Health insurance before Medicare: planning coverage for early retirement

For Americans planning to retire before 65, health insurance is often the largest uncertainty in the budget. Medicare eligibility generally begins at 65, so anyone who leaves employer coverage earlier needs another source. This guide outlines the main options, points to official sources for current rules, and explains how to build coverage costs into your FIRE number. It is general information about insurance costs and planning, not medical or insurance advice; plan details and prices vary by state, age and household.

Why it matters for your FIRE number

Health coverage before Medicare can cost thousands of dollars a year per person in premiums, plus deductibles and out-of-pocket costs. Because your FIRE number is roughly 25× spending at a 4% withdrawal rate, every $1,000 of yearly health costs adds about $25,000 to the target. Getting the estimate right — and understanding what drives it — is worth the effort.

Option 1: Marketplace (HealthCare.gov or a state exchange)

The Health Insurance Marketplace sells individual and family plans. HealthCare.gov explains that the premium tax credit lowers monthly premiums for eligible households, and that the credit is based on household information and the estimated income you enter on your application. Its glossary states that households with income between 100% and 400% of the federal poverty level qualify for the premium tax credit in all states; check the current page for eligibility details, because rules can change by law.

For early retirees, “income” for this purpose is not the same as spending. HealthCare.gov explains how to estimate and report income, and it generally includes items such as taxable investment income and taxable retirement withdrawals. That means your withdrawal strategy — how much comes from taxable accounts, traditional accounts, Roth accounts or cash — can affect your premium tax credit. Many FIRE planners model this carefully. Because the credit is reconciled on your tax return, estimating income accurately matters.

Option 2: COBRA continuation

COBRA, explained by the U.S. Department of Labor, allows many workers and families to continue group health coverage for a limited period after leaving a job, usually by paying the full premium plus an administrative charge. It keeps your existing doctors and plan, which can be valuable mid-treatment or mid-year after meeting a deductible, but it is often expensive because the employer no longer contributes. It is usually a bridge, not a long-term solution.

Option 3: A spouse’s or partner’s employer plan

If one partner continues working, family coverage through that employer can be the simplest and often the cheapest route. Some couples time the second retirement to coincide with Medicare eligibility for this reason.

Option 4: Part-time work with benefits

Some employers offer health benefits to part-time staff. This is the origin of the “Barista FIRE” name. Part-time income also reduces how much the portfolio must supply. Use the Barista FIRE calculator to see the effect on your target.

Option 5: Other arrangements

Other routes exist, such as coverage through professional associations or retiree plans from former employers. Some people consider arrangements that are not insurance, such as health-care sharing ministries; these are not regulated as insurance and may not cover the same costs. Read the terms carefully and compare against Marketplace plans.

Health savings accounts

If you have a high-deductible health plan, IRS Publication 969 explains that you can contribute to an HSA and withdraw tax-free for qualified medical expenses. For 2026 the IRS lists HSA contribution limits of $4,400 for self-only coverage and $8,750 for family coverage, with an extra $1,000 for those 55 and older. Building an HSA balance during working years can help fund out-of-pocket costs in early retirement.

Budgeting: a practical approach

1. Get real quotes. Use HealthCare.gov’s plan preview with your ZIP code, ages and an estimate of retirement income. Note premiums with and without the premium tax credit.
2. Add out-of-pocket costs. Include a realistic estimate of deductibles and copays — some people budget the plan’s out-of-pocket maximum in a bad year.
3. Include it in spending. Add the yearly total to the spending you enter in the FIRE number calculator.
4. Stress-test. Run your plan without the premium tax credit to see how sensitive it is to rule changes.
5. Plan the Medicare transition. Medicare.gov explains when you can sign up and how parts A, B and D work. Costs continue after 65, though usually differently.

Interactions with withdrawals and Roth conversions

Because Marketplace subsidies depend on income, strategies like Roth conversions (see our early-access guide) can raise reported income and reduce subsidies in the same year. Some early retirees balance conversion amounts against premium tax credit effects; others prioritise conversions and accept higher premiums. This is a trade-off worth modelling with a tax professional.

Common mistakes

• Using today’s employer premium contribution as a guide — the employer usually pays most of the cost.
• Forgetting that income for subsidy purposes includes some withdrawals and investment income.
• Ignoring out-of-pocket maximums.
• Assuming rules will stay the same for decades.

An illustration of the effect on your target

Suppose a couple’s core spending is $50,000 a year and they estimate $12,000 a year for premiums and typical out-of-pocket costs before Medicare. Ignoring health costs, their FIRE number at 4% is $1,250,000. Including them, spending becomes $62,000 and the number becomes $1,550,000 — a $300,000 difference. If the costs fall away at 65 when Medicare begins, they might instead hold a separate bridge amount for the pre-Medicare years rather than raising the whole target. Either way, leaving health costs out entirely would understate their needs significantly.

Questions to ask when comparing plans

• What is the monthly premium before and after any premium tax credit at your estimated income?
• What are the deductible and the out-of-pocket maximum?
• Are your current doctors and prescriptions covered in the plan’s network and formulary?
• Is the plan HSA-eligible?

Writing the answers down for two or three plans each autumn gives you a realistic range to use in your budget.

Summary

Health insurance before 65 is a major line item for early retirees. Marketplace plans with premium tax credits, COBRA, a spouse’s plan and part-time benefits are the main routes. Get real quotes, include premiums and out-of-pocket costs in spending, and remember that your withdrawal choices can affect subsidies. This guide is educational, not insurance, tax or medical advice.