For many people approaching retirement, one of the biggest questions is simple: Do I have enough money to retire? But answering that question involves more than looking at a portfolio balance or projected income. Healthcare coverage—and how you will pay for it before becoming eligible for Medicare—can play an important role in determining when retirement feels financially comfortable.
In my recent By Your Side Chat, I spoke with Allison Clayton, a local health insurance agent who specializes in individual health insurance, Medicare insurance and helping individuals bridge the gap between employer coverage and Medicare. Our conversation highlighted an important part of retirement planning: healthcare should not be treated as a separate conversation. It can be closely connected to income planning, tax planning, Social Security and the way retirement assets are used.
The Years Between Retirement and Medicare
Leaving the workforce often means leaving behind something that has been part of your financial life for decades: employer-sponsored health insurance. For someone retiring before age 65, that creates a period that needs to be planned for carefully. Depending on the circumstances, potential options may include COBRA, coverage through a working spouse, or an individual plan through Pennsylvania's health insurance marketplace, known as Pennie.
As Allison explained, there is no single solution that works for everyone. The first step is understanding all of the available options. COBRA, for example, allows some individuals to continue their employer-sponsored coverage for a period of time, although they may be responsible for the full cost of that coverage. For some retirees, that may still make sense depending on their circumstances and the benefits provided. A spouse's employer-sponsored plan may also be an option. This is sometimes overlooked, particularly when one spouse has historically been covered under the other's plan. If those options are not available or appropriate, Pennie may provide another avenue for coverage.
The important point is that the healthcare decision begins with understanding the choices—not assuming there is only one path.
Why Income Matters to Healthcare Costs
One of the most important connections between financial planning and healthcare planning is income. For individuals using the marketplace before Medicare, factors such as household size, location and income can affect the plans and costs available to them. Allison noted that modified adjusted gross income is an important starting point when evaluating marketplace coverage. That makes the source of retirement income especially relevant. Consider two people who both need $100,000 of annual income in retirement. If one person is drawing that income primarily from one type of account while the other is using a different combination of assets, their taxable income—and potentially their healthcare costs—could look very different.
This is why the decision about where retirement income comes from can matter just as much as the amount being withdrawn. For example, retirement may be a period when someone is considering Roth conversions, beginning Social Security or drawing from an IRA. Each decision can affect the broader income picture. If those decisions are made without considering healthcare, they may have unintended consequences for the cost or availability of coverage. That does not mean a particular strategy should automatically be avoided. Rather, it means the healthcare implications should be part of the conversation.
Planning Ahead Can Create More Options
Allison and I both agree that healthcare planning is most useful when it begins before the retirement date is right around the corner. While exact costs and marketplace rules can change, having an understanding of how the pieces work can help someone evaluate different retirement timelines.
For example, a person considering retirement at 58 may want to compare that scenario with retiring at 60 or 62. Financial planning software can help illustrate how different retirement dates, income needs and portfolio withdrawals could affect the overall picture. That can make healthcare costs part of the retirement decision rather than an unexpected expense discovered after the decision has already been made.
Allison also noted that while it can be helpful to understand the general process several years in advance, estimates become more meaningful closer to the actual coverage year because insurance costs and rules can change. The goal is not to predict an exact healthcare cost years into the future. It is to understand the range of possibilities and identify what needs to be revisited as retirement gets closer.
Social Security and RMDs Add Another Layer
Healthcare planning does not stop once retirement begins. Social Security can change the amount of income that needs to come from a portfolio. Required minimum distributions, or RMDs, can also become an important part of the income picture later in retirement. These changes can affect healthcare planning as circumstances evolve.
For couples, there can be an additional layer of complexity when one spouse becomes eligible for Medicare while the other remains below Medicare age. The younger spouse may need to continue coverage through an existing marketplace plan, COBRA or another available option. When that happens, the household's healthcare situation can change even though only one person's coverage has changed.
These are all examples of why maintaining ongoing communication matters. Retirement planning is not a one-time calculation. Income needs, healthcare coverage and tax considerations can all evolve over time.
Be Mindful of Changes in Income
One of the most important practical points from our conversation was the need to communicate when income changes.
Someone receiving marketplace tax credits may have estimated their income for the year based on a particular retirement strategy. If they later take an unexpected IRA withdrawal or experience another change in income, that may affect their marketplace calculation.
Allison explained that marketplace coverage uses income information and that changes may need to be reported. There can also be a reconciliation process when actual annual income is ultimately determined.
For someone close to an income threshold, an unexpected withdrawal could therefore have consequences beyond the immediate need for cash.
This is where coordination can be particularly valuable. If you know you may need to make a large withdrawal for a home project, major purchase or other expense, discussing it in advance can help the financial planning and healthcare conversations happen together.
HSAs Can Be Another Piece of the Conversation
Health savings accounts (HSAs), for individuals who are eligible for an HSA-qualified plan, can offer tax advantages and provide a way to set aside funds for qualified healthcare expenses. However, Allison emphasized that HSA funds generally cannot be used to pay the premiums for standard Pennie marketplace plans. There are other situations in which HSA funds may be used toward certain healthcare costs, including eligible COBRA or Medicare premiums, subject to applicable rules.
The broader planning point is that an HSA should not be viewed in isolation. If you are eligible to contribute to one, it can be worth discussing how it fits into your overall retirement and tax strategy.
Healthcare Belongs in the Retirement Conversation
Retirement planning is about more than determining whether your investments can support your desired lifestyle. It is about understanding the different moving parts that can influence that plan over time. Healthcare is one of those moving parts.
For someone retiring before 65, the years between employer-sponsored coverage and Medicare may require thoughtful coordination. The right approach can depend on household circumstances, available coverage, income, taxes, timing and individual healthcare needs.
Conversations between your financial planning team and healthcare professional can be valuable. Rather than looking at retirement, taxes and healthcare as separate decisions, bringing those conversations together can help create a more complete picture.
Most importantly, don't let an assumed healthcare cost become the reason you postpone a retirement decision without first exploring the options available to you. At the same time, don't assume the cost will be lower than it actually is. Understanding your choices and incorporating them into your broader plan can provide a more informed starting point.
Retirement is a significant transition. Planning for the healthcare years before Medicare can help make sure an important part of that transition is considered alongside the rest of your financial life.
*Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.