Health Insurance in Early Retirement – The White Coat Investor – Investing & Personal Finance for Doctors

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One of the most common questions on the WCI Forum, the private WCI Facebook Group, and even my email box is some variation of this:

Q . What should I do for health insurance between the time I retire early and age 65 when I become eligible for Medicare.

A. Short version: You buy it.

Long version: See below

What’s Special About Health Insurance?

I find the question hilarious actually. It really is demonstrative of our screwed-up health insurance system where we usually buy it through our employers. I mean, when you really look at it, what’s so special about health insurance? I NEVER get these questions:

What should I do about housing in early retirement?

What should I do about groceries in early retirement?

What should I do about gasoline in early retirement?

What should I do about my cell phone bill in early retirement?

There really isn’t ANYTHING special about health insurance in this regard. The simple answer is that you just BUY HEALTH INSURANCE in early retirement. Just like you pay your property taxes, buy your groceries, and pay your other bills. However, most Americans, including many doctors, have never actually purchased health insurance so it is a complete mystery how to do so.

How to Buy Health Insurance On The Open Market

The easiest way to buy health insurance is to call up a health insurance broker and have them outline your options. It’s a bit like buying life insurance or disability insurance, except there is no physical and you probably have to shop it every year instead of just once. Once you pick the option you like, you sign the contract, write them a check for the first payment, and set up automatic ACH payments for the rest of the year. Easy peasy. Seriously. I’ve done this at least 5 times in the last decade. I assure you that it is no different to do it at 55 or 60 as at 40. Just Google “health insurance broker in [your town]” and choose from the dozens of options. If you don’t like the person you chose this year, pick a different one next year.

So what should you look for in a policy? Well, mostly it’s finding your place on the continuum from high premiums/low deductibles/low co-insurance/large panel of doctors and hospitals to low premiums/high deductibles/high co-insurance/small panel of doctors and hospitals. If you usually have lots of health care expenses, pick something on the left side of the spectrum. If you usually don’t have any, then pick something on the right side of the spectrum.

As a general rule, I’m a big fan of HSA-eligible plans. They usually have a bit higher of a deductible (minimum of $1,400 single/$2,800 married for 2020), but they give you access to a sweet triple-tax free investing account.

No Limitations on Pre-Existing Conditions

The reason you can do this is that it is currently illegal to exclude pre-existing conditions when you buy health insurance. That wasn’t the case a decade ago before PPACA was passed, but it has sure made buying health insurance on the open market far easier (and far more expensive, unfortunately.)

Sticker Shock

Of course, the first thing you will realize when you go to buy health insurance on the open market is that it is REALLY expensive stuff. Unfortunately, for the last few decades and probably your entire life you have never actually seen or paid the price tag on health insurance. You have been shielded from this by your employer. More and more at least part of the price tag is being passed on to the employees, but a lot of employees made a really crazy assumption – that their portion of the premium was all (or even most) of the premium paid for the insurance. It usually isn’t. We recently implemented a group health insurance plan here at The White Coat Investor and got to decide how much of the premium to pay for employees. We chose 80%. That’s pretty typical.

So what does health insurance cost? Well, for my family of six, it’s $1,100-1,400 a month, including dental. When you include what we actually spend on health care above and beyond the premiums (including HSA contributions) it is usually a figure between $20,000 and $25,000 a year. I could pick a cheaper plan and I could pick a more expensive plan, but that’s what we’re paying in 2020. It goes up most years, sometimes by just a little but often by 5-10%. Sometimes a lot more.

It obviously varies by how nice the plan is, your age, and your geographic location. Lots of early retirees have found their health insurance cost is $2,000-3,000. As I said early, health care is really expensive stuff. For some reason, we think the price should be more similar to what we pay for cell phone service than what we pay for rent. That is not the case.

This should be one of your major budget items in retirement because health care, you know the stuff that health insurance helps pay for, is expensive stuff. All that technology, highly trained staff available 24/7/365, and bloated bureaucracy doesn’t come cheap. Even if we fixed all the issues we have with health care (and there are many) I don’t think we could get the price down more than 20-30%. It’s always going to be expensive.

