You are ready to retire at 61. Your savings and pension look solid. Then you realise your employer health insurance ends when you leave, and Medicare does not start until 65. Four years of health coverage is one of the biggest costs for early retirees — and one of the most overlooked.
Key Takeaways
- COBRA lets you keep your employer’s health plan, usually for up to 18 months, but you typically pay the full premium plus up to 2%.
- ACA marketplace plans are available to anyone, regardless of health, with premium tax credits based on household income.
- Because subsidies depend on income, early retirees can sometimes manage taxable income to reduce premiums.
- Losing employer coverage triggers a Special Enrollment Period for marketplace plans; enroll promptly to avoid gaps.
Premium tax credit rules have changed several times in recent years. Check current eligibility at healthcare.gov or your state’s marketplace before deciding.
Option 1: COBRA
COBRA continuation coverage lets you stay on your former employer’s group health plan after leaving a job. It generally applies to employers with 20 or more employees; many states have similar rules for smaller employers.
Duration: usually up to 18 months after job loss, longer in some situations.
Cost: you pay the full premium — including the portion your employer used to pay — plus up to 2% for administration. This often shocks people who only saw their employee share.
Advantages:
- Same doctors, network and benefits
- Deductibles and out-of-pocket amounts already met that year may carry over
- No new plan to learn
Disadvantages:
- Often expensive
- Limited duration
- No income-based subsidies
COBRA can make sense for short gaps, for people in the middle of treatment, or when they have already met a large deductible.
Option 2: ACA marketplace plans
Plans on the Affordable Care Act marketplace (healthcare.gov or a state exchange) are available to anyone, and insurers cannot deny coverage or charge more based on health conditions. Premiums can vary by age, location, tobacco use and plan level.
Premium tax credits reduce monthly premiums for eligible households, based on modified adjusted gross income (MAGI) and household size. The rules for how high income can be and still qualify have changed in recent years, so check the current rules for the year you plan to enroll.
Cost-sharing reductions lower deductibles and copays for lower-income households who choose silver plans.
Why retirement income matters
In retirement, MAGI depends on choices you make:
- Withdrawals from traditional IRAs and 401(k)s add to income.
- Roth IRA withdrawals of contributions, and qualified distributions, generally do not.
- Withdrawals from savings or taxable accounts add only realised gains, interest and dividends, not principal.
- Roth conversions add to income.
- Social Security benefits may be partly included.
By choosing which accounts to draw from, some early retirees can keep MAGI in a range that qualifies for significant subsidies. This must be balanced against other goals, such as Roth conversions.
If your income turns out different from your estimate, the premium tax credit is reconciled on your tax return. You might owe money back or receive more.
Special enrollment period
Losing job-based coverage — including when you retire — qualifies you for a Special Enrollment Period on the marketplace, typically 60 days before and after the loss of coverage. Choosing COBRA does not take away this option during the window, but voluntarily dropping COBRA later generally does not create a new Special Enrollment Period outside open enrollment.
Other options
- Spouse’s employer plan, if available
- Retiree health coverage from a former employer
- Part-time work with benefits
- Health sharing ministries, which are not insurance and do not provide the same protections
Planning checklist
- Price COBRA using your employer’s full premium.
- Price marketplace plans at healthcare.gov using estimated retirement income.
- Check networks for your doctors.
- Estimate MAGI for each year until 65.
- Coordinate with Roth conversion plans.
Frequently Asked Questions
Can I switch from COBRA to a marketplace plan? Yes, during open enrollment or within the special enrollment window after losing employer coverage.
Will marketplace plans cover pre-existing conditions? Yes. Marketplace plans cannot deny coverage based on health.
When does marketplace coverage end? When you become eligible for Medicare at 65, you generally should switch to Medicare.
Are short-term plans a good option? Short-term plans often exclude pre-existing conditions and have limited coverage.
The bottom line
Early retirement needs a health insurance plan for every year before 65. Compare COBRA with marketplace options, estimate how your retirement income affects subsidies, and enroll promptly to avoid gaps.
