Coverage options for people who retire before Medicare at 65.
Medicare eligibility begins at age 65 for most Americans. If you retire at 55, 58, or 62, you face a coverage gap of anywhere from 3 to 10 years. Employer retiree health coverage is increasingly rare — according to KFF, only about 14% of large employers now offer retiree health benefits. For most early retirees, the question is which of several options makes the most financial sense for this bridge period.
Early retirement is one of the situations where ACA marketplace subsidies can be most powerful. If you retire from a high-income job, your active income drops sharply. A retired couple in their late 50s who live on a mix of savings withdrawals and investment income may have a “reportable income” far below what they lived on while working — and therefore qualify for substantial marketplace subsidies.
The key distinction for early retirees is between retirement income that counts as ACA income (Social Security, pension payments, taxable IRA/401(k) withdrawals, rental income, interest/dividends) and assets that do not (Roth IRA withdrawals, savings account balances). With careful retirement income planning, some early retirees are able to structure income to maximize marketplace subsidies during the pre-Medicare years.
If you leave an employer with group health benefits, you can elect COBRA coverage for up to 18 months (extendable to 36 months under certain disability provisions). COBRA preserves your current plan and provider relationships — valuable if you have established specialist or hospital relationships you want to maintain. However, COBRA requires you to pay the full group premium plus up to 2% administrative fee, often $1,200–$2,500/month for family coverage. It is rarely the long-term solution for early retirees with a decade until Medicare, but it can bridge the first 18 months while you evaluate permanent options.
If you have an HSA (Health Savings Account) balance accumulated during your working years, early retirement is one of the best times to draw on it. HSA funds can be used tax-free for qualified medical expenses including premiums for long-term care insurance and Medicare premiums after 65 (but not ACA marketplace premiums). If you plan to use a high-deductible marketplace plan during early retirement, continuing to contribute to an HSA preserves the triple tax benefit.
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