Modified Adjusted Gross Income (MAGI) which directly correlates to your eligibility for a premium tax credit.
  • Keep in mind that there are always trade-offs — we often have to decide between the premium tax credit or doing a Roth conversion by weighing the short-term insurance savings with the long-term potential tax benefits. This is because doing Roth conversions increases your Modified Adjusted Gross Income (MAGI) which directly correlates to your eligibility for a premium tax credit.
• It is traditional insurance that most of us are used to having. The plans cover preventative care in full, there are no pre-existing condition clauses, there are in-network and out-of-network providers, and all the other typical rules that come along with insurance.

2. A non-traditional option for obtaining health coverage before Medicare age is the use of a healthshare. Although some have been around for decades, they have been growing in popularity in recent years as healthcare costs continue to skyrocket. Healthshareguide.org is a great website that provides information on healthshares and how they are different from traditional insurance. They also provide links to various healthshares that you can choose from. Some of the key considerations with healthshares are:

• They are NOT traditional health insurance so are not required to follow the same rules on preventative care and pre-existing conditions. For purposes of going to the doctor, you are considered “self-pay.”
• They do not have in-network or out-of-network providers. Since you are considered self-pay you can usually use any provider you like.
• They can be much cheaper than healthcare.gov plans depending on your income situation and the type of healthshare you choose.
• They are usually best for those who are quite healthy and have no ongoing health issues — think of them as “catastrophe coverage.” They are a great option if you have a major health event such as breaking a bone or falling ill unexpectedly, but they are not great if you have ongoing health needs for existing conditions.
• They operate under reimbursement policies so you need to pay for medical costs out-of-pocket and then submit for reimbursement from the healthshare.
• It’s important to thoroughly understand how the healthshare works before deciding if it’s right for you.

While it can certainly be intimidating trying to navigate the health insurance options after leaving the workforce, the good news is that you do have options. Many clients who retire before 65 successfully obtain health coverage through one of the options above and then transition to Medicare when they are eligible at age 65.

About the author: Amy Shepard, CFP®, RMA®, BFA™

Amy Shepard, CFP®, RMA®, BFA™, MBA is a financial planner at Sensible Money. She has been working with clients since 2013 and loves helping them create and implement a financial plan so they can achieve their life goals. She is involved in the CFP Board’s Mentor Program and previously served on the board of the FPA of Greater Phoenix. Outside of work she enjoys spending time with her husband and kids – they have a goal to take a family picture in all 50 states!

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