Retiring Before 65? Here Are Your Four Healthcare Options — and How to Choose

https://www.youtube.com/watch?v=rBphe8sJ2r8

August 2026 Blog

Why Healthcare Keeps Pre-Retirees at Their Desks

David and Carol have been running the numbers for months. He's 63, she's 60, and by every measure that matters — savings, spending projections, Social Security timing — they could retire this year. But one question keeps David at his desk every Monday morning: What do we do about health insurance for the next two to five years until Medicare kicks in?

He's heard COBRA is expensive. He's not sure if they'd qualify for an ACA subsidy. And a friend at church mentioned something about a medical bill-sharing plan, but that sounded too good to be true. So they wait — not because they can't afford to retire, but because the healthcare question feels unsolvable.

If that sounds familiar, you're not alone. And the good news is that the pre-Medicare coverage gap is a solvable problem. There are four real options worth understanding, and the right one depends on your income, your health history, and how you plan to draw down your savings.

The fear is understandable when you look at the numbers. According to the 2025 KFF Employer Health Benefits Survey, the average annual premium for employer-sponsored family health coverage reached $26,993. Workers contributed an average of $6,850 toward that cost — meaning their employers covered roughly $20,000 per year.

When you retire, that employer subsidy vanishes. Suddenly, you're looking at the full cost of coverage, and it can feel like a wall between you and the retirement you've earned.

But that wall has doors. Let's walk through each one.

Option 1: COBRA — Keeping Your Employer Plan After You Leave

COBRA — the Consolidated Omnibus Budget Reconciliation Act — allows departing employees to continue their existing employer health plan after they leave. According to the U.S. Department of Labor, coverage typically lasts up to 18 months for a qualifying event like retirement or voluntary separation.

The coverage itself doesn't change — same doctors, same network, same plan. What changes is who pays for it.

Under COBRA, you pay the full premium with no employer contribution. The DOL allows plans to charge up to 102% of the applicable premium — the full cost plus a 2% administrative fee. For a married couple, this often falls in the range of $1,500 to $2,000 per month, though the actual amount varies by employer plan.

For David and Carol, COBRA could keep them on his employer plan for up to 18 months — but at a potential cost of $18,000 to $24,000 per year.

So when does COBRA make sense? Consider it when:

• Your coverage gap before Medicare is short — say, 12 to 18 months
• You have an established relationship with specialists or are mid-treatment and don't want to switch networks
• Your projected income during retirement is high enough that ACA subsidies wouldn't apply anyway

COBRA is a known quantity — same plan, same coverage — but the cost can be significant. For many pre-retirees, it's worth comparing against the next option.

Option 2: ACA Marketplace Plans — Potential Savings If Your Income Qualifies

How the Premium Tax Credit Works

The Affordable Care Act's Marketplace plans (available at healthcare.gov) offer a premium tax credit that can reduce your monthly health insurance cost. The credit is based on your household income relative to the federal poverty level — and for 2026, the rules have changed in an important way.

The enhanced premium tax credits that were in place from 2021 through 2025 — first under the American Rescue Plan, then extended by the Inflation Reduction Act — expired at the end of 2025 and were not renewed by Congress. Starting in 2026, the original ACA rules apply: subsidy eligibility is capped at 400% of the federal poverty level.

The Income Cliff You Need to Know About

For a two-person household in 2026, 400% of the federal poverty level is approximately $84,600 if you are in the continental US. If your household income stays below that threshold, you may qualify for a meaningful premium tax credit. If your income exceeds it — even by a small amount — the subsidy may disappear entirely.

This is what planners call the "subsidy cliff," and it's back in full force for 2026. The Bipartisan Policy Center estimates that a 60-year-old couple with income just above 400% FPL (roughly $85,000) could face annual premiums exceeding $20,000 if they no longer qualify for a premium tax credit, depending on age, location, and plan selected.

