Question: I'm 60 with $2.8 million saved. I'm miserable working, but I need health insurance until I can get Medicare at age 65. What are my options?
Answer: By age 60, you may be at the point where you’re unhappy at your job and can’t take the grind any longer. If you have a large pile of savings, you may be perfectly positioned to make an early workforce exit.
There’s just one problem. Unless you have a spouse who’s still working with a company health insurance plan you can hop onto, you’re going to have to pay for coverage yourself until you become eligible for Medicare. Generally, that doesn’t happen until you turn 65. Having to pay for health insurance could whittle an otherwise generous nest egg down too quickly for comfort. That doesn’t mean you don’t have options, though.
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Know what it will cost to pay for health insurance
It may be that if your portfolio is generating a nice amount of income and your living costs are fairly low, you can afford the expense of health insurance premiums for a five-year period with $2.8 million in savings. But it’s important to know what you’re getting into, says Scott Sturgeon, CFP and Founder/Senior Wealth Advisor at Oread Wealth Partners.
“A person retiring at 60 essentially enters a 'health care desert' where they have to go out and find some sort of coverage on their own,” he says. “When I run projections for a client in this situation, I would probably budget at least $1,000 per month, per person in health insurance premiums as part of their cash flow plan.”
Of course, Sturgeon cautions, the cost of health insurance can vary based on your needs and your market. But that’s a starting point he likes to work with.
However, there’s another option, says Sturgeon. Whether it’s more cost-effective, though, depends on the circumstances.
“If they can hold out a couple of years, COBRA may also be an option where they maintain the current health care plan they have through work but have to pay the premiums themselves,” he says. “That can get pricey, so it's something that needs to be reviewed carefully.”
Gil Baumgarten, Founder and CEO at Segment Wealth Management, agrees that COBRA could be an option but warns that it typically has an 18-month limit. Even if you’re willing to cover the cost, it won’t bridge a five-year gap until Medicare kicks in. And he says that based on his experience, “A 60-year-old couple should expect to pay $15,000 or more per year for coverage.”
Consider a health insurance co-op
Given the high cost of health insurance, Baumgarten says people retiring before becoming eligible for Medicare could consider another option — a health insurance co-op. This option, he says, can result in big savings.
“There are several that are faith-based for whatever religion might apply,” Baumgarten explains. “Christian Health Ministries and Christian Healthcare Plan offer practicing Christians an expense-sharing co-op that is significantly less expensive than traditional insurance. United Refuah HealthShare offers similar resources for Jewish affiliations, also at greatly reduced cost as compared to traditional insurance.”
This option, however, may not be available in all markets. And you may not receive the same level of coverage as through a traditional insurance plan.
A scenario worth planning for in advance
Some people don’t realize they want to retire ahead of Medicare eligibility until they reach a certain point in their careers when they can’t take it anymore. That’s why Sturgeon thinks younger workers should anticipate wanting to retire well before 65 — and plan accordingly.
In this situation, he says, “If we could rewind 10 or 20 years, the ideal strategy I would suggest is using a high deductible health care plan, maxing out their health savings account, paying out of pocket for any deductibles, and investing the HSA funds.”
As Sturgeon explains, someone with a lofty HSA balance could dip into those dedicated funds, enroll in an ACA plan with a fairly high deductible at 60, and then use HSA funds to pay those expenses until Medicare becomes available.
Of course, it’s also possible to dip into your general savings to cover health care costs as they arise. The question, though, is whether you can afford to.
With $2.8 million in savings, you have some wiggle room to dip into your savings to cover health care costs. But a better bet would be to try to limit health care withdrawals until Medicare kicks in.
To this end, working part-time is something to consider, as it could allow you to secure health coverage through an employer, even if the coverage itself isn’t that great. At the very least, you may not have to bear the cost of premiums on your own.
Going without health insurance isn't an option
If you’re fairly healthy at age 60 and don’t want to see your hard-earned savings dwindle, you may be tempted to forgo health insurance completely and hope for the best until Medicare becomes available to you. But that, cautions Baumgarten, is a big mistake.
“Going without insurance at that age can also completely wreck your finances with a major health event,” he warns.
If you’re truly done working, period, at 60, your best bet may be to budget carefully and live a bit more frugally while paying for health insurance through age 65. Once Medicare kicks in, you may be able to boost your spending in other areas.
Also keep in mind that come age 67, you’ll be eligible for your monthly Social Security benefits without a reduction. That, combined with distributions from your remaining savings, could make for a reasonably comfortable retirement lifestyle, even if your nest egg was tapped substantially during the five-year period when you were covering your health insurance costs.
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