Retiring early is a dream for many. After all, a life of leisure with no need to report to work sounds great — especially if you have plans for retirement, such as traveling the world. Unfortunately, even if you actually manage to save a pretty substantial nest egg, there could be obstacles standing in your way to early retirement. The biggest of those obstacles: covering healthcare costs.
A recent TD Ameritrade survey of adults over 45 with at least $250,000 in investable assets found that concern about medical costs was cited as the No. 1 barrier to early retirement. Respondents are right to be worried, as most estimates suggest seniors will need hundreds of thousands of dollars to cover out-of-pocket care costs — even when they’re covered by Medicare. For those who retire early, figuring out how to get insurance before Medicare kicks in at age 65 can make things even more complicated.
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While healthcare is inevitably going to be a big issue for anyone hoping to retire early, there are ways you can plan ahead, so your needs for insurance and medical care don’t make leaving the workforce early an impossibility. Here are a few ways to ensure health costs don’t keep you working once you’re ready to hand in your notice.
Understand all your options
If you retire before age 65 — the age when you become eligible for Medicare — you’ll have to figure out how to get healthcare coverage. Depending on your situation, your options may include:
- Getting covered through a spouse’s plan: This can be the best approach if you have a spouse who plans to keep working, but find out what kind of costs you’ll incur. Many employers require employees to pay a higher share of premiums for their spouse or other dependents, which means even if your spouse’s insurance is free or cheap, yours may not be.
- Maintaining coverage through COBRA: As long as you were covered by insurance when you left work, you’re typically allowed to retain coverage under your employer’s plan for 18 months, or sometimes even longer if you’re disabled. If you have only a few months until you become Medicare-eligible, this could be a good option that allows you to keep your doctor and your coverage. But be aware that you’ll have to start paying 100% of the premiums, which your employer may have been previously subsidizing, so maintaining coverage through COBRA can be quite expensive.
- Getting individual coverage: You can also buy an individual insurance plan on the private market. Retiring and losing employer-provided coverage counts as a qualifying event, which means you don’t have to wait until open enrollment to get a policy. Policies can be bought directly through an insurer, or on either the state or federal Obamacare exchange. Depending on your income, you may be eligible for subsidies to help cover premium costs, so this option could be more affordable than COBRA or getting covered through a spouse’s plan. Just be sure to check the deductible and coverage to find a policy that’s comprehensive enough for your needs.
After you turn 65, you’ll need to sign up for Medicare to avoid late enrollment penalties. But you should know Medicare has some important coverage exclusions, as well as premiums and coinsurance costs you must pay. Many people sign up for Medigap plans, which provide additional coverage above and beyond what Medicare offers. You could also opt for a Medicare Advantage Plan, which is an alternative to traditional Medicare that can sometimes provide broader coverage.
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Be sure to shop around carefully to understand Medicare Advantage, Medigap plans, and the limitations of Medicare. Don’t expect you’ll just be covered once you turn 65.
Invest in an HSA (or set aside dedicated funds for care)
No matter how you get insurance in early retirement, you can expect to incur at least some out-of-pocket costs. Before you leave the workforce early, you need to make sure you have the cash to cover them.
The best way to prepare to pay for care is to invest in a health savings account (HSA) while you’re still working. You’re only eligible to open an HSA if you have a qualifying high-deductible health plan (HDHP), but if you do then you can open an HSA with nearly any broker or financial institution, and you even get a tax deduction for deposited funds, up to annual limits.
Although HSA funds can be withdrawn to cover healthcare costs as you incur them, it’s usually smarter to invest your HSA money and leave it until you’re ready to retire. This could provide you with a big chunk of change to cover your healthcare expenditures after early retirement. Money can be withdrawn tax-free to cover healthcare costs, so tax savings both when depositing and when withdrawing funds make HSAs a very valuable resource. You’re also allowed to withdraw money from an HSA for any reason after age 65 without incurring any penalties, but you do have to pay ordinary income tax on withdrawals not used for healthcare expenses.
If you aren’t able to invest in an HSA, you still need to aggressively save for healthcare costs if you plan to retire early. Consider opening a separate traditional or Roth IRA, and making annual contributions. If you go this route, treat it as a dedicated savings account only meant to cover healthcare during your golden years. By setting aside money specifically for healthcare, you can make sure you don’t run out of savings too soon when you need your investments to provide other financial support in retirement.
Look into long-term care insurance
Most estimates that suggest you’ll need a fortune to cover out-of-pocket healthcare costs actually exclude one of the biggest expenses older people face: long-term care insurance. For someone turning 65 today, there’s almost a 70% chance of requiring some long-term care, according to the U.S. Department of Health and Human Services. The costs of living in a nursing home or receiving in-home care are astronomical, and unaffordable if you don’t have a plan.
Buying long-term care insurance when you’re relatively young can ensure you have affordable coverage for any expensive inpatient or outpatient nursing services you or your spouse need later. You must have some plan in place for nursing-home care or in-home care costs before retiring, and finding the right insurance can be a good option. Just make sure you read the fine print and shop carefully, as not all long-term care policies are a good deal.
Planning for healthcare makes early retirement possible
While it will undoubtedly be a challenge to save enough to cover healthcare costs, making a plan to cover care can make early retirement possible.
Start saving ASAP, and explore your options for coverage to understand the costs you’ll incur. The sooner you begin planning, the more likely it is you’ll be able to build a dedicated savings fund for care costs, so healthcare won’t hold you back from leaving work when you’re ready.
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