Retiring Before 65? Here’s How to Handle the Health Insurance Gap
For many Americans, retirement planning revolves around investment accounts, Social Security timing, taxes, and income strategies. But there’s one issue that can completely derail an early retirement plan if it’s not addressed properly: health insurance.
If you’re planning to retire before age 65, you may face a significant challenge because Medicare eligibility typically doesn’t begin until age 65. That leaves a potentially expensive gap between employer-sponsored coverage and Medicare.
This is one of the biggest reasons people delay retirement. Many workers feel trapped in their jobs simply because they’re afraid of losing health insurance coverage.
The good news is that retiring before 65 is absolutely possible with the right planning. Understanding your options and coordinating your financial strategy correctly can dramatically reduce costs and help you retire on your timeline instead of your employer’s timeline.
Why Health Insurance Is Such a Major Retirement Issue
Most employees don’t realize the true cost of health insurance because their employer subsidizes a large portion of the premium. Once you leave your employer, you’re suddenly responsible for the full cost.
That can be a shock.
A couple in their early 60s may discover that private health insurance costs anywhere from $750 to well over $1,500 per month depending on coverage levels, deductibles, and income.
And unfortunately, this is also the stage of life when healthcare becomes more important. As people age, medical costs often increase, making coverage essential.
Going without health insurance is a dangerous gamble. A single unexpected medical event can create devastating financial consequences.
Step 1: Understand Your Employer Coverage Options
The first step is understanding exactly what happens to your current health insurance when you retire.
Many people assume they know their costs because they see deductions on their paycheck, but that number rarely reflects the full premium.
You need to ask your employer:
- Can you continue coverage after retirement?
- Will your employer continue subsidizing premiums?
- Are you eligible for COBRA?
- How long does COBRA last?
- What are the exact monthly costs?
- What deductibles and out-of-pocket expenses apply?
COBRA coverage can provide temporary continuation of your employer-sponsored plan, but it’s often significantly more expensive because the employer subsidy disappears.
For some retirees, COBRA may work well as a short-term bridge. For others, it may simply be too expensive.
Before comparing alternatives, you need a complete understanding of your current plan costs and benefits.
Step 2: Explore Short-Term Health Insurance Plans
Many retirees don’t realize that short-term health insurance plans have become more widely available again.
These plans are different from Affordable Care Act marketplace plans. They often:
- Cost less monthly
- Have higher deductibles
- Include underwriting
- May exclude pre-existing conditions
- Offer more limited coverage
For healthy individuals retiring before Medicare eligibility, short-term plans can sometimes provide a cost-effective bridge.
In some situations, these plans can now last up to three years, depending on regulations and availability in your state.
However, these plans are not ideal for everyone. If you have chronic medical conditions, expensive prescriptions, or significant healthcare needs, short-term plans may not provide the protection you need.
This is why working with a knowledgeable insurance professional becomes important. You need someone who can compare all available options objectively.
Step 3: Understand Affordable Care Act Marketplace Coverage
The Affordable Care Act (ACA) marketplace — commonly accessed through Healthcare.gov in many states — has become one of the most important tools for early retirees.
Yet many people misunderstand how these plans work.
Some retirees incorrectly assume they won’t qualify for assistance because they have retirement savings or significant assets.
That’s often not true.
ACA subsidies are primarily based on income, not net worth.
This means someone with substantial retirement assets may still qualify for meaningful healthcare subsidies if their taxable income remains within certain ranges.
This creates tremendous planning opportunities for retirees.
How ACA Subsidies Actually Work
Here’s where retirement income planning becomes incredibly important.
Affordable Care Act subsidies are tied to your household income. As income rises, subsidies decrease.
But many retirees have flexibility in how they generate income.
For example, taxable IRA withdrawals increase reportable income. Social Security benefits may increase reportable income as well.
However:
- Roth IRA withdrawals generally do not count as taxable income
- Health Savings Account (HSA) withdrawals are typically tax-free for qualified medical expenses
- Cash savings can supplement income without affecting ACA subsidy calculations
This means strategic retirement income planning can significantly lower healthcare costs.
In some cases, retirees can save thousands of dollars annually simply by managing how income is recognized during the years before Medicare eligibility.
