How to Retire Before 65 Without Letting Health Insurance Derail the Plan

Early retirement is often treated as an investment problem.

Workers calculate whether their portfolios can replace their salaries, sustain withdrawals and survive a prolonged market decline. They estimate travel expenses, housing costs and Social Security benefits. Health insurance is frequently left as a line item to be filled in later.

That omission can undermine an otherwise sound retirement plan.

Most Americans do not become eligible for Medicare until 65. A worker who retires at 60 may therefore need to secure five years of coverage without the employer subsidy that previously kept premiums manageable. Depending on age, location, family size and medical needs, the cost can rival a mortgage payment.

The good news is that early retirees usually have several options. Coverage may come through the Affordable Care Act marketplace, a former employer’s plan under COBRA, a working spouse’s plan or Medicaid. A health savings account can help pay qualified expenses, while careful tax planning may reduce Marketplace premiums.

The correct choice depends on more than the advertised monthly premium. Retirees must compare deductibles, provider networks, prescription coverage, income limits and the timing of the eventual transition to Medicare.

1. Start With the Affordable Care Act Marketplace

The Affordable Care Act transformed early retirement by giving people access to individual health insurance without exclusions or higher premiums based on pre-existing medical conditions.

Marketplace plans are divided into metal categories—Bronze, Silver, Gold and Platinum—based on how costs are divided between the insurer and the policyholder. The categories do not indicate the quality of the doctors or medical care. They describe the general balance between premiums and out-of-pocket expenses.

Bronze plans usually have lower premiums and higher deductibles. Gold plans generally charge more each month but cover a larger portion of medical costs. Silver plans occupy the middle and have an additional advantage: They are the only plans that can provide cost-sharing reductions for qualifying households.

Those reductions can lower deductibles, copayments and annual out-of-pocket limits. A household that selects a Bronze plan solely because of its low premium could therefore miss substantial assistance available through a Silver plan.

Early retirees should compare plans based on expected total annual cost rather than premium alone. Someone who rarely visits a physician may accept a higher deductible in exchange for lower premiums. A retiree managing cancer, diabetes, heart disease or an expensive medication may save more with a plan that has a higher premium but better cost sharing and a stronger provider network.

Networks deserve particular attention. A familiar physician or hospital may not participate in every Marketplace plan, even when several policies are sold by the same insurance company. Retirees who spend part of the year in another state should also determine whether nonemergency care will be covered outside the plan’s local network.

2. Income—not Portfolio Size—Usually Determines ACA Assistance

One of the most important features of the Marketplace is that financial assistance is based largely on household income and family size, not on the value of a retiree’s home, brokerage account or retirement portfolio.

A household could own $2 million in investments and still qualify for assistance if its Marketplace modified adjusted gross income falls within the applicable limits.

For ACA purposes, modified adjusted gross income generally begins with adjusted gross income and adds tax-exempt interest, nontaxable Social Security benefits and excluded foreign income.

That makes the source of retirement cash flow extremely important.

A $60,000 withdrawal from a traditional IRA generally increases taxable income. A qualified Roth IRA withdrawal generally does not. Spending cash that was already held in a bank account does not create income merely because the money is used. Selling investments from a taxable account may create taxable capital gains, but only the gain—not necessarily the entire sale proceeds—enters income.

The distinction gives early retirees an unusual degree of control over the income reported for Marketplace purposes.

That control is especially important in 2026 because the temporary expansion of the premium tax credit ended after 2025. Eligibility has generally returned to the rule limiting premium tax credits to households with income no higher than 400% of the federal poverty level, subject to the full eligibility requirements. A household that crosses the limit may lose the credit and may have to repay excess advance credits received during the year.

This creates what can function as a subsidy cliff. A relatively small increase in taxable income could produce a much larger increase in net insurance premiums.

Retirees near the limit should not rely on a rough income estimate prepared months earlier. Income should be reviewed throughout the year, particularly before completing Roth conversions, realizing capital gains or taking an additional retirement-account distribution.

3. Tax Planning Can Reduce Premiums—but It Involves Trade-Offs

Managing income for ACA purposes does not mean avoiding all taxable income.

The years between retirement and Medicare can also be an attractive period for Roth conversions. A retiree may have left a high-paying job but not yet begun Social Security or required minimum distributions. That temporary dip in taxable income may provide an opportunity to convert traditional retirement assets to a Roth IRA at relatively low tax rates.

The problem is that the conversion itself raises modified adjusted gross income.

A large Roth conversion could reduce or eliminate the household’s premium tax credit. The retiree may save taxes in the future while paying thousands of dollars more for health insurance today.

The correct decision requires combining both costs.

Suppose a married couple can convert an additional $30,000 while remaining in the same federal income-tax bracket. The conversion may appear inexpensive from a tax perspective. If it pushes income above an ACA assistance threshold, however, the true marginal cost includes the additional tax and the lost insurance subsidy.

That does not automatically make the conversion a mistake. Reducing future required distributions, creating tax-free assets and improving estate planning may justify the immediate cost. The decision should simply be evaluated as part of one coordinated plan.

