By David K. MacLeod, CFP®, CFA

You’ve run the numbers. You’re pretty sure you have enough money to retire early. Then, a question pops into mind. “How much money will I need for health care if I retire early, before Medicare eligibility at age 65?”

You know health costs have been rising a lot. But your employer pays for a lot of your health insurance premiums, and you’ve been relatively healthy. It’s difficult to know exactly what to expect.

The question of “how much” is an excellent one. Unrealistic expectations can ruin an otherwise good plan.

Health Care Costs
Health care costs have been rising faster than average U.S. inflation. In fact, according to the U.S. Bureau of Labor Statistics, average prices for medical care are up 88% since the year 2000. This equates to a 3.4% annual inflation rate, significantly higher than the 2% overall U.S. inflation rate. That’s translated to a higher cost of health insurance through steep health insurance premiums, higher deductibles, larger co-pays, and higher coinsurance percentages required by the insured.

Medicare
At the age of 65, after years of paying Federal Insurance Contributions Act (FICA) taxes, most Americans qualify for the U.S. government health insurance program called Medicare. The various parts of Medicare insurance include hospital benefits, doctors, and prescription drug coverage. Monthly premiums are very low. Many of our clients who participate get additional coverage (e.g., HMO or PPO) from a private insurance company to supplement what Medicare covers. Overall, the cost of insurance drops significantly when you reach the age of 65 because of Medicare.

Early Retiree Costs
For early retirees, the cost of health insurance will depend on factors including age, household size, and geographic location. If you live in a high-cost area like Orange County, CA, or have adult children under age 26 covered by your plan, your premiums will be a lot higher.

It’s not uncommon for a typical 60-year-old in Fullerton to face health insurance premiums of over $1,000 per month per person. California residents can shop and compare private health insurance plans on the Covered California website.

Tax Credits
If your income is low enough, you may qualify for premium assistance tax credits. But keep in mind that the law could change or your retirement income could be higher than you expect. If your income is just one dollar above the limit, then you lose all of the tax credits. Talk to your fiduciary financial planner or insurance agent for specific details related to your situation.

Mr. and Mrs. Smith
Let’s consider an example. Mr. and Mrs. Smith retire at age 55 and live in Fullerton, CA. Their children are adults and independent now, so the couple are looking for health insurance for only the two of them. They shop around and find an HMO health insurance plan that covers the doctors they want. The coverage has reasonable deductibles, copays, and other potential out-of-pocket costs.

Their insurance premiums are $1,800 per month. Assuming all other out-of-pocket costs are $2,000 per year (which may be too conservative an estimate depending on current health) and costs increase by 4% per year, Mr. and Mrs. Smith will spend $283,300 by age 65 on health care costs alone.

As they consult with their fiduciary financial advisor on retirement planning to determine their maximum monthly spending amount, they may be able to afford these health care costs in addition to traveling and enjoying their leisure time. But remember that free time is expensive, and many people underestimate their spending in the early retirement years.

Conclusion
If health care costs aren’t appropriately built into your retirement projection, those costs may come as a shock. We’ve known early retirees who decide to go to back to work, even if only part time, until age 65 because of the cost of health insurance.

We would encourage you to do proper homework on retiree health insurance and understand how much you can expect to pay before Medicare and after Medicare (age 65). As the old saying goes, good health and good sense are two of life’s greatest blessings. You can choose to have the good sense to plan for good health care coverage in retirement.

Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.