Overview
Retiring before Medicare eligibility (generally age 65) and before you can safely rely on full Social Security benefits creates a planning gap many people call the “retirement bridge.” This period requires deliberate choices about health coverage, taxable income, and how you withdraw or convert retirement savings. In my 15+ years advising clients, the households that plan bridges early — often 3–5 years before retirement — avoid the biggest costs and tax mistakes.
Key planning principles are straightforward: secure credible short‑term health coverage, create a tax‑efficient income sequence, preserve emergency liquidity, and protect long‑term retirement assets through targeted conversions and timing of Social Security. The sections below walk through workable options, pros and cons, tax rules to watch, and a practical checklist.
Health coverage options and rules to know
- COBRA: If you leave an employer with group coverage, COBRA typically extends the same plan for up to 18 months (sometimes longer for dependents or qualifying events). COBRA keeps existing benefits intact but can be costly because you pay the full premium plus an administrative fee (U.S. Department of Labor guidance).
- ACA Marketplace: You can shop for individual plans on the Health Insurance Marketplace and may qualify for premium tax credits based on income (see Healthcare.gov). Subsidies can make marketplace plans much cheaper during low‑income early retirement years.
- Spouse’s employer plan or retiree coverage: Joining a spouse’s plan or a company retiree plan can be the most cost‑effective route when available.
- Short‑term limited duration plans and health‑sharing ministries: These may be cheaper but often exclude pre‑existing conditions and do not meet ACA standards; treat them as high‑risk alternatives.
- Medicaid and Medicare Savings Programs: If income and assets are low, Medicaid or state Medicare Savings Programs can provide coverage or help pay Medicare premiums (see state Medicaid offices and Medicare.gov). Medicare Savings Program guide).
Important: Medicare eligibility begins at 65 (Part A and Part B enrollment rules apply), and late enrollment can cause lifetime Part B premium penalties unless you have qualifying coverage or a Special Enrollment Period (Medicare.gov).
For detailed enrollment timing and paperwork, see our internal guide: Medicare Enrollment Planning and the broader Medicare Planning) article.
Income strategies to bridge the gap
- Withdrawal sequencing (taxable, tax‑deferred, tax‑free)
- Typical tax‑efficient sequencing: spend from taxable (after‑tax brokerage) accounts first, then tax‑deferred accounts (IRAs/401(k)s), and preserve Roth assets for later tax flexibility. That order can reduce early years’ taxable income and make you eligible for Marketplace subsidies.
- Caveat: If converting to Roths, you may intentionally take taxable income now to reduce future required minimum distributions (RMDs) and tax drag.
- Roth conversion ladder
- Convert traditional IRA/401(k) funds to Roth IRA during low‑income years to lock in lower tax rates and shrink future RMDs. Conversions are taxed as ordinary income in the year of conversion. Roth IRAs grow tax‑free; converted funds must generally sit five years before penalty‑free withdrawal of converted amounts for younger retirees.
- 72(t) substantially equal periodic payments (SEPP)
- Rule 72(t) allows penalty‑free early withdrawals from IRAs/401(k)s before age 59½ if you take carefully calculated periodic payments for at least five years or until age 59½, whichever is longer. Use with caution—payments are inflexible and subject to complex rules (IRS guidance for Section 72(t)).
- Part‑time or contract work
- Earning modest, flexible income reduces portfolio withdrawals and can preserve eligibility for subsidies (because Marketplace subsidies are income‑based). Part‑time work also maintains Social Security credits and may offer employer health coverage.
- Annuities and guaranteed income
- Immediate annuities or laddered fixed‑income products can provide predictable cash flow. Understand fees, inflation risk, and surrender terms; annuities are best when you need longevity insurance, not short bridges.
- Home equity strategies (reverse mortgage or HELOC)
- These can provide liquidity but come with costs and complexity; evaluate carefully with a fiduciary.
Tax, timing, and Social Security considerations
- Social Security earliest age is 62; claiming at 62 reduces benefits permanently compared with claiming at your Full Retirement Age (FRA) or delaying to 70 (Social Security Administration guidance). Determine your FRA (generally 66–67, depending on birth year) and model survivor and longevity effects.
- Early retirement often lowers taxable income for several years; use that window to do Roth conversions or harvest long‑term capital gains at preferential rates (IRS tax brackets and long‑term capital gains rules).
- Keep an eye on the Affordable Care Act subsidy cliff: small increases in income can reduce premium tax credits; plan withdrawals and conversions to stay within subsidy‑friendly bands if needed.
Liquidity and emergency planning
- Maintain a cash or short‑duration bond buffer equivalent to 6–24 months of expected expenses during the bridge; this prevents forced sales in a market downturn.
- If you rely on a Roth conversion ladder, ensure you keep enough liquid post‑tax cash to pay the tax bill when conversions occur.
Practical checklist (timeline approach)
- 3–5 years before retirement: project retirement income needs, estimate healthcare costs, and run Social Security claiming scenarios.
- 2–3 years before: build a cash buffer, identify health coverage options (COBRA, spouse plan, Marketplace), and consult a tax pro about Roth conversion windows.
- 12 months before: finalize health plan enrollment triggers, confirm COBRA dates and Marketplace enrollment periods, and test withdrawal sequencing in a retirement cash‑flow model.
- Ongoing: monitor Medicare enrollment windows and keep records for any Special Enrollment Periods.
Real‑world examples (anonymized)
- Case A: A 58‑year‑old client used 18 months of COBRA while taking modest IRA distributions and doing two years of targeted Roth conversions. The conversions were taxed in lower brackets and reduced RMD pressure later; Marketplace premiums were kept low because other income was controlled.
- Case B: A 60‑year‑old couple with a low‑expense lifestyle relied on taxable account withdrawals for three years, preserving tax‑deferred assets for later. They avoided the Medicare late‑enrollment penalty by coordinating retiree coverage and timely Part B sign‑up.
Common mistakes to avoid
- Underestimating health care costs and timing enrollment windows for Medicare (Medicare.gov).
- Taking large, untimed IRA withdrawals that push you into higher tax brackets and reduce subsidies.
- Ignoring the 5‑year rule on Roth conversions when you expect to access converted funds early.
Frequently asked (brief answers)
- Can I get premium help on the Marketplace while retired? Yes—premium tax credits are based on household income in the year you enroll; low‑income early retirees often qualify (Healthcare.gov).
- Is COBRA always the best option? Not necessarily; COBRA preserves benefits but can be expensive. Compare COBRA, Marketplace plans, and spouse/retiree plans for coverage and cost.
Where to learn more and internal resources
- For enrollment timing and Medicare paperwork, see our guides: Medicare Enrollment Planning and Medicare Planning.
- For low‑income protections and assistance programs, read Medicare Savings Program).
Sources and rules (authoritative references)
- Social Security Administration — claiming ages and Full Retirement Age guidance (ssa.gov).
- Medicare.gov — Medicare eligibility, Part A/B enrollment rules, and penalties.
- Healthcare.gov — Marketplace plans and premium tax credit rules.
- Internal Revenue Service — rules on Roth conversions, 72(t) distributions, and HSA tax treatment (irs.gov).
Professional note and disclaimer
In my practice I recommend running multiple retirement cash‑flow scenarios before taking taxable actions like large Roth conversions or 72(t) elections. This article is educational and not individualized tax or investment advice. Consult a qualified CFP® or tax professional before executing a bridging plan.
Prepared using current guidance from federal agencies (Social Security Administration, Medicare, IRS) as of 2025.