It's also worth noting that under the IRS rules governing the premium tax credit, if you receive advance subsidy payments during the year and your actual income turns out to be higher than projected, you may be required to repay the full excess at tax time. There is no repayment cap for tax years after 2025. This makes precise income projection throughout the year essential — not just at enrollment time.

What the Savings Could Look Like

To illustrate the potential impact, consider David and Carol shopping for ACA coverage in 2026 with a projected household income of around $65,000. Depending on their ages, location, and the plan they select, their unsubsidized premium might be in the range of $2,000 to $2,200 per month. With a premium tax credit, their net cost could potentially drop to somewhere around $600 to $800 per month.

That's a potential difference of roughly $14,000 to $17,000 per year — money that could remain in their retirement portfolio.

But subsidy amounts vary significantly by age, location, plan tier, and exact income level. There is no single "average subsidy" that applies to every couple. The best way to estimate your specific subsidy is to use the healthcare.gov Marketplace calculator with your actual projected income and zip code.

The Roth Conversion Conflict: When Two Good Strategies Compete

For many pre-retirees, the years between leaving work and starting Social Security or Required Minimum Distributions represent a rare low-income window — an ideal time to convert pre-tax IRA or 401(k) balances into a Roth IRA, paying taxes now at a lower rate to enjoy tax-free growth and withdrawals later.

But here's the tension: every dollar you convert from a Traditional IRA to a Roth IRA counts as ordinary income. And as the IRS confirms in Publication 974, household income for premium tax credit purposes is based on modified adjusted gross income — which includes Roth conversion amounts.

Suppose David and Carol have a baseline income of $50,000 from pension and taxable account withdrawals. If they convert $40,000 from David's Traditional IRA to a Roth, their household income jumps to $90,000 — which could affect their eligibility for an ACA premium tax credit. They could potentially lose their entire ACA premium tax credit for the year. If that credit was worth $14,000 or more, the Roth conversion could potentially cost them more in lost healthcare subsidy than it saved in future taxes.

Contrast that with converting just $30,000, keeping household income at $80,000 — which may allow them to preserve some or all of their potential subsidy while still completing a Roth conversion. They may preserve the subsidy and still move a meaningful amount into the Roth.

Arizona's flat state income tax rate is also worth factoring into the conversion math — every dollar converted is subject to both federal and state income tax, which affects the total cost of the conversion and your net income for ACA subsidy purposes.

This is not a problem with an obvious answer. The right balance depends on the size of your pre-tax balances, your expected future tax rates, how many years remain before Medicare, and your health coverage costs. It requires careful coordination — ideally with a financial professional who can model both sides of the equation together.

Option 3: Medical Bill-Sharing Plans — Lower Cost, Higher Risk

Medical bill-sharing plans — sometimes called health care sharing ministries — are member-based programs, often faith-based, where participants pay a monthly "share amount" into a common pool. When a member has a medical need, eligible expenses are paid from that pool.

Monthly share amounts can be meaningfully lower than COBRA premiums or unsubsidized ACA plans, and there are no income restrictions that affect eligibility — making these plans attractive to some individuals looking for alternatives to traditional health insurance.

But here's what you need to understand: these plans are not considered health insurance and generally are not subject to the same regulatory requirements as traditional health insurance plans. The National Association of Insurance Commissioners (NAIC) confirms that health care sharing ministries "do not have to comply with the consumer protections of the federal Affordable Care Act, like covering treatments for pre-existing conditions or capping out-of-pocket costs."

According to research from Georgetown University's Center on Health Insurance Reforms, these plans typically exclude coverage for pre-existing conditions, behavioral health, and maternity care, and they limit coverage for prescription drugs. For a retiree managing a chronic condition — say, a thyroid disorder or high blood pressure that requires ongoing medication — this can create real financial exposure.

Bill-sharing plans may be worth considering for retirees who are generally healthy, have minimal ongoing prescriptions, and understand the risks. But they should not be treated as equivalent to regulated health insurance.