A Real Example of Early Retirement Health Insurance Planning
Imagine a married couple retiring at age 60.
They need health insurance coverage for five years before Medicare begins.
If they simply withdraw large amounts from traditional retirement accounts, they may show high taxable income and receive little or no subsidy assistance.
But with proper planning, they may:
- Use Roth savings strategically
- Control taxable income levels
- Delay Social Security
- Reduce healthcare premiums substantially
Even small income adjustments can create major differences in subsidy eligibility.
In some cases, reducing taxable income slightly may increase subsidies by several hundred dollars per month.
That can add up to thousands of dollars annually.
Why Delaying Social Security May Help
Many retirees focus on Social Security primarily from the standpoint of maximizing benefits.
But delaying Social Security can also help reduce healthcare costs before Medicare.
Because Social Security benefits may increase taxable income, claiming benefits early could reduce ACA subsidies.
That means there may be situations where delaying Social Security not only increases future monthly benefits but also lowers healthcare costs during the bridge years.
This is why retirement planning should never happen in isolation.
Social Security, taxes, healthcare, investments, and retirement income all interact together.
Healthcare Planning Is Now Part of Retirement Income Planning
One of the biggest mistakes retirees make is treating healthcare planning separately from financial planning.
In reality, they are deeply connected.
Healthcare decisions can affect:
- Retirement timing
- Tax planning
- Withdrawal strategies
- Social Security timing
- Investment income decisions
- Cash flow needs
That’s why retirees benefit from coordinated planning involving:
- A financial advisor
- A tax professional
- A health insurance specialist
Without coordination, it’s easy to make costly mistakes.
The Biggest Mistake: Assuming Early Retirement Isn’t Possible
Too many Americans assume they simply cannot retire before 65 because of health insurance.
That assumption often leads people to work years longer than necessary.
While healthcare costs are absolutely important, there are often more options than people realize.
The key is understanding the rules early enough to create a strategy.
Retirement should not be delayed solely because of confusion around health insurance.
Questions to Ask Before Retiring Early
If you’re considering retirement before Medicare eligibility, ask yourself:
- What will my healthcare costs actually be?
- What income sources will I use first?
- How will withdrawals affect ACA subsidies?
- Should I delay Social Security?
- Would Roth conversions help before retirement?
- What coverage options are available in my state?
- How much flexibility do I have with taxable income?
These questions can have a major impact on both your retirement lifestyle and long-term financial picture.
The Importance of Having a Retirement Healthcare Strategy
Healthcare planning is no longer optional in retirement planning.
For many retirees, healthcare becomes one of the largest ongoing expenses before Medicare eligibility.
But with proactive planning, it’s possible to:
- Reduce healthcare costs
- Optimize subsidies
- Create tax-efficient income
- Retire earlier than expected
- Avoid unnecessary financial stress
The earlier you begin planning, the more flexibility you may have.
Final Thoughts
Retiring before age 65 doesn’t have to mean sacrificing health insurance coverage.
Yes, the system can feel complicated. Yes, costs can be significant. But there are strategies available that many retirees overlook.
Understanding employer coverage, evaluating short-term plans, learning how ACA subsidies work, and coordinating income planning can make an enormous difference.
Most importantly, don’t assume you have to keep working solely because of healthcare concerns.
With proper planning, many Americans can bridge the gap between retirement and Medicare more efficiently than they realize.
Frequently Asked Questions About Retiring Before Medicare
Can I retire before 65 and still get health insurance?
Yes. Options may include COBRA, Affordable Care Act marketplace plans, short-term health insurance plans, or coverage through a spouse’s employer.
How expensive is health insurance before Medicare?
Costs vary widely based on age, location, income, and coverage levels. Couples in their early 60s may pay anywhere from several hundred to over a thousand dollars per month.
Do retirement assets affect ACA subsidies?
Generally, ACA subsidies are based primarily on income rather than total assets or net worth.
Do Roth IRA withdrawals affect ACA healthcare subsidies?
Qualified Roth IRA withdrawals generally do not count as taxable income for ACA subsidy calculations.
Can delaying Social Security reduce healthcare costs?
Potentially, yes. Delaying Social Security may help lower taxable income during early retirement years, which can improve ACA subsidy eligibility.
