If you retire before age 65 and Medicare eligibility, the four main health insurance options are COBRA (up to 18 months of your employer plan), the Affordable Care Act marketplace at Healthcare.gov, spousal coverage if your spouse still works, and individual private market plans. The ACA marketplace usually offers the lowest cost for early retirees because premium tax credits are based on income, and retirees can often manage withdrawals to keep modified adjusted gross income low enough to qualify for substantial subsidies.
Key Takeaways:
– COBRA continues your employer plan for up to 18 months, but you pay 100 percent of the premium plus a 2 percent admin fee.
– ACA marketplace premium tax credits are based on modified adjusted gross income relative to the federal poverty level.
– Fidelity estimates a 65 year old retiring today will spend $172,500 on retirement healthcare, not counting long-term care.
– Health Savings Accounts (HSAs) are the most tax-advantaged account in the code: tax-deductible going in, tax-free growth, tax-free withdrawals for qualified medical expenses.
– The 2026 HSA contribution limit is $4,400 individual and $8,750 family, plus a $1,000 catch-up for those 55 and older.
How long is the gap between early retirement and Medicare?
Medicare eligibility begins at age 65 for most people. Anyone retiring before 65 needs alternative coverage to bridge the gap.
– Retire at 64: 1 year gap
– Retire at 62: 3 year gap
– Retire at 60: 5 year gap
– Retire at 55: 10 year gap
The cost of bridging this gap is one of the largest variables in early retirement planning.
What is COBRA and how does it work?
COBRA is a federal law that lets workers continue their employer health insurance for up to 18 months after leaving the job. The retiree pays 100 percent of the premium plus a 2 percent administrative fee.
For a family plan, COBRA typically runs $1,800 to $2,500 per month. It’s the simplest option but rarely the cheapest. COBRA is useful primarily as a bridge to other coverage, not as the long-term solution.
How do ACA marketplace plans work for early retirees?
The Affordable Care Act marketplace offers individual health plans with income-based premium tax credits. The credits reduce monthly premiums for households below certain income thresholds.
For early retirees, managing modified adjusted gross income (MAGI) can preserve the credits. Withdrawing from a Roth IRA or taxable brokerage account in early retirement keeps reported income low. Withdrawing from a traditional IRA increases income and may reduce or eliminate the subsidy.
How much can ACA subsidies save?
Substantial amounts. A couple in their early 60s with $60,000 of MAGI in 2026 may qualify for thousands of dollars in monthly premium credits, depending on state and plan choice. The same couple with $120,000 of MAGI typically qualifies for far less.
For early retirees with control over which accounts they withdraw from, optimizing for ACA subsidies in the gap years can save tens of thousands of dollars across the bridge.
Should you stay on a working spouse’s plan?
Yes, if available. Spousal coverage is usually the cheapest option because the employer continues to subsidize the premium.
If only one spouse retires early and the other continues working with employer coverage, this is
typically the simplest and lowest-cost solution.
What is a Health Savings Account?
A Health Savings Account (HSA) is a tax-advantaged account available to anyone enrolled in a qualified high-deductible health plan. The IRS sets the 2026 contribution limits at $4,400 individual and $8,750 family, with an additional $1,000 catch-up for those 55 and older.
HSAs have three tax advantages:
1. Contributions are tax-deductible
2. Growth is tax-free
3. Qualified medical withdrawals are tax-free
After age 65, HSA funds can be used for any purpose without penalty. Non-medical use is taxable like a traditional IRA, but medical use stays tax-free at any age.
How do you use an HSA for retirement healthcare?
Three strategies work:
1. Contribute the maximum during working years and let it grow
2. Pay current medical expenses out of pocket and save receipts. After retirement, reimburse yourself tax-free from the HSA using those old receipts.
3. Use the HSA to pay Medicare premiums after age 65. Medicare premiums are a qualified medical expense.
Can you delay Medicare to keep using an HSA?
Yes, but with caveats. Enrolling in Medicare at 65 ends HSA contributions. Some workers delay Medicare enrollment past 65 to continue HSA contributions if they remain on an HSA-eligible employer plan.
This only works if you stay on the qualified high-deductible plan and have not already started Social Security (which automatically enrolls you in Medicare Part A).
Common Mistakes:
1. Defaulting to COBRA without comparing ACA marketplace alternatives
2. Withdrawing too much from traditional IRAs in early retirement and losing ACA subsidies
3. Failing to maximize HSA contributions in working years
4. Enrolling in Medicare automatically at 65 without considering HSA implications
5. Underestimating total healthcare costs in early retirement planning
Frequently Asked Questions
Can I get on Medicare before 65?
Generally no, except for certain disabilities or end-stage renal disease.
Is COBRA worth it?
Usually only as a short-term bridge. After 18 months it expires, and ACA plans are typically cheaper.
Do I need to use my employer's plan for COBRA?
COBRA continues your existing employer plan, so yes. You can’t switch plans through COBRA.
Can I have an HSA after 65?
You can keep an HSA after 65 and continue to use it for qualified medical expenses. You cannot contribute to it once enrolled in Medicare.
How much does ACA cost without subsidies?
For a couple in their early 60s, full-price ACA plans typically run $1,500 to $2,500 per month depending on state and plan level.
About the Author
Kurt Supe is a CPA and Senior Partner at Creative Financial Group, an Indianapolis-based retirement planning firm. CFG has worked with retirees and pre-retirees for nearly 30 years, managing over 600M dollars in assets across 1,500 households. Kurt contributes to MarketWatch on retirement and tax planning topics.
This is not financial advice. Consult a qualified professional before making any financial decisions. Scenarios are hypothetical and for illustrative purposes only.