Retirees can also manage income by alternating strategies from year to year. A household might complete a larger Roth conversion during a year covered by COBRA, then report lower income after moving to a Marketplace plan. Another may spread conversions across several years to preserve at least part of the available premium assistance.

Capital-gain harvesting, charitable contributions, business income and the timing of Social Security can also affect the calculation. The central lesson is that health-insurance planning and tax planning cannot be separated during early retirement.

4. Be Careful Not to Report Too Little Income

Lower Marketplace income can produce greater assistance, but driving income too low can create a different problem.

Medicaid eligibility varies by state, household circumstances and whether the state expanded eligibility under the Affordable Care Act. In expansion states, adults with sufficiently low income may be directed to Medicaid rather than receive a Marketplace premium tax credit. Other states have different eligibility gaps and restrictions.

Medicaid can provide valuable comprehensive coverage at little or no premium. It may also have narrower provider networks than a retiree expects, and access to particular physicians can vary substantially by location.

A retiree should not assume that the ideal strategy is to report the lowest possible income. The better objective is to understand how a projected income level affects Marketplace subsidies, cost-sharing reductions and Medicaid eligibility in the state of residence.

Income estimates also need to be honest and supportable. Marketplace savings are based on expected household income for the coverage year, not simply the previous year’s tax return. Changes should be reported when income rises or falls materially.

Underestimating income can create a tax bill when advance premium credits are reconciled. A retiree whose final income exceeds 400% of the federal poverty level in 2026 may be required to repay all advance premium tax credits received for the year.

5. COBRA Can Preserve Familiar Coverage

COBRA allows many workers and family members to temporarily remain on an employer’s group health plan after employment ends.

Coverage generally lasts as long as 18 months following a job loss or reduction in hours, although certain circumstances can extend coverage longer for qualified beneficiaries.

COBRA’s greatest advantage is continuity.

A retiree can usually keep the same insurer, medical network and prescription coverage. Deductible spending already accumulated during the year may continue to count. That can be particularly valuable for someone in the middle of cancer treatment, recovering from surgery or taking a medication that may not be covered by an available Marketplace plan.

COBRA can also serve as an effective bridge for someone retiring at 63½ who needs coverage only until Medicare begins.

The disadvantage is cost. Employers generally stop subsidizing the premium after employment ends, leaving the former employee responsible for the full price of coverage, potentially plus an administrative charge. A plan that appeared inexpensive through payroll deductions may become startlingly expensive once the employer contribution disappears.

Retirees should compare the actual COBRA premium with the net Marketplace premium after any available tax credit. They should also compare deductibles and provider networks rather than assuming the Marketplace is automatically cheaper.

COBRA has another useful feature: Qualified individuals generally have at least 60 days to elect coverage, and the election can be retroactive to the date employer coverage ended, provided the required premiums are paid. That may create a limited opportunity to evaluate immediate medical needs before deciding, although deadlines and payment requirements must be followed precisely.

6. A Working Spouse’s Plan May Be the Simplest Answer

When one spouse continues working, joining that spouse’s employer plan is often the easiest solution.

Losing other health coverage generally creates a special enrollment opportunity for an employer plan, although the employee must act within the plan’s required timeframe. The family should ask the employer’s benefits department about enrollment deadlines before the retiring spouse’s coverage ends.

A spousal plan may offer lower premiums, broader networks and lower deductibles than an individual policy. The employer may also subsidize a portion of the spouse’s premium.

That does not guarantee it is the least expensive option.

Some employers contribute generously toward employee-only coverage but very little toward spouses or dependents. Family coverage can therefore be considerably more expensive than placing the working spouse on the employer plan and the retired spouse on a Marketplace policy.

Eligibility for affordable employer coverage can also affect whether a person qualifies for a Marketplace premium tax credit. The affordability calculation and the coverage offered to family members must be evaluated before assuming the household can decline the employer plan and receive subsidies instead.

Married couples should compare at least three arrangements:

The entire household on the employer plan, each spouse on a separate plan, and both spouses on Marketplace coverage if eligible.

The least expensive premium may still not be the best choice when one plan excludes essential physicians or exposes the family to substantially higher out-of-pocket costs.

7. An HSA Can Become a Retirement Health-Care Fund

A health savings account is one of the most tax-efficient accounts available.

Eligible contributions can be deductible or made pretax through payroll. Investments grow without current taxation, and withdrawals are tax-free when used for qualified medical expenses.

Unlike a flexible spending account, an HSA balance does not generally have to be spent by the end of the year. The money can be invested and carried into retirement.

For 2026, the HSA contribution limit is $4,400 for self-only coverage and $8,750 for family coverage. Individuals age 55 or older can generally contribute an additional $1,000 catch-up amount. To contribute, the account holder must satisfy the eligibility rules, including enrollment in a qualifying high-deductible health plan.

Starting in 2026, additional Bronze and Catastrophic plans can qualify for HSA use under new federal rules, expanding the options available to some individual-market customers.