Should I use COBRA or marketplace insurance?
It depends on your healthcare needs, budget, subsidy eligibility, and how long you need coverage before Medicare begins.
Is going without health insurance before Medicare a good idea?
Generally, no. Unexpected medical expenses can create major financial hardship, especially in your early retirement years.
Investment advisory services offered through Dolphin Wealth Management Inc., a Registered Investment Advisor in the state of Florida. Insurance products and services are offered through Dolphin Insurance Inc., Dolphin Wealth Management Inc, and Dolphin Insurance Inc. are affiliated companies doing business as Dolphin Financial Group.
Daniel Wendol
Item #1
00:00:01
so you’ve retired and you’re excited you’re about to start your journey into not having to work anymore but there’s one little thing that a lot of people forget about well they usually don’t forget about it they think about it because they know how scary it can be and that’s health insurance and we’re going to talk about what do you do if you have a health insurance Gap meaning you retire before you hit 65 before you go on Medicare what are your options you’re leaving your group employer
00:00:30
coverage before turning 65 and it could be very stressful for a lot of people they haven’t had to think about health insurance and now that their employer is Le you know dropping them from their coverage they’re on their own they have to go into the wild world of health insurance and they can’t get on Medicare just yet and that’s a problem for a lot of people here’s my co-host Tony Shore Tony you’ve heard this story before health insurance and I’ve said I’ve done
00:00:59
uh short little blur on how I don’t want to hear people being held captive to working because of health insurance there are alternatives and I want to talk about them today interesting because yeah this is one of the big reasons that I hear a lot of experts or retirement people say this is why you should not retire early you can’t retire before 65 because of health insurance and you know a side note do not get me started on my opinions on health insurance you know that I I the health insurance companies record billions in
00:01:35
net profits every year you can look it up whatever health insurance you use Blue Cross Blue Shield or I don’t know what the big health insurance there is but you just look it up and say net profits for and then the last year or two ago when they have numbers and it’s outrageous and so we have a healthare crisis in this country but that leads to your problem that you’re pointing out is what if I want to retire at 62 but I don’t get Medicare benefits until I’m 65 so what do I do isn’t Cobra
00:02:08
is an option but Cobra is outrageously expensive right yeah and it doesn’t last forever um there’s a limit on that and the Cobra for those listening that’s a that’s a technical acronym and it’s continuing benefits after your employer uh Severance or you leave the co coverage from your employer uh yeah it’s it’s scary world you know the big thing for a lot of people is they don’t realize how much Insurance costs because their employer is paying for usually at least half of the bill and so they don’t
00:02:42
know what self-employed people pay or people that don’t have group coverage it it’s pretty darn expensive um it’s expensive with group coverage and with your employer covering up to half of the cost and I and and I agree with you that the insurance in this country is more about profits than health benefits um as a whole the insurance industry really and I’m not I’m not trying to critique all of capitalism but that’s just a frustration that’s a big part of the problem with
00:03:16
Healthcare in this country is Health Care is so expensive and health insurance is expensive and hard to get so yeah yeah so I’m going to give four steps so if you’re in this situation where you’re like I’m retiring or I can’t retire because my my wife’s younger than I am and if I leave my employer then she’s going to be I can go on Medicare but she couldn’t so what are we gonna do for her you know that or you know that’s the issue so the first my neighbor worked to 71 because his wife
00:03:47
was that much younger the exact scenario and I’ve mentioned that before my neighbor and good friend Tom his wife is a lot younger than him and he worked for the State uh of Minnesota up in Minnesota and he had amazing health insurance through the state I mean I think they were paying 135 a month for their whole family so no so they were paying but the rest of the state of Minnesota was paying for their health insurance through their taxes right and he kept his job he kept his job though the point is he kept his job
00:04:19
just for the health insurance because she would not be eligible she didn’t work and she would not be eligible for Medicare and that’s it so 65 is the is the the normal cut off unless you’re disabled you’re get not going to get Medicare until 65 and not everyone wants to wait till 65 to stop working mainly because they’re just tired and they want to enjoy life while they’re young and healthy yeah or they might be getting unhealthy and they’re like I don’t know if I’m G to if I could do this anymore
00:04:49