So if you can’t afford to pay for your health care in early retirement, YOU CAN’T AFFORD TO RETIRE EARLY. Just like you can’t afford to retire early if you can’t pay for housing, food, or transportation. Work a few more years until you have enough money to pay for all of your living expenses, including health insurance.

Medicare Isn’t Free

The other thing that I find hilarious is that people think this issue ends at age 65. People are appalled to learn that Medicare isn’t free, despite the fact that 2.9-3.8% of all the earned income (and for high earners a lot of the unearned income) they ever made has been taken from them by the government to pay for Medicare.

First, you have to actually be eligible for Medicare. That means you have to be 65+, have worked (and paid Medicare taxes) for at least 10 quarters, have been a US citizen or permanent resident for at least 5 years, or be disabled. Okay, no big deal, most of us will qualify for that at 65.

Medicare Part A

Second, THAT is just Medicare Part A, which covers the cost of hospitalization. That’s right. It doesn’t cover doctor visits and it doesn’t cover medications. And even though there are no Medicare Part A premiums for the folks above, there are Medicare A costs. These include a deductible of $1,408 per hospitalization in 2020. If you’re there longer than 60 days, there is a co-insurance amount of $352-704 PER DAY. Medicare A also pays for Skilled Nursing Facilities after qualifying admissions. But only the first 20 days are “free.” After that, it costs $176 per day for the next 80 days. After that, you’re on your own.

Medicare Part B

Third, Medicare Part B (covers physician services, outpatient hospital services, certain home health services, durable medical equipment etc.) has both premiums and deductibles. The premiums vary from $144.60-$491.60. Double that number if you’re married. By the way, this is a GREAT use of those HSA dollars you saved up as this is an HSA eligible expense. The annual deductible is $198 each.

Medicare Part D

Fourth, Medicare Part D (covers prescriptions) also has a cost. The average monthly premium in 2019 was $33.19. The range this year is from $13 to 83. There are also monthly co-pays (set amount per prescription) or co-insurance (set percentage of the cost of the prescription.)

Medicare Part C

Fifth, I bet you noticed that letter I missed, didn’t you? Yup, there’s a Medicare Part C (Medicare Advantage). Lots of people buy Medigap insurance instead. This gets complicated, but basically both are bought from highly regulated private insurance companies and cover co-pays, deductibles, and expenses not covered by the other Medicare plans.

Yes, this is obviously cheaper than buying health insurance on the open market as a 70-year-old. But it is FAR from free. So now that I’ve disabused you of the notion that health insurance is (or even should be) cheap prior to age 65, and that is isn’t free after 65, it really makes this common question look pretty silly, doesn’t it?

What Are Your Options?

So, what can you actually do about health insurance between the date you retire and age 65? Let’s list them out.

Go Bare

Well, I don’t think it is a very good option, but approximately 17% of my patients choose this one. They simply don’t buy health insurance and hope for the best. I’m sure some get lucky and avoid any significant health care expenses. Or they simply don’t pay their health care bills. This obviously has serious potential to come back and bite you. It is at least penny-wise, even if often pound-foolish. Under current law there is no financial penalty for committing the currently illegal act of not having health insurance. Welcome to America.

Buy Health Insurance

This is the option my family has chosen. We simply call up the insurance broker and buy the stupid stuff. Yup, it costs a lot of money, but you’re so rich you don’t have to work anymore so you should be able to afford to buy it.

COBRA Your Employer’s Health Insurance

Here’s another option. In fact, to be truthful, this is what we did in 2019 since my physician partnership decided I should not be eligible for their health insurance because I only work half-time. COBRA is a federal law that allows you to take over the premiums for your employer’s health care insurance for a period of up to 18 months after you are no longer eligible for the insurance. Usually, that’s because you quit or are fired, but as you can see in my case, there are other reasons too.

When I tell people I’m “on COBRA” the first thing they say to me is “I hear that’s really expensive.” No, it’s not. It’s EXACTLY the same price I was paying before, since as a partner/owner of the business I had to cover the entire premium myself. It wasn’t a surprise to me what health insurance really cost; I’ve been paying that price myself ever since I made partner in 2012.

Get the Taxpayer to Pay

There are lots of government programs to assist you in buying health insurance, both federal and state. Most of them are based primarily on taxable income. They don’t ask WHY your taxable income is low. They generally don’t care if it is low because you are disabled, lazy, caring for an ill family member, or living off capital gains and Roth IRA withdrawals. Early retiree millionaires usually qualify for these programs just as easily as very poor people. These include programs like Medicaid and “Obamacare,” (although to be fair in most states Medicaid actually does have some asset tests that you may or may not be able to get around with careful planning.)

Under PPACA (Obamacare), those who purchase health insurance through the state exchange qualify for some form of tax subsidy. This varies by family size and income, but you generally get something until you hit 4X the federal poverty level (a modified adjusted gross income of $134,960 for a family of six, $100,400 for a family of four, $65,840 for a family of two, and $48,560 for a family of one.) At half of those income levels, your subsidy is substantial- about half of the annual premiums. Many early retirees can get their AGI down to levels where they qualify for subsidized health care, even while enjoying a nice lifestyle by living off of Roth IRA withdrawals, qualified dividends, long-term capital gains, principal, and loans.

Get a JOB

Another approach people take is to keep working for an employer that covers at least part of the cost of health insurance. Maybe that’s just sticking with your career. Maybe that’s cutting back somewhat. Maybe that’s getting some self-employment income so you can at least pay the premiums with pre-tax money. Maybe that’s an encore career. Is this really retiring early? Well, I’m not the Internet Retirement Police. Call it whatever you like.

Use a Health Sharing Organization

These organizations are usually Christian-based “ministries.” They have some similarities to health insurance, but also substantial differences. Many early retirees have found them to be a great deal because the “premiums” (usually called something else like a “share”) are half the price (or less) of health insurance premiums. The “deductible” structure is also often a bit different, such as a “per health incident” amount rather than an annual deductible. Many health care costs are NOT covered, reading the fine print is essential.

Another reason these programs work is that they self-select a healthier population. Because the programs don’t cover the cost of medications for chronic conditions, if you get lupus or rheumatoid arthritis and require expensive medications on a long-term basis, you leave the program and sign-up for regular health insurance, either with a without a PPACA subsidy.

If you do decide to go with one of these programs, I recommend you get the most expensive version that includes some form of catastrophic coverage. Health insurance that caps out at $125K simply is not adequate and leaves the serious potential for having to declare bankruptcy in early retirement.

READ THE FINE PRINT ABOUT WHAT IS COVERED AND WHAT IS NOT. You will likely find some surprises there. IT IS NOT THE SAME THING AS HEALTH INSURANCE, for better and for worse.

TrumpCare

The Trump administration passed a regulation that allows you to buy a “bare-bones” health insurance plan for up to one year. These plans often exclude medications, maternity, and mental health expenses and have high deductibles but do come with a significantly lower premium. Discuss with your health insurance broker. Like COBRA, it only works for a short time period, but it might help you bridge the gap to Medicare.

Medical Tourism

For more elective stuff, you can also go to foreign countries and just pay cash. I don’t really see this as a solution to the issue, because it obviously won’t work for every medical condition. But it could potentially help you supplement things. If you’re not willing to move to a foreign country to reduce your housing expenses in early retirement, you probably aren’t willing to travel for health care.

As you can see, anyone asking this question likely has limited knowledge of how both health insurance and Medicare work. Ever since PPACA eliminated the ability to exclude pre-existing conditions, nobody who has assets sufficient to retire should feel like they cannot retire JUST because they need health insurance.

Health Care Inflation

The final concern I hear from people is that they have no idea how much health care is going to cost in 10 years. They have seen substantial premium increases in the last 10 years and so they worry the cost will continue to climb. They are right to worry. New, improved tests, treatments, and medications cost more money and health insurance, hospitals, Big Pharma, and even doctors are going to try to raise their prices whenever they can. But health care is hardly unique in this phenomenon. The price of everything goes up and down all the time.

Build-in some “fudge factors” when you run the numbers to determine whether you have enough to retire. If you’re really conservative, maybe you should wait until you have enough to retire even if health insurance costs four times as much in a decade as it does now. Personally, I’d use a much smaller inflation figure, such as what I’ve actually seen in the last 5-10 years. Perhaps 5-10% a year. But I wouldn’t let health insurance be the thing that kept me from retiring early.

What do you think? Are you going to retire before 65? If so, what do you plan to do for health insurance in that time period between retirement and age 65? Comment below!