Retirees can use HSA funds for deductibles, copayments, prescriptions and many other qualified expenses. After age 65, HSA money can also generally be withdrawn for nonmedical purposes without the additional 20% penalty, though ordinary income tax applies to nonqualified withdrawals.

The account can also pay certain Medicare premiums after enrollment, including Part B and Part D premiums and Medicare Advantage premiums. It generally cannot be used tax-free for Medigap premiums.

Some workers choose to pay current medical bills from ordinary cash flow and allow the HSA to remain invested. If they retain receipts, they may reimburse themselves tax-free years later for qualified expenses incurred after the HSA was established.

That strategy can create an additional source of tax-free cash in retirement, but it requires careful recordkeeping and the ability to pay medical costs without using the account immediately.

8. Medicare Enrollment Can End HSA Eligibility

The transition from an HSA-qualified plan to Medicare requires advance planning.

A person cannot continue contributing to an HSA after Medicare coverage begins. The existing account remains available, and the money can continue to be spent on qualified expenses, but new contributions must stop.

The timing can become complicated for someone who works beyond 65 and delays Medicare. When an individual enrolls later in premium-free Part A, coverage may be retroactive by as much as six months, though not earlier than the first month of Medicare eligibility.

As a result, Medicare advises some people enrolling after 65 to stop HSA contributions six months before applying for Medicare or Social Security. Those enrolling during the normal initial period generally need to stop no later than the month before Medicare eligibility begins.

Failing to coordinate the dates can create excess HSA contributions and tax penalties.

Retirees should also avoid assuming that COBRA permits them to delay Medicare enrollment without consequence.

COBRA is not treated the same as coverage based on current employment for Medicare Part B enrollment purposes. The eight-month Part B special enrollment period generally begins when employment or active employer coverage ends, even when the retiree elects COBRA.

Someone who waits until COBRA ends could therefore miss the Part B enrollment window, experience a coverage gap and face a lifetime late-enrollment penalty.

9. Plan the Medicare Handoff Before the 65th Birthday

Medicare’s initial enrollment period generally begins three months before the month a person turns 65 and continues for seven months.

Retirees receiving Social Security may be enrolled automatically in Parts A and B. Those who delayed Social Security may need to enroll themselves.

The process should begin several months in advance. Retirees need to decide between Original Medicare and Medicare Advantage, determine whether prescription-drug coverage is needed and, when choosing Original Medicare, evaluate Medigap policies.

Coverage should be coordinated so that the Marketplace or COBRA plan ends when Medicare begins. Canceling private insurance too early can leave a gap. Keeping Marketplace coverage too long can result in paying for overlapping insurance, and eligibility for Marketplace premium assistance generally ends once a person becomes eligible for premium-free Medicare Part A.

A spouse who is younger than 65 may need to remain on the Marketplace or another private plan after the older spouse transitions to Medicare. The change in household enrollment and income can alter the younger spouse’s subsidy, making a new projection necessary.

The Cheapest Premium Is Not Always the Lowest-Cost Plan

Early retirees frequently focus on the visible monthly premium because it is predictable. Medical expenses are not.

The real cost of a plan includes premiums, deductibles, copayments, coinsurance, prescription expenses and the annual out-of-pocket maximum. It also includes the less visible cost of losing access to a trusted physician or traveling long distances for in-network care.

A healthy retiree may prefer a low-premium, HSA-eligible plan and keep enough cash to cover the deductible. A retiree with substantial medical needs may benefit from paying a higher monthly premium for lower cost sharing.

The calculation should also consider the household’s ability to absorb a worst-case year. A policy with a $7,000 out-of-pocket maximum may be manageable for a household with ample cash reserves but dangerous for one operating with little liquidity.

Premium assistance does not eliminate the need for an emergency fund. Even subsidized coverage can leave the policyholder responsible for thousands of dollars when serious medical care is required.

Health Insurance Should Be Tested Before the Retirement Date Is Set

A worker should not resign and then discover what insurance will cost.

The better approach is to obtain estimates under several retirement dates and income scenarios. A household can compare COBRA with Marketplace plans, test the effect of Roth conversions and calculate the cost of remaining employed for another year.

In some cases, the best answer will be to retire as planned.

In others, working six additional months may preserve employer coverage, allow another HSA contribution and reduce the number of months that must be financed before Medicare. A spouse may continue working primarily for benefits. A retiree may choose part-time employment that includes health insurance.

These are not failures of the retirement plan. They are evidence that the plan is accounting for one of its largest risks.

Health insurance before 65 can be expensive and administratively complicated, but it is rarely unmanageable when addressed early. The Marketplace can provide coverage and income-based assistance. COBRA can preserve continuity. A spouse’s plan can reduce costs. An HSA can create a reserve for future medical expenses.

The key is coordination.

Retirement withdrawals affect insurance subsidies. Insurance choices affect taxes. Medicare enrollment affects HSA contributions. A decision made in one area can create an unexpected cost in another.

A successful early retirement plan does not merely accumulate enough money to leave work. It builds a reliable bridge from the final employer paycheck to the first day of Medicare.

Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.

IMPORTANT DISCLOSURES:

• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.

• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.

• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.