so I got to leave at the same time that they’re unhealthy they’re they’re needing health insurance and it’s it’s a really uh difficult situation so Step One is first you got to know what your employee plan options are you might be able to continue coverage some government employees can continue coverage for themselves Andor their spouse or their family um some can’t you need to know that you need to know if you can continue for 18 months through Cobra you need to know what the cost is and this
00:05:19
is where it gets real because you can’t you can’t just look at your pay St and say oh here’s what I pay you have to then ask if I leave employment what will it cost me because that’s a different story wor a lot of times companies will not continue to subsidize your health insurance so what do you do you need to know exactly what your employer plan options are dollar-wise so that you can then use that to compare your Alternatives because if you if you start looking at Alternatives and you say oh my God
00:05:49
that’s just terrible it’s so much more than what I’m paying now well of course it’s going to be but first you need to know exactly what you would pay and all the details you need to understand deductibles you need to understand what co-pays are and co- insurance so it’s you just need to learn this stuff and I find that a lot of people don’t really think too hard about it because it’s just here are my three choices at work and now when you’re on your own you’re
00:06:14
like oh I got to figure this really out so step one is really understanding your plan step two is now you got to look at your local short-term health insurance options now before the Affordable Care Act with Obama back in 2010 there were something called short-term health plans and those got eliminated because they weren’t meeting the high restrictions that were meant for the Affordable Care Act but they’ve come back so there are short-term health insurance options um these are going to be um non
00:06:49
uh Affordable Care Act plans they will have a pre-existing condition Clause they will have larger deductibles and uh larger cost out of pocket um but they’ll relatively they’ll be relatively cheaper than if you went through and got an Affordable Care Act plan because the Affordable Care Act plans are required to have a level of of coverage up to here you may not need all that so you can look at what your local and I say local because they’re usually a network that’s localized um for short term this
00:07:21
is something to look at don’t think that they’ve gone away they’re are some options now there’s coverage limits there’s loopholes there’s different things you need to Bear be aware of but for those that are relatively healthy this might be a really good option and they used to be limited to less than a year now you can go up to three years with these so you can kind of find something that fits that gap of coverage um so that’s step number two is look at those options and how do you do
00:07:47
that you find someone that that offers these a local broker for insurance health insurance and talk to them say give me my options I want to see what’s outside of the Affordable Care Act I keep mentioning the Affordable Care Act because that’s step number three you need to understand your Affordable Care Act options this is healthcare.gov you can go there and you need to look at that and learn what this means what are what does the healthcare.gov mean because we passed that bill remember
00:08:16
that Tony that was a big thing yeah um and um Pelosi I think it was said we gotta pass it so we can find out what’s in it I think for most people in this country they need to leave work to find out what their alternative right because if there are options there are options and this is step three is going to be the option that people need to look at especially if they’re not healthy if they have a pre-existing condition that they want covered they’re not necessarily going to be able to go
00:08:45
to a short-term Health company and say hey can you cover me for a year and a half I have you know debil debilitating diseases and and chronic conditions and you got to cover me for that the the the short-term plans would say no no we’re not covering that Affordable Care Act plans will be required to cover them so you need to know this especially if you’re not healthy um yeah my my love of pizza Dan is a considered a pre-existing condition by some insurance companies I found right that they won’t insure me
00:09:14
because of my love of pizza right so you would get if you went to a short-term plan they would probably put a dis a clause on there like a rider that says we are not going to cover his love of pizza and all conditions related to so we’re talking heart blood you know health mental physical everything that pizza destroys very little would be covered yes but if you wanted to get covered outside of your group plan you would go to affordable car and they would say well we we we all struggle with pizza so
00:09:42
you’re in right they can’t deny you um but it’s going to cost right so that’s step number four is you need need to then understand and this is the big one this is the last step not the last step but this is the key and this is what I want to talk about in in detail is you need to understand that the healthcare.gov when it was passed it was designed to you know you can keep your doctor and and people still call it Obamacare because that’s what you know was the term they used back when it was
00:10:13
issued still people still feel that it’s some sort of lesser plan like I don’t want to get on the Obamacare I don’t want to go on the health insurance exchanges I don’t want healthcare.gov some states like Florida we don’t have a local exchange for health health insurance we use healthcare.gov some other states have their own local exchange for the entire state so you need to understand that but the health care subsidies are a national thing and it’s key that you understand
00:10:45
what this means so I’m going to give you an example um and we’ll use you Tony let’s fast forward 30 years and now you’re 60 okay sure you and your wife um and right now you’re covered under your wife’s plan because she’s got a good coverage sure and she’s like Tony I’m done I’m retiring we’re both 60 I’m calling it quits and you’re like wait wait wait wait do we have enough money yes we have enough money but who’s going to cover health insurance and she’s like well
00:11:15
they won’t cover me when I leave uh your company doesn’t offer it so we’re on our own let’s look at the health insurance exchanges now fast forwarding your kids will be gone so it just be the two of you Yep this is typical for people 60 years old two of us we need coverage for 5 years what do we do short-term plans only go out maybe 3 years we can get short-term plan every year and switch it but you’re like I got pre-existing Pizza condition I need coverage so you look at the healthcare exchanges and you run the
00:11:46
numbers and it says I’m going to throw out random examples but it’s pretty close all right the cheapest plan for the two of us is going to be 750 a month and people like whoa wait a sick but that’s with a huge deductible I only pay a $1,000 deductible right now oh you want a $1,000 deductible $ 1,200 a month yeah what right and and and so that’s where people freeze but they don’t realize that the government our government as part of the Affordable Care Act has what they call subsidies
00:12:19
and they will subsidize your health insurance cost how much depends on your income it doesn’t matter matter what your assets are you can have 40 million in the bank in cash in gold in real estate anything your net worth could be two billion you could still get a subsidy because all they are looking at is what your income is and this is key for people that are in between Medicare and retirement and that’s probably they’re looking at adjusted gross right or no right they’re looking at your
00:12:55
gross income um so people that just retire typically their income goes down right because they’re retired right and so when they’re looking at all right when do I turn on Social Security when do I start pulling for my IRA and Ira distribution would be considered income according to the Affordable Care Act and so there’s a game you want to show certain levels of income and so the more income you show the lower your subsidy will be but but if you show say 40,000 of income you might get your entire health
00:13:36
insurance covered I think for a married couple you got to know what these levels are that’s the step you need to know these subsidies they have what they call brackets so if your income is above this much we’ll cover this much and the higher your income goes the less the government will subsidize your health insurance cost when it first came out I learned these formulas and they’ve changed over the years but it would become to a point where Tony I know you need 60,000 to live but if we just
00:14:06
showed you $59,000 of income your subsidy would increase by $400 a month think of that that’s an extra four grand and you’re only reducing your income by 1,000 bucks so there it’s it’s a tricky game but it’s it’s all about the math as you always point out it really is you have to figure it out well people think and this is what the lesson is people think that I can’t get a subsidy cuz I’ve been working my whole life and I I have too much money in the bank my IRA is almost
00:14:37
a million dollars I can’t get health insurance subsidy you can it’s based on what you’re showing for income so if you can use your health savings account we did a a a show on that how that’s taxfree that’s not income you use a Roth withdrawal that’s not counted as income so your income level can be adjusted to reflect lower for the purpose of reducing your health care subsidies sounds like another reason to have a tax-free account or an account that doesn’t count as income or have
00:15:13
some cash ready to go to bridge that Gap and to delay Social Security even though hell this is great I want to turn on Social Security delaying it you can offset the you could reduce your subsidy because as soon as you turn on Social Security the government say oh there’s your income that raises your income reduces your subsidy it’s it’s kind of a game but it’s a it’s it’s a financial planning income planning strategy most financial advisers Tony won’t touch health insurance with a 10- foot pole
00:15:42
right right they just don’t so if you’re planning to retire before 65 you need to coordinate the insurance purchase health insurance with your accountant with your insurance agent and with your financial advisor this has to work together otherwise you’re going to be paying a lot for insurance for some people that’s fine they could pay the full amount no big deal but for most people they want to reduce their cost oh yeah yeah I mean why wouldn’t you if the math makes sense and work with somebody like yourself and
00:16:14
