Strategic Readiness Protocol
Health insurance before Medicare: four options, the ACA subsidy lever, and how to actually price the bridge years if you retire before 65.
There is a planning gap that shows up consistently in conversations with pre-retirees who are getting close to actually pulling the trigger on retirement before age 65.
The portfolio is solid. The Social Security timing is figured out. The drawdown order is on paper. And then the question comes up — almost in passing, almost as an afterthought — what about health insurance until Medicare?
In a non-trivial number of cases, this question has not been seriously priced. The pre-retiree was on employer-provided coverage for thirty years, and the assumption has been that something will work itself out between retirement day and the 65th birthday.
Something usually does work itself out. But the cost of that something is often the single largest line item that was never on the original retirement spreadsheet. For a 60-year-old couple retiring five years before Medicare eligibility, the bridge can run from $15,000 to $40,000 a year, sometimes more. Over five years that is six figures of unbudgeted spending. This post is about how to actually price the bridge before you retire, not after.
The starting point matters. Medicare is the federal health insurance program for people 65 and older. The vast majority of Americans become eligible the month they turn 65.
There are limited exceptions — Social Security Disability Insurance recipients can qualify earlier, as can people with specific medical conditions like end-stage renal disease. For most pre-retirees, those exceptions do not apply, and the 65th birthday is the gate.
Medicare itself has multiple parts. Part A (hospital insurance) is generally free if you have worked enough quarters. Part B (medical insurance) requires a monthly premium that increases at higher income levels through IRMAA. Part D (prescription drug coverage) is a separate enrollment. Many retirees also add a Medicare Supplement (Medigap) policy or choose a Medicare Advantage plan instead. Medicare is its own conversation. This post is about the years before Medicare — the bridge from retirement date to age 65.
If you retire before 65, you have four practical paths for health insurance during the bridge years. Each has tradeoffs.
The Affordable Care Act marketplace (healthcare.gov or your state's exchange) sells individual health insurance to anyone, regardless of pre-existing conditions.
The honest tradeoffs:
For most pre-retirees who retire before 65, the ACA marketplace is the default option. Worth pricing carefully.
COBRA lets you keep your existing employer health insurance for up to 18 months after leaving the job, at your own expense.
The honest tradeoffs:
COBRA is often the right answer for the first 18 months when continuity of care matters most, with a transition to ACA marketplace afterward.
If your spouse is younger and still working, with employer-provided health insurance that offers family coverage, this is often the cleanest option.
The honest tradeoffs:
Worth running the numbers carefully before assuming this is the answer. Some employer plans cost more for spousal coverage than the spouse expects.
A diminishing number of employers offer retiree health benefits that bridge to Medicare. If yours does, this is generally the highest-value option.
The honest tradeoffs:
If you have retiree health benefits available, the right question to ask your HR or benefits administrator is what exactly do I get, what does it cost, and when does coverage start? Get the answer in writing before you set the retirement date.
Here is the planning lever specific to pre-retirees who retire before 65 and rely on ACA marketplace coverage. The size of your ACA premium tax credit is determined by your modified adjusted gross income (MAGI) for the year. The lower your MAGI, the larger the subsidy.
For a pre-retiree retiring in their early 60s, the years before Medicare are often the lowest-income years of their adult life. They have stopped earning a salary. They have not yet started Social Security. They may be living primarily on cash reserves or taxable account drawdowns, which produce far less reportable income than wages did.
This is the window where ACA subsidies are largest, sometimes covering the majority of premium cost. It is also the window where one badly-timed decision — a large Roth conversion, a portfolio rebalance that triggers significant capital gains, a 401(k) lump-sum distribution — can push MAGI above the subsidy threshold and cost you tens of thousands of dollars in lost premium tax credits.
The interaction between ACA subsidy planning and retirement income planning in the bridge years is one of the highest-leverage technical conversations an advisor can have with a pre-retiree. Done well, it can substantially lower the effective cost of the bridge. Done poorly, or not at all, it can leave money on the table.
Before setting a retirement date that is earlier than your 65th birthday, here are the five items to have written down:
These five items are not optional. They are what separates "I will figure it out" from "I have a plan."
A pre-retiree couple in Sarasota, both 61, planning to retire at 62. Both healthy, no significant pre-existing conditions, currently on employer-provided coverage at the higher earner's job.
Approximate Three-Year Bridge Total: $60,000.
Year 1 (COBRA): $28,800 | Year 2 (Midpoint): $20,000 | Year 3 (ACA Net): $11,200
That number is now on the spreadsheet. The retirement plan accommodates it. The Roth conversion strategy is adjusted to preserve the subsidy. The cash reserve includes enough to cover the high-cost first year without forcing a portfolio drawdown. That is the work.
Same couple. Same age. Same situation. But without the pricing exercise.
The vague plan: "We'll go on the ACA marketplace until Medicare." No specific plan selected. No subsidy modeling. No interaction with the Roth conversion strategy. No line item in the spending plan.
Retirement day arrives. They shop the marketplace. They find a plan for $2,100 a month. They take it. They do a large Roth conversion in year one because someone told them retirement years are good for that.
The Roth conversion pushes their MAGI above the subsidy threshold. They lose the $14,000 subsidy that year. The net cost of the conversion was much higher than they thought. The plan still works. But the bridge years were more expensive than they needed to be, and the couple is genuinely surprised by how much. The bridge years are not a planning detail. For many pre-retirees, they are the single largest line item that was never on the spreadsheet.
The five items above are part of the broader work of pre-retirement readiness. If you are 5 to 10 years from retirement and want a structured way to see whether your healthcare bridge planning is ready alongside the rest of your readiness gap, our free Pre-Retiree Readiness Checklist walks through healthcare planning alongside four other questions every pre-retiree should be answering.
If your gap is specific — you know you are retiring before 65 but have not priced the bridge — a 30-minute call with an advisor at Hance Financial is the fastest path to a written number. No obligation, no pressure. Retire with confidence.