Want to retire early? Here’s how to lower the health-care barriers.
Early retirement is a dream many people have, but one of the biggest barriers they face in deciding if or how to retire early is health care.
Most Americans are eligible to enroll in the federal Medicare program at age 65. But retiring before age 65 leaves many people at odds over how to pay for health care costs and how to access health insurance coverage. During their working years, many people rely on their employers for health insurance; 2019 data from the Kaiser Family Foundation shows that just over 60% of U.S. adults age 19-64 get health insurance through a workplace or employer.[1]
What are the options for people looking to leave the workforce and retire before age 65, when Medicare eligibility begins?
First, if you are currently enrolled in a workplace health care plan that offers a Health Savings Account (HSA), contribute as much as you can while you are still working. In 2022, annual HSA contribution limits are $3,650 for an individual and $7300 for a family. If you are over age 55, you can make an additional $1,000 catch-up contribution this year.
HSA contributions are TRIPLE tax free; they reduce your federal and state tax liability and are not subject to FICA taxes. The key is not to spend HSA savings while you are working. HSA funds can be used to pay for any medical or health-related expenses, including doctor office visits, dental and vision care, prescriptions, hearing aids and more. You can even use money in an HSA to cover a portion of tax-qualified long-term care insurance, as well as nursing homes and skilled in-home care.
You can’t use HSAs for health insurance premiums, but you can for Cobra insurance after your separation from service from your employer.
Second, your Roth IRA can be a source of funding to pay for health care costs or health insurance premium. You can withdraw the basis (i.e., contributions, not growth) from a Roth account for any purpose at any time, without penalty.
Next, review what subsidies or tax credits may be available to you based on your state of primary residence. Some people find their lower income in retirement qualifies them for subsidies and tax credit they were not eligible for previously. Visit healthcare.gov or call 1-800-318-2596 to see your options.
Another option to consider is for you or your spouse to work part-time at a preferably low stress job that offers health insurance coverage. Some major companies offer this-Costco, Whole Foods, Lowe’s, Starbucks and Staples, to name a few.
Finally, consider an individual health insurance plan with catastrophic coverage, which often come with a lower premium. When you pair this coverage with a well-funded HSA, you can cover your insurance premium out-of-pocket then tap your HSA for any costs not covered by the catastrophic plan. There are often different short-term, alternative coverages available for you to consider. You can also call local hospitals and medical networks to find out what plans may be available in your state.
With any decision on health care and insurance, remember your options are dependent on your health, geography and funding sources. If you are in good health, the best plan is to have good savings/HSA. If early retirement is your goal, it’s important to plan ahead and have conversations with your financial advisor many years before you retire, so you can devise a plan and prepare yourself financially for the realities of early retirement.
[1] Health Insurance Coverage of Adults 19-64, Kaiser Family Foundation. Estimates based on the 2008-2019 American Community Survey, 1-Year Estimates.