Health care options for early retirees

One of the biggest hurdles to early retirement is finding affordable health care. You cannot get Medicare until the age of 65. So what are the options from age 55 to 64? The first place to check is with your employer. Find out if they provide health care coverage to retirees, and at what cost. Warning: the number who do is decreasing steadily, and the retiree's share of the premiums is going up. To help keep such coverage in place, the Patient Protection and Affordable Care Act (the Obama administration's health care reform law) established a temporary federal program which will reimburse retiree health plans for high-cost medical claims. This ends 12/31/2013 when retirees will in theory be eligible for coverage through new state health insurance exchanges, often with subsidies.

An obvious second option is enrolling in a working spouse's health care plan. If this is not applicable, COBRA (Consolidated Omnibus Budget Reconciliation Act) is a short-term solution. Employees who are eligible for COBRA can continue their employer health care coverage for 18 months (and longer under certain circumstances). You will have to pay the full premiums, but because it is a group policy it will likely be much less expensive than an individual policy. After COBRA runs out, check into whether you are eligible for state high-risk pools.

If your only option is to buy insurance on the open market, the most cost-effective choice might be a high-deductible plan combined with a health savings account (HSA). With high-deductible plans you might pay a few thousand dollars out of pocket each year before insurance starts to pay (compared to a few hundred with a traditional policy), but the monthly premiums can be as little as one-third of a traditional policy. And the costs can be reduced further by investing pre-tax dollars in an HSA, from which you pay your medical bills. HSAs can be mutual funds, CDs, or interest-bearing accounts. Any unspent funds at the end of the year roll over. And if you accumulate a balance, after age 65 you can withdraw the money for any reason without penalty, although you will owe income tax on non-medical withdrawals.