Early retirement: Bridging the gap until Medicare

“Early retirement is a significant milestone, but it’s crucial to have a robust health care strategy in place,” said Vanguard wealth planning strategist Stephen M. Weber, CFP^®, CLTC^®, lead author of the recent Vanguard white paper, Six Steps to Creating a Health-Aware Retirement Plan. “Understanding and preparing for the financial and logistical aspects of health care can make all the difference in ensuring a secure and enjoyable retirement.” According to Weber, this is true when retiring early by choice, or when leaving the workforce for other reasons, such as poor health or a job loss.

When making decisions about health care needs as an early retiree, an investor should consider two key factors: their current health status and their preferences for care. People with poor health may prioritize access to specific providers, coverage for chronic conditions, and the possible need for long-term care as part of their planning.

Choosing a caregiver is another critical consideration, often influenced by a combination of personal preference and financial feasibility. Paid options such as home health aides, adult day care, or continuing care retirement communities (CCRCs) may work for some, while others may choose unpaid support from a spouse, other family members, or friends.

Regardless of the care scenarios and supports they choose, investors should make sure to communicate their preferences clearly to those who need to know. They should also grant access to important documents for chosen representatives and make sure that caregivers are authorized to make decisions on their behalf.

Individuals aren’t eligible for Medicare coverage until age 65. Early retirees and their nonworking spouses should consider a transition strategy to bridge health care coverage from retirement to age 65.
 

Most early retirees can access coverage through the public health insurance marketplace. The most commonly selected options are the Bronze plan (31% of enrollees) and Silver plan (54% of enrollees).¹ The premiums for these plans for a 64-year-old can exceed four times the cost of most Medicare coverage at age 65.² (See the table below for details about specific Medicare plans.)

The good news is that many retirees can access this coverage at a subsidized rate. During 2024 open enrollment, 92% of enrollees had their premiums reduced by Affordable Care Act tax credits.³ These credits are available to individuals and families with incomes at or above the federal poverty level who purchase coverage in their state’s health insurance marketplace. 

Expected premium contributions at different 2025 income levels
 

There’s also no maximum income limit for the premium tax credit through the end of the 2025 coverage year. People qualify if the benchmark premium (the premium cost of the second-lowest-priced Silver plan available in their state) costs more than 8.5% of their household income. However, current law caps subsidies for households over 400% of the poverty line after 2025. 
 

17% of large employers offer retiree health benefits, according to Mercer Health & Benefits, which partnered with Vanguard for the 2024 National Survey of Employer-Sponsored Health Plans. These plans cover about 40% of the cost of pre-Medicare insurance, on average.

The Mercer-Vanguard health care cost model projects that a typical 64-year-old retiree could pay about $8,600 in annual premiums for employer-sponsored coverage.⁴ Retirees with access to an employer plan should still compare the plan’s premium with the potential costs of public marketplace insurance to ensure it’s the best choice for their situation.

“While the dream of early retirement is appealing, the transition to Medicare can be a complex journey,” Weber said. “Planning for early retirement requires a comprehensive approach to health care.”

A thorough look at potential costs can help early retirees get a handle on the financial implications of health care costs during these transition years. Insurance premiums, deductibles, out-of-pocket expenses, and incidental costs for unpaid care (such as home modifications to enable aging in place) can all affect income.

The knowledge gleaned from this assessment can enable investors to view these costs as ordinary recurring expenses. That way, the costs can be built into a retirement income plan, like the costs of housing, food, and transportation.

Less easy to anticipate are the costs associated with long-term care, which almost half of all people will need to some extent.⁵ These expenses can vary dramatically, depending on the type of care needed and the duration, and they aren’t covered by medical insurance.

Investors can develop worst-case scenarios for long-term care outcomes and integrate them into their retirement plan with the help of an advisor, who can help fine-tune the details. This partnership may be particularly useful if poor health is driving the early-retirement decision.

The ultimate goal for investors is to assess how health care costs in early retirement will affect their income. That includes the potential needs of a nonworking spouse. To address identified shortfalls, an investor may consider:

• An adjusted investment strategy.
• An increase in savings.
• Additional contributions to a health savings account.
• Alternative income sources to cover long-term-care costs. 

Once an investor has decided on the health care strategy for early retirement, the strategy will need to be put into action. Key steps may include:

• Enrollment in a private insurance plan.
• Review and revision of important documents.
• Home modifications for aging in place.
• CCRC visits. (Best practice is to get added to CCRC waitlists while still in good health.)
• Identifying solutions to cover long-term care.

“A well-thought-out strategy can help give investors the reassurance that they’re prepared, which can enable them to make the most of their early retirement,” Weber said.