Dan I know obviously uh you know how to figure this out and look at it and look at a person’s personal situation and help them figure out okay the math says you’d be way better off doing this your insurance will cost you 400 less uh a month and then yeah huge for a typical couple let’s say there’s 64 right so this is when the insurance is going to cost the most right Insurance costs more health insurance as you get older right so they’re 64 they got a year to go before they’re on Medicare which you know we
00:16:48
know what the limits are for Medicare um they’re like I got a year you know if they could just show income a certain way they could literally get 10 $10,000 of subsidy toward health insurance for that year wow which is a lot it’s not chump change it’s significant amounts of subsidies and people might say well Dan you’re just you know gaming the system I’m not I’m health insurance is overly expensive the government subsidizes it for the purpose of making sure people don’t go in debt
00:17:22
just to pay for health insurance premiums why not why not use the formulas to your benefit because you know you’re going to be it’s going to cramp your lifestyle especially if you if you got a couple more years before 65 you’re going to be shifting money around you’re going to feel uncomfortable potentially but financially it makes a lot of sense but it can’t you can’t just you can’t just first of all just say oh I can’t go on Exchange can’t just roll over and yeah
00:17:52
right which is what a lot of people do so conclusion Tony the gap between retirement and Medicare is you know it could be tight for some it could be bigger for others and It’s Tricky It’s Tricky when it comes to health insurance you need to know these complex tax rules you need to know how the subsidies work you need to truly begin to analiz your health insurance options because it could be thousands of dollars difference um and you know then there there might be those that say oh I’m
00:18:27
just going to go without that’s that’s the worst I should put that as step number before Step Zero is get make agree that you’re not going to have a gap in coverage because 64 you know the early 60s that’s when things start to break yeah and I see this with clients oh I’m healthy I don’t need no you things go wrong you know just through age just physic you know so I think people get that but there’s always that gez I don’t want to pay a th a month for he you have to have health
00:18:57
insurance your entire life that’s just period you can’t go without you cannot go without right so once you get over that hump then it’s like all right I need it then what you need to do is make sure that you understand this complexity and that the only way to really do that is to learn it or to bring in a team or work with somebody that that actually can coordinate Financial with insurance this is the time to bring the team together this is the time to get your accountant in the room or on the phone with the
00:19:29
health insurance agent because it it matters it matters and you can’t go back and fix mistakes you make you know that’s just the way it works the government’s watching if they’re giving you a subsidy they’re going to make you reconcile this but don’t be afraid of it don’t don’t think of it as you know some sort of handout or some sort of complex thing that’s only for the other guy it’s for you if you are thinking about retiring and you’re thinking I can’t because of health
00:19:54
insurance give me a call because that’s a pet peeve of mine I talked about that over and over again um just get the answers and and just start asking certain questions I can talk to you through it and and it just makes me feel good when someone can retire a little earlier than they want especially if the only thing holding them back is health insurance that’s a big no no exactly wish it wasn’t so complex I wish it wasn’t yeah don’t take it lightly though and work with a financial professional
00:20:23
like yourself Dan this is a great show it’s a wakeup call for a lot of people out there so how can our listeners get a hold of you go to Dolphin Financial group.com the number is 888-585-2719 do that too so don’t hesitate to call us thinking you have to be a client we we’ll give you the answers especially oh you might be in a different state than Florida everyone State’s different but the the bottom line is those Federal subsidies the health insurance Marketplace is regulated at a federal level so
00:21:14
everyone’s got to go through the same Hoops so it’s worth a call it’s worth taking seriously and we’ll be happy to help so thanks for a good show Tony um Great Dan we what what we can conclude is this you and your wife can retire because you know we’ll figure out a health insurance situation but we also can’t retire retire because you’re still only in your 30 so that’s the message for the listeners here have a good show we’ll see have a good day I mean we’ll
00:21:42
see you guys all next week all matter is discussing Today’s Show for informational purposes only this show is not investment advice Dan wi nor Dophin Financial Group are affiliated or endorsed by any government agency investment advisory services are offered through Dolphin Wealth Management in a registered investment adviser in the State of Florida Insurance products and services are offered through Dolphin Insurance Inc dolphin Wealth Management Inc and dolphin Insurance Inc are affiliated companies doing businesses as
00:22:11
dolphin Financial Group you should talk to someone at Dolphin Financial Group before implementing any of these strategies or ideas