Bridging the gap to Medicare

For anyone leaving work before 65 · a five-minute read · Tatiana Andrea Real

Medicare starts at 65. Stop working at 62 and that’s three years you have to cover yourself. It also lands in the most expensive stretch of coverage in most people’s lives, because premiums rise with age.

The good news first: leaving a job-based plan opens a special enrollment window, so you don’t have to wait for Open Enrollment to retire. You generally have 60 days.

You have three ways across. COBRA keeps the plan you know, but you pay the entire premium yourself plus up to a two percent administrative fee, which comes to as much as 102 percent of what the plan costs. A Marketplace plan with a premium tax credit is usually the cheapest route for a retiree with moderate income. A medically underwritten private plan can beat both if you’re healthy and your income is too high for a credit.

Now the part that belongs in the same room as your financial advisor. The Marketplace credit is based on your modified adjusted gross income, and for a retiree that number is mostly a decision, not a fact.

It counts most IRA and 401(k) withdrawals, pension income, capital gains, interest and dividends including tax-exempt interest, and Social Security. That last one counts in full, the taxable and the non-taxable parts alike. It doesn’t count qualified distributions from a Roth account.

Read that list again and the lever shows itself. Twenty thousand dollars out of a traditional IRA and twenty thousand out of a Roth are the same money in your pocket and a completely different subsidy. Which account you draw from between retirement and 65 can change what your coverage costs you for years.

The Social Security timing trap. Claiming early cuts your monthly benefit for life, and the whole benefit still lands in the income the Marketplace counts, including the part you never pay tax on. Advisors model the benefit cut. Fewer model what it does to three years of health premiums.

What to have ready before you sit down with either of us. Your planned last day of work. A list of your accounts and how each one is taxed: traditional, Roth, brokerage, HSA. A rough income figure for every year until you turn 65, not only the first one. Any pension or annuity start date. Whether you plan to claim Social Security before 65. The doctors and prescriptions you aren’t willing to give up. And your spouse’s age, because if they’re younger than you, the gap doesn’t close when yours does.

Then there’s the handoff at 65, and this one has teeth. Your Medicare initial enrollment period runs seven months: the three months before your birthday month, that month, and the three after. Once you’re eligible for Medicare Part A, you can no longer get savings on a Marketplace plan. And the Marketplace plan doesn’t end on its own. You have to end it.

Keep taking the credit past that point and you pay it back when you file. Miss the enrollment window and you may have to wait to sign up, then carry a monthly late penalty that grows the longer you waited. Put a reminder in your phone for the month you turn 64 and a half. That one reminder is worth more than most of the advice in this article.

Where I fit, and where I don’t. I’m a licensed insurance broker. I don’t tell you which account to draw from, when to claim Social Security, or how to sequence your retirement income. That’s your financial advisor’s work, and you should have one for this. What I do is hand the two of you the number: what coverage costs at each income level you’re weighing, so the tax decision and the health decision get made together instead of a year apart.