We're 64 With $4.3 Million. I Want to Retire Now and Pay for Health Insurance Until We Get Medicare. My Wife Says We Should Work. Who's Right?

Question: We're 64 with $4.3 million saved. I want to retire now and use some savings to tide us over until Medicare kicks in. My wife says we should work 10 more months so we don't have to bridge that gap. Who's right?

Answer: There's a reason many older Americans wait until 65 to retire. Medicare eligibility generally begins at age 65. And since so many people get health insurance through their jobs, waiting until then tends to set the stage for a less stressful transition, financially speaking.

But if you've saved a lot of money for retirement, you may want to wrap up your career before you become eligible for Medicare. And while having to cover the cost of health insurance for many years could make a pretty large dent in your nest egg, a shorter gap may be manageable.

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If you're 64 with $4.3 saved, you're clearly in a strong position to retire. And it's not unreasonable to want to dip into your nest egg to pay for health insurance premiums so you can retire on the spot.

On the other hand, if you're only 10 months away from being eligible for Medicare, your wife may think it's more prudent to keep plugging away and retire once you're 65. And that logic makes sense, too.

Resolving this debate may come down to understanding your costs and recognizing the value of an earlier workforce exit.

Know what costs you're looking at before making a decision

The idea of having to pay for health insurance for 10 months can seem daunting. That's why Jim Davis, CFP and senior wealth adviser with Aspen Wealth Management, says it's important to have an idea of what that cost looks like before making a decision.

"For couples with $4.3 million saved, the Medicare gap at 64 typically isn’t a financial constraint. It’s a confidence hurdle," he says.

Davis suggests that for a couple in their mid-60s, a realistic estimate to bridge 10 months is roughly $16,000 to $20,000 total.

"In our planning work, we budget $800 to $1,000 per month, per person for solid pre-Medicare coverage," he says.

Review your health coverage options carefully

You may be surprised (in a good way) by the different options you have for bridging your 10-month gap until Medicare becomes available, Davis says. And one option you shouldn't write off is COBRA.

"COBRA is often the cleanest bridge because it preserves the same plan and provider network," he says. "Once the employer subsidy disappears, however, premiums commonly run $1,800 to $2,500 per month, sometimes more. Marketplace coverage can be more economical, particularly if taxable income is managed deliberately in that final working year."

Phillip Battin, president and CEO of Ambassador Wealth Management, says it's important to carefully explore all your options.

"At first glance, COBRA or private insurance may seem more affordable because ACA premiums for quality family coverage can range from $1,400 to $2,200 per month. However, many older workers considering early retirement underestimate how critical income and tax planning are in this situation."

As Battin explains, ACA premium tax credits are based on income, not assets, which means the way your accounts are structured before retirement can significantly affect your eligibility for subsidies.

"If most of your $4.3 million is held in retirement accounts or non-income-producing assets, you may be able to qualify for ACA subsidies," he says.

If you know you're looking to retire ahead of Medicare eligibility and will have a 10-month gap, Battin says it's important to do some strategic income planning. And part of that involves assessing your spending needs.

"If you expect to travel extensively or incur spending that pushes your income above subsidy thresholds, COBRA or private insurance may be the more practical option," he says.

Recognize the value of retiring sooner

There's a clear cost to paying for health coverage for 10 months. But there's also a huge benefit to leaving the workforce now versus 10 months from now.

"Using a conservative 4% to 5% withdrawal framework," Davis says, "a $4.3 million portfolio can reasonably support $172,000 to $215,000 annually before tax. A $20,000 bridge represents a small fraction of one year’s sustainable spending and well under 1% of total assets, especially if it’s for such a defined, short window."

Davis says that from a purely financial standpoint, retiring now and paying for 10 months of health insurance is easily doable. So the question becomes whether you're mentally ready to retire and what you have to lose by waiting.

"Ten additional months of work at 64 is 10 months of healthy, active retirement they do not get back," he says. "When the plan already accounts for healthcare inflation, longevity, and contingencies, the question shifts from 'Can we afford this?' to 'Are we comfortable stepping away from the safety net of employer benefits?'"

Consider a middle-ground strategy

In a situation like this, feeling hesitant about retirement may not just be about having to pay for health insurance. It may also boil down to not feeling ready to stop working completely.

That's why Davis suggests exploring what he calls a "step-down retirement," which involves transitioning to reduced hours with the same employer or taking part-time work that also includes health benefits.

"For many driven professionals, this glide path is far more manageable psychologically than going from a full career identity to fully retired overnight," he says.

Another option may be to stagger retirement so one spouse maintains employer coverage temporarily. In this case, if it's your wife who thinks working 10 more months is the best bet, perhaps she could continue to do so while you wrap up your career a bit sooner.

But all told, Davis says, once the cost of insurance during a bridge period is modeled within the full retirement plan, the Medicare gap tends to lose much of its emotional weight.

"The regret we hear most often is not about paying for temporary coverage," he says. "It's about postponing retirement longer than necessary out of fear."

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