Why Early Retirement Might Cost You More Than You Bargained for in Health Care

Key Takeaways

• Leaving the workforce before age 65 can leave you exposed to major gaps in health insurance coverage and high out-of-pocket costs.

• Careful planning is essential to bridge the time between retirement and Medicare eligibility without draining your savings.

Understanding Health Insurance Gaps After Early Retirement

Retiring before 65 often sounds ideal—more freedom, more personal time, and fewer work obligations. However, there is a critical issue you cannot afford to overlook: health care. Since Medicare eligibility generally begins at age 65, retiring early means you must find and fund your own health insurance until you qualify. This gap can create significant financial strain if not properly addressed.

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How Retiring Before 65 Impacts Your Health Coverage

If you retire from a government job before reaching 65, you will lose your employer-sponsored health insurance unless you qualify for temporary continuation or other extensions. Here’s what typically happens:

• Temporary Continuation of Coverage (TCC): Available for up to 18 months after separating from federal service.

• Continuation under FEHB (Federal Employees Health Benefits) for Annuitants: Only if you meet specific retirement eligibility requirements.

• COBRA Coverage: Available for private sector retirees but often comes at a high cost.

For most, these options are either limited in duration or extremely expensive. Once these periods expire, you must secure private insurance until you reach Medicare eligibility.

Health Insurance Costs During the Coverage Gap

In 2025, private health insurance premiums for an individual policy can run into several hundreds of dollars each month. Costs are significantly higher if you want a plan that mirrors the benefits and protections you had as a government employee. In addition to premiums, you must account for:

• Deductibles before your insurance kicks in.

• Coinsurance payments for medical services.

• Copayments for doctor visits and prescriptions.

• Maximum out-of-pocket limits that could reach several thousand dollars per year.

Without planning, these costs can quickly erode your retirement savings.

Medicare Eligibility Rules to Know

Medicare generally begins at age 65. To enroll without penalties, you have a seven-month Initial Enrollment Period (IEP): three months before your 65th birthday, the month of your birthday, and three months after. Missing this window can result in lifelong penalties and delayed coverage.

Because of this structure, planning to bridge your insurance until Medicare kicks in is essential if you retire before 65.

FEHB Coverage for Retirees: A Vital Lifeline—But Only If You Qualify

If you retire under an immediate retirement—such as through MRA+10 or voluntary early retirement (VERA)—and were continuously enrolled in FEHB for at least the five years immediately before retirement, you may continue your FEHB coverage as a retiree. However, the premiums come out of your annuity, and while the government continues to subsidize part of the cost, you are still responsible for your share.

If you do not meet these conditions, your FEHB coverage ends, and you must find other insurance until Medicare eligibility.

Common Health Care Mistakes Early Retirees Make

1. Assuming FEHB Will Automatically Continue: It doesn’t unless you meet the five-year rule and retire with an immediate annuity.

2. Underestimating Health Care Costs: Premiums, deductibles, and out-of-pocket expenses add up quickly.

3. Failing to Budget for Health Care Separately: Without a dedicated health care savings plan, costs can force you to dip into retirement income sooner than planned.

4. Missing the Medicare Enrollment Window: Late enrollment can lead to higher premiums for life.

5. Not Considering Long-Term Care Needs: Early retirement increases the likelihood of needing care before Medicare covers certain services.

Strategies to Cover the Health Care Gap Until Medicare

If you are determined to retire early, there are strategies you can adopt to protect yourself from high health care costs:

• Use TCC Wisely: Time your TCC enrollment strategically to stretch coverage as long as possible.

• Shop for ACA Marketplace Plans: Depending on your retirement income, you may qualify for lower-cost plans.

• Budget for Health Care in Your Retirement Plan: Set aside a specific fund just for health insurance and medical expenses.

• Part-Time Work with Benefits: Some retirees work part-time jobs that offer affordable group health insurance.

• Health Savings Accounts (HSAs): If you have an HSA, you can use it tax-free for qualified medical expenses in retirement.

Impact of Early Retirement on Health Care Beyond Age 65

Even once you reach Medicare eligibility, early retirement can have lingering effects. If you drain your savings to cover health care costs before 65, you may have fewer resources available for:

• Medicare Part B premiums (which increase annually).

• Medicare Supplement (Medigap) plans to cover costs Medicare doesn’t.

• Prescription drug plans with separate premiums and out-of-pocket costs.

• Long-term care insurance or services not covered by Medicare.

Public Sector Employees: Special Health Care Considerations

Government employees often have strong health benefits, but these benefits must be preserved through careful retirement planning. Special considerations include:

• Eligibility for FEHB in Retirement: Confirm your five-year continuous enrollment.

• Survivor Benefits: Ensure you plan for your spouse’s health insurance needs.

• Medicare Coordination: Know how your FEHB and Medicare will work together once you are eligible.

• Post-Retirement Increases in Premiums: Expect annual increases in FEHB premiums, which can impact your retirement budget.

Financial Risks of Early Retirement Without Health Care Planning

Health care inflation continues to outpace general inflation. A single uninsured or underinsured medical event—such as an emergency surgery or extended hospital stay—can devastate your retirement savings.

Without proper insurance, you risk:

• Paying full price for treatments.

• Losing your financial independence.

• Forcing an early drawdown on your retirement accounts.

• Facing medical debt in retirement.

Timeline to Prepare for Health Care Costs Before Early Retirement

If you are planning to retire early, use this general timeline to prepare:

• 5 Years Before Target Retirement: Review FEHB enrollment history. Open a Health Savings Account if eligible.

• 3 Years Before Target Retirement: Begin estimating annual health care costs post-retirement. Research private insurance options.

• 2 Years Before Target Retirement: Identify income streams and set aside a health care fund.

• 1 Year Before Target Retirement: Apply for TCC or other transitional options. Consider a part-time job with benefits if needed.

• 6 Months Before Retirement: Confirm all paperwork for continued FEHB or private insurance is submitted.

• At Retirement: Implement your health care funding strategy immediately.

Questions to Ask Yourself Before Early Retirement

• Am I eligible to continue FEHB as a retiree?

• Do I have enough savings set aside specifically for health care costs?

• Have I factored in the cost of health insurance premiums, deductibles, and copays?

• What will I do if private insurance costs more than expected?

• How will I cover health care costs between retirement and age 65?

• Have I considered how my decision affects my spouse’s health coverage?

• Do I have a backup plan if health care expenses are higher than anticipated?

Taking Control of Your Health Care Planning

Early retirement is a major life decision. When health care costs are not properly anticipated and funded, they can seriously undermine even the best-laid retirement plans. That’s why it is critical to prepare thoroughly, understand your benefits, and take proactive steps to bridge the gap between early retirement and Medicare.

If you are planning to retire before 65, now is the time to consult with a licensed professional listed on this website who can help you map out a sustainable health care strategy.