In 2021, U.S. workers retired, on average, at 65, the age at which they qualify for Medicare—government-sponsored health insurance. But like any average, “65” conceals as much as it reveals.
Mark J. Warshawsky, a researcher affiliated with the American Enterprise Institute, calculates that some 25% of workers retire at 56. Another 25% wait until 75 to put in their papers. This distribution of early and late retirements produces an average retirement age of 65.
My focus is the 25% who retire in their mid-50s. These retirees qualify as members of “F.I.R.E.”—financial independence retire early—a social media-powered collective of workers who exit traditional employment long before they’re eligible for government retirement benefits such as Medicare and Social Security.
Big bills post-employment
This collective contends with (at least) two F.I.R.E. hazards:
- The need to pay living expenses for perhaps 35 or 45 years (God bless!) without labor income.
- An immediate need to pay for health insurance.
The second hazard is a component of the first, but I treat health insurance separately. After all, if your living expenses include a golf-club membership or winter excursions to the sun or the slopes, you can cut spending to adapt to changes in the income generated by your investment portfolio.
But if your doctor orders a life-saving surgery, you need health insurance to pay the bill.
When employer subsidies disappear
In 2023, my employer paid $22,000 of my $28,000 in premiums to provide health-care insurance for my family of four. And because my coverage is a High Deductible Health Plan, I paid $7,000 out of pocket before my plan would cover all expenses. All-in costs topped $35,000–40% covered by me, 60% by my employer.
What might the loss of employer subsidies mean for workers who exit the labor force before Medicare eligibility? The answer: higher costs and greater risk. Early retirees have three health-insurance options:
- They can remain in their previous employer’s group plan for up to 18 months (36 months if they qualify for Medicare within three years). If I decided to play with F.I.R.E., I could remain with my employer’s plan for another 18 months. I would need to pay the $28,000 premium, plus a 2% administrative fee. This premium will no doubt be higher in 2024. Health-care costs always rise faster than inflation. In 2024, I might face out-of-pocket costs of $37,000 or so.
- They can purchase coverage through state marketplaces established by the 2010 Affordable Care Act. When I searched for coverage comparable to my employer plan, I came up with annual premiums and out-of-pocket costs that approached $50,000. Consider this terrifying figure an upper bound. I sourced these estimates from the Pennsylvania marketplace.
- They can qualify for Medicaid. This option has limited relevance for F.I.R.E. members, who have mostly accumulated substantial assets and tend to earn disqualifying incomes from their portfolios. Medicaid eligibility varies by state, and the requirements defy simple synