How to Afford Health Insurance if You Retire Early
A 62-year-old friend of mine was recently offered an early retirement buyout from his employer, and it appeared to him that the offer was quite generous. He was seriously considering it, and he asked me what I thought about it.
"How much will you have to pay for medical insurance?" was my response. He looked into it, and a few days later, he said "Over $1,000 per month to cover both my wife and me. I can't afford that amount, even with the buyout offer. Looks like I'll be working until age 65."
Another 57 year-old friend recently left her job and received a notice for continuing her medical insurance under COBRA: The price tag for her alone was over $1,000 per month.
My friends' experience is common. If you currently receive medical insurance from your employer, it's likely your employer subsidizes a substantial portion of the cost -- often 80 percent or more. But that subsidy typically goes away when you retire (although a few employers still offer some form of retiree medical insurance). If you're considering retiring before age 65, it's critical to find out just how much you'll pay for medical insurance and factor that into your retirement budget.
Just to give you an idea of the potential costs you'll incur, I checked ehealthinsurance.com for individually-purchased policies in Ventura County, California, where I live. I asked for premium costs for a 62 year-old woman for a PPO policy with a $2,500 deductible, a 25% copay, and a $4,500 out-of-pocket limit from a national insurance carrier. The monthly premium was $535, which works out to be $6,420 per year. For a married couple, the monthly cost would exceed $1,000, just as it did for my first friend mentioned above. Note that most employer-sponsored plans have a lower deductible and lower copay, with correspondingly higher premiums. That's why my second friend mentioned above had a much higher COBRA premium.
Warning: your premium costs could easily exceed the above amounts, since medical costs and premiums vary widely by state (see below).
And these costs assume you'll even be able to buy medical insurance coverage without restrictions for pre-existing conditions. The federal Health Care Reform law prevents exclusions for pre-existing conditions starting in 2014, but that's assuming Health Care Reform isn't gutted by then.
If you're still considering retirement before age 65, here are some tips for reducing your medical insurance premiums:
- Opt for a high deductible, high copay, and/or high out-of-pocket limit. In the example above, the least expensive policy from the same insurance company was $215 per month. It had a $5,000 deductible, a 40% copay, and an $8,500 out-of-pocket limit. While that's not ideal coverage, the out-of-pocket limit still protects you against catastrophic, expensive conditions. And there were many policies available between the least and most expensive plans.
- Consider buying COBRA coverage under your employer's medical plan. You can typically buy up to 18 months of coverage after you terminate employment. In spite of the above example, the premiums might be less than you'd pay buying insurance on your own.
- Consider moving. Health care costs, and related medical insurance premium costs, are generally highest in the Northeast, and lowest in the West and Southwest.
- Find a part-time job that offers medical insurance with a cost subsidy from your employer.
Most people retiring at age 65 in 2011 might be able to obtain medical insurance coverage with a total cost well under $500 per month. This result comes from adding up $110.50 per month for Medicare Part B, around $30 per month for Medicare Part D coverage for prescription drugs, and roughly $100 to $300 per month for a Medigap plan. And, you'll no longer be subject to pre-existing condition exclusions. So one strategy is to figure out how you can bridge coverage between the time you retire and age 65.
One thing is certain: It pays to shop around! You could easily save thousands of dollars each year by investigating all possible sources of medical insurance, making that research a great use of your time.
Image from iStockphoto contributor blackwaterimages
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