Why healthcare planning matters before age 65

Retiring before Medicare eligibility (generally age 65) creates a coverage gap and a material financial risk. Healthcare is often one of the largest non‑housing expenses in retirement; many studies and industry reports show it can consume a meaningful share of retirement spending and erode nest eggs if unplanned (see EBRI and Kaiser Family Foundation summaries). Even if you’re healthy at retirement, unexpected events, chronic conditions, and price inflation for medical services can quickly raise out‑of‑pocket costs.

This guide gives practical, actionable steps you can use to model costs, choose coverage, and build a tax‑efficient funding plan for healthcare in early retirement. It does not replace personalized advice from a financial planner, tax professional, or licensed insurance agent.

Sources: Employee Benefit Research Institute (EBRI); Kaiser Family Foundation (KFF); U.S. Department of Health and Human Services (HHS); Internal Revenue Service (IRS).

Key components of an effective plan

  1. Project realistic healthcare spending
  • Start with current out‑of‑pocket spending (premiums, deductibles, copays, prescriptions, dental/vision, hearing) and escalate for age and medical inflation. A commonly used planning assumption is to apply an annual health‑care cost escalation rate when projecting decades ahead; choose a conservative rate (for example, 3–6%) and run sensitivity scenarios at higher and lower rates.
  • Model multiple scenarios: low‑cost (healthy, little utilization), moderate‑cost (routine care, some specialty visits), and high‑cost (major illness or high prescription costs). Use at least one downside scenario that assumes a major health event.
  1. Know your coverage options for the pre‑65 period
  • Employer coverage continuation (COBRA): Available in many situations for up to 18 months after leaving a job, but premiums are often the full group premium plus an administrative fee. COBRA is reliable for continuity of care but can be expensive.
  • Marketplace (ACA) plans: Depending on your household income, you may qualify for premium tax credits that make individual plans more affordable. Marketplace plans vary widely by metal level (Bronze–Platinum) and provider networks.
  • Spousal or family coverage: Staying on a spouse’s employer plan can be the most cost‑effective solution for some early retirees.
  • Part‑time work with benefits: Some retirees take reduced‑hours roles that include employer health benefits as a bridge to Medicare.
  • Short‑term or limited‑benefit plans: These can have gaps and are not guaranteed to cover pre‑existing conditions—use caution.
  1. Use tax‑advantaged accounts wisely
  • Health Savings Accounts (HSAs): HSAs offer triple tax advantages when you qualify (pre‑tax or tax‑deductible contributions, tax‑free growth, tax‑free withdrawals for qualified medical expenses). They’re a powerful tool to accumulate tax‑efficient reserves for healthcare in retirement. Note: HSAs require enrollment in a high‑deductible health plan (HDHP) to contribute; the IRS publishes annual contribution limits—check current IRS guidance for the year you contribute.
  • Roth and traditional retirement accounts: Consider whether using Roth conversions or tax‑efficient withdrawals can help manage future Medicare Part B/D/IRMAA exposure (income affects Medicare premiums). Consult a tax advisor about timing.
  1. Address long‑term care (LTC) risk
  • Medicare generally does not cover custodial long‑term care (home health aides, assisted living). Options to consider include long‑term care insurance, hybrid life/LTC policies, self‑funding from a designated bucket, or combinations of these approaches. Start LTC planning early—premiums and underwriting are better when you are younger and healthier.
  1. Maintain flexibility and review annually
  • Healthcare needs, family status, and plan options change. Revisit assumptions, coverage, and funding strategies annually and whenever health, employment, or income changes.

Practical steps: a checklist you can follow today

  1. Build a current baseline
  • Total last 12 months of healthcare spending (premiums + out‑of‑pocket). Include dental, vision, hearing, OTC that you routinely buy, and transportation to care if material.
  1. Create three forward scenarios (low, medium, high)
  • Apply a sensible escalation assumption for medical cost inflation and include likely events (new prescriptions, specialist visits). Use higher estimates for late‑60s and beyond.
  1. Map coverage pathways from retirement to Medicare
  • Identify the most likely coverage route: COBRA, Marketplace, spouse’s plan, part‑time employer, or self‑insured. Estimate premiums and out‑of‑pocket max for each option.
  1. Fund a healthcare reserve
  • Decide on a target reserve (e.g., cover 2–5 years of projected pre‑Medicare healthcare costs, depending on risk tolerance). You can use a liquid emergency bucket for near‑term costs and an HSA for longer‑term tax‑advantaged savings.
  1. Evaluate long‑term care funding
  • Get price quotes for LTC insurance or hybrids. Compare those premiums and benefits to a self‑insured reserve strategy.
  1. Integrate planning with your retirement income strategy
  • Consider how withdrawals, Social Security timing, and Roth conversions affect taxable income and future Medicare premiums.

Real examples and common pitfalls

Illustrative example (not advice): A couple retiring at 62 assumed Medicare would cover most costs at age 65 and did not build a 3‑year bridge reserve. They elected COBRA for continuity and paid high premiums; unplanned specialist care and medications increased their annual health cash needs by $6–8k, which strained their withdrawal plan. After adjusting the plan to use a conservative escalation rate and building a three‑year HSA/short‑term reserve, they regained confidence in their spending plan.

Common mistakes:

  • Assuming Medicare eliminates health costs. Medicare has premiums, deductibles, coinsurance, and significant gaps (dental, vision, hearing, long‑term care).
  • Waiting too long to buy LTC insurance; underwriting becomes restrictive as health declines.
  • Ignoring income‑driven effects on Medicare premiums—your provisional income can increase Part B/Part D premiums or trigger IRMAA adjustments.

Tools and calculations to use

How to talk with advisors

  • Ask a fee‑only financial planner to run healthcare‑inclusive Monte Carlo or cash‑flow scenarios. Request sensitivity tests for medical inflation and a severe health event.
  • Consult a licensed insurance agent about Marketplace options, COBRA rules, and LTC product underwriting.
  • Speak with a tax advisor before large Roth conversions or HSA distributions to understand Medicare premium interactions and tax consequences.

Quick reference: authoritative resources

  • Kaiser Family Foundation (KFF) — state and national health expenditure data and pre‑Medicare cost studies.
  • Employee Benefit Research Institute (EBRI) — reports on retirement and health spending.
  • Centers for Medicare & Medicaid Services (CMS) — official Medicare rules, coverage, and enrollment periods.
  • IRS — HSA rules and contribution limits (check the IRS website for current annual limits).

Links: CMS/Medicare official site (medicare.gov); IRS HSA topic pages (irs.gov).

Professional disclaimer

This article is educational and general in nature. It is not personalized financial, tax, or medical advice. For tailored guidance, consult a certified financial planner, CPA/tax advisor, and licensed insurance professional who can evaluate your specific situation.

Prepared by a financial planning professional for FinHelp.io. All sources and links cited were checked for reliability; check the original agencies (IRS, CMS, KFF, EBRI) for the latest figures and rules before making decisions.