I started my career with ING. After five years, I was convinced I would finish my career there. They spun off in the U.S., and after year six, I found a new home. After five years at my new firm, and after becoming an owner, I was convinced I would finish my career there. In year eight, I sold my shares back to start my own firm. The point is that things don’t always go as planned.
According to the Employee Benefit Research Institute, the median expected retirement age is 65. I can confirm that almost everyone I see who is younger than 65 defaults to this age, presumably because that is when Medicare starts. The reality is that the actual median retirement age is 62. So, what do you do about healthcare between 62 and 65? Moreover, is pushing to 65 for Medicare worth the extra three years of work?
Bridging the Healthcare Coverage Gap
Let’s start with the fact that you can obtain insurance independent of an employer and a group before Medicare. It may be a foreign concept, but marketplaces actually make it pretty easy. Here’s the bad news: It’s expensive. Premiums vary widely based on age, location, and type of plan selected.
According to the Mercer-Vanguard healthcare cost model, a medium-risk 64-year-old with a “silver” marketplace plan can expect to pay about $18,000 per year, including both premiums and out-of-pocket expenses. If you’re retiring from the federal government, that number will shock you. However, if you are a business owner, $1,500 per month seems much more reasonable.
For clients who are more concerned about discontinuing coverage than writing a large check every month, the Consolidated Omnibus Budget Reconciliation Act (COBRA) can be a handy tool. COBRA essentially allows you to continue your employer plan for a period of up to 18 months after employment ends. The catch is that you are now responsible for the entire premium rather than just the employee portion.
For example, if the total premium for your policy was $1,000 per month and your employer picked up $600, you are now responsible for the entire $1,000, not the $400 you were paying previously. For clients who can afford it and are willing to pay for it, 63½ becomes the new 65.
Should Healthcare Determine Your Retirement Age?
Returning to the question of whether Medicare is a good reason to wait until 65, let’s consider the actual median retirement age of 62. In that scenario, we estimate that you will pay about $18,000 per year for healthcare. Consequently, your total out-of-pocket, pre-Medicare expense is $54,000. The question now is both financial and personal. On the financial front, can you afford that extra expense? Your financial plan should provide clarity on this matter. Our software has healthcare as a line item and allows you to input a “pre-Medicare” amount if you choose to retire before 65.
The personal question is: What is $54,000 worth to you? Many readers may have no problem affording it, yet still hesitate to take on this expense. Just because you can afford a luxury car doesn’t mean you’ll buy one.
My two cents: Healthcare shouldn’t drive your retirement timeline unless financially necessary and when a health situation makes it too risky to change plans. When work stops fulfilling you, when you aren’t reliant on the paycheck, and when you’re tired of your boss’s jokes, it may be time to say goodbye.
