Given the skyrocketing cost of healthcare (as well as the increasing need for it as we age), it’s not too surprising that Baby Boomers’ biggest worry is how they’re going to afford their medical costs in retirement. Thankfully, however, Medicare (which is available to individuals who paid – or have spouses who have paid – Medicare taxes for at least 10 years and are at 65 years of age or older) is the de facto option for healthcare for retirees. And it’s actually quite affordable – at least relative to the underlying costs of care – due to the fact that Medicare taxes already cover between 77% and 99% of a Medicare recipient’s premiums (such that they only have to pay the net remaining premium out of pocket).
The caveat, however, is that, while the majority of individuals plan to retire at some point after they reach age 65, there is still a non-trivial number of individuals, whether by choice or by need, who retire before they are eligible for Medicare (or even Social Security, for that matter) and still need health insurance coverage (and can’t just simply be added to their still-working spouse’s employer-sponsored plan).
Fortunately, early retirees do have a few options as they consider the best way to obtain health coverage in early (pre-Medicare) retirement. For workers who retire from a company with greater than 20 employees, COBRA (Consolidated Omnibus Budget Reconciliation Act) coverage allows newly-separated employees (or employees who work so few hours that they’re not eligible for their employer’s health plan) to continue their existing insurance coverage at the same (full-premium) cost (plus an administrative fee that is usually capped at a maximum of 2% of the premium). However, COBRA coverage generally lasts only 18 months, and thus can only (except under certain conditions) be used to bridge short gaps before Medicare eligibility begins. Another option for retirees looking to continue their coverage using the same health insurance provider is to “convert” the plan under the group to an individual plan… at least, as long as the plan allows for such a conversion. Again, though, this isn’t always an ideal alternative, as there’s no requirement that the terms (or cost) of such an individual policy are the same as their “old” group plan.
Meanwhile, retirees who (either due to eligibility or cost) decide that either COBRA coverage or a conversion policy isn't the right choice for them, may choose to simply purchase health insurance using their state-approved exchange created under the Affordable Care Act. However, while retirees can’t be denied coverage for a pre-existing medical condition, coverage can only be purchased during specific open enrollment periods, or within 60 days that the employer’s plan is terminated (which means time is of the essence after retiring to make a decision).
Ultimately, though, the key point is simply to realize that, while retirees may be understandably worried about their healthcare costs eating away at their life savings, the availability of Medicare ameliorates those concerns to a significant degree. However, for those who aren’t yet eligible for Medicare, the issue of securing health insurance to bridge the gap until they reach age 65 becomes less clear… particularly for those whose budgets aren’t exactly robust. Regardless, the good news is that there are options, with coverage that is guaranteed (at least if timely obtained). But the range of choices means it is necessary to conduct a thorough cost/benefit analysis when finding the best option between purchasing COBRA coverage, converting an existing group health plan to individual coverage, and/or purchasing insurance via a state-approved health insurance exchange.
Welcome back to the 136th episode of Financial Advisor Success Podcast!