Option 4: Employer Retiree Coverage — Rare but Worth Checking

Some employers — particularly larger corporations, government agencies, and unionized workplaces — offer subsidized retiree health benefits that bridge the gap to Medicare. If available, this may be the most cost-effective option because the employer continues to share the premium cost, and there are typically no income restrictions that affect eligibility.

This benefit is uncommon and has become less prevalent over the past two decades. But before you assume it's unavailable to you, it's worth a call to your HR department or former employer's benefits office. If you spent a long career with a single employer, there may be a retiree health benefit you're not aware of — and it may save you thousands of dollars per year in premium costs.

How to Choose the Right Option

There's no single "best" option — the right choice depends on your specific circumstances. Before deciding, consider these questions:

• How long until Medicare? If you're 63.5, COBRA's 18-month window might carry you all the way. If you're 60, you'll need a longer-term solution.
• What is your projected household income during the gap years? If you can manage income below approximately $84,000 (2026 figure, subject to annual adjustment), ACA subsidies may dramatically reduce your costs.
• Do you have pre-existing conditions or ongoing prescriptions? If so, bill-sharing plans may carry too much risk, and you'll want regulated coverage.
• Are you planning Roth conversions during the same window? If yes, you'll need to coordinate conversion amounts with the ACA subsidy threshold — these two strategies directly compete for the same low-income space.
• Does your former employer offer retiree coverage? Check before evaluating other options — it may be the simplest and most affordable path.

The Bottom Line

The pre-Medicare coverage gap is a real challenge — but it's one that can often be addressed with careful planning. The right solution depends on your specific income, health profile, and broader retirement tax strategy. Getting it wrong may cost thousands of dollars per year, whether through overpaying for coverage or inadvertently losing a valuable subsidy.

This is exactly the kind of decision that benefits from coordinated planning — someone who can model your healthcare coverage options alongside your Roth conversion strategy, withdrawal sequencing, and tax bracket management. If you're approaching retirement and want help thinking through these tradeoffs, we'd welcome the conversation.

Start a conversation with Sonmore Financial →

References

1. U.S. Department of Labor. "COBRA Continuation Coverage." https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/cobra
2. U.S. Department of Labor. "FAQs on COBRA Continuation Health Coverage for Workers." https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/cobra-continuation-health-coverage-consumer.pdf
3. KFF. "2025 Employer Health Benefits Survey." October 22, 2025. https://www.kff.org/health-costs/2025-employer-health-benefits-survey/
4. healthinsurance.org. "Marketplace enrollees face return of the 'subsidy cliff' in 2026." July 30, 2026. https://www.healthinsurance.org/blog/marketplace-enrollees-face-return-of-the-subsidy-cliff/
5. healthinsurance.org. "2026 Obamacare subsidy calculator." July 29, 2026. https://www.healthinsurance.org/obamacare/subsidy-calculator/
6. Internal Revenue Service. "Publication 974 (2025), Premium Tax Credit (PTC)." January 12, 2026. https://www.irs.gov/publications/p974
7. Bipartisan Policy Center. "Enhanced Premium Tax Credits: Who Benefits, How Much, and What Happens Next?" December 1, 2025. https://bipartisanpolicy.org/issue-brief/enhanced-premium-tax-credits-who-benefits-how-much-and-what-happens-next/
8. National Association of Insurance Commissioners (NAIC). "What You Should Know About Health Care Sharing Ministries, Discount Plans, and Risk-Sharing Plans." June 11, 2024. https://content.naic.org/article/what-you-should-know-about-health-care-sharing-ministries-discount-plans-and-risk-sharing-plans
9. Georgetown University Center on Health Insurance Reforms. "Health Care Sharing Ministry Data Point to Problems for Consumers, Regulators." August 21, 2023. https://chir.georgetown.edu/health-care-sharing-ministry-data-point-to-problems-for-consumers-regulators/

Disclosure

This content is for informational purposes only and should not be considered tax, legal, or financial advice. Consult a qualified financial professional before making any investment or tax-related decisions.

Advisory services are offered through Sonmore Financial LLC, an Investment Advisor in the State of Arizona. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.