Being Single, Wanting to Retire Early, and Medical Insurance Options

Recent surveys have indicated that a big worry for baby boomers is how they are going to handle healthcare costs in retirement. This concern is paramount for those who want to retire early. For singles who want to retire early, there is no spousal insurance fallback. Single people need to get insurance to bridge the gap between retirement and Medicare on their own.

A Brief Summary Of Medicare And Average Costs

For people who retire at age 65, Medicare (Part A, B, and D) will take over as the primary health insurance. Premiums are announced each year by the Federal government Center for Medicare and Medicaid (CMS). Most people will also need a supplemental policy to cover the roughly 20% of health care costs that Medicare does not cover. Alternatively, a person can opt for Medicare Advantage (Medicare Part C), an all-in-one solution that has less flexibility but is usually less expensive. 

Depending on income (MAGI) Medicare Part B premiums range from $1626 to $5,526 per year, Medicare Part D premiums average about $400 per year, and Medicare Supplemental (Medi-Gap) premiums average $1700 per year. Then there are out-of-pocket health care costs such as co-pays. The total average healthcare costs for a 65-year-old woman is $5200/year – this is not a small amount of money, but it is predictable and manageable and easy to plan around. Costs can be substantially higher for someone with chronic illnesses.

Health Insurance Options For An Individual Who Wants to Retire Early 

For a single person who wants to retire before age 65, there are a few options for health insurance overage. One option is COBRA (Consolidated Omnibus Budget Reconciliation Act) – a health insurance program that allows an eligible employee to continue their employer health insurance coverage for up to 18 months. Some states (such as California) have COBRA laws that allow up to an additional 18 months, for a total of 36 months. However, the premiums can be quite high. The advantage of choosing COBRA is a seamless continuation of coverage. Another option for some retirees, although not as common and can be expensive,  is to “convert” their group health insurance policy into their own individual health insurance plan. 

Besides the high cost, depending on what age a person retires, COBRA may not bridge the coverage gap completely. For example, a person who retires at age 60 and chooses COBRA, will have coverage for 3 years maximum up to age is 63, but will still have to buy health insurance for the next 2 years. 

A better option may be to purchase a health insurance policy on the health insurance marketplace in your state. These exchanges were instituted with the passage of the Affordable Care Act in 2010. Buying health insurance in this way is especially affordable for people whose income (AGI) qualifies for premium tax credits.  In general, individuals and families may be eligible for the premium tax credit if their household income for the year is at least 100 percent but no more than 400 percent of the federal poverty line for their family size. This amounts to $12,140 to $48,560 for a single individual in the continental U.S. during 2019.

These income levels may seem low, but many individuals income drops dramatically after retiring. Net worth isn’t considered for eligibility for premium tax credits. It’s quite possible for a person with a comfortable net worth to qualify for premium tax credits.

 An example:

Susan is 60 years old, lives in California and wants to retire in the next year. She has $1,000,000 saved in her 401(k) and another $800,000 in taxable savings accounts. Dividends and capital gains generated by her taxable investments average $30,000 per year. She has an inherited IRA and last year had to take a distribution of $5000.00. She earns a small amount of interest on her bank account, so her AGI is about $35,500.00. With this amount of income, she would qualify for premium tax credits.

Entering her details on the California State Health Insurance marketplace – Covered California website, Susan could qualify for a monthly discount of up to $809.00! She could opt for a Silver Plan with premiums ranging from $224 to $413 a month or choose a more expensive plan, for example, Gold plan options range from $264-$587 per month. (These premium levels include the discount).

Bottom Line

The cost of healthcare is a topic that causes a lot of anxiety and many times unnecessarily so. Just with any other financial decision, it pays to know your options and to do a detailed cost/benefit analysis. As you can see, with the above example, Susan’s healthcare costs will be manageable. If you are trying to decide whether to retire early and want to understand your healthcare costs, start by talking to your employer’s human resources department about options for extending your current insurance. At the same time, log into your state’s health insurance marketplace and compare costs. Armed with this information, you can make the right decision for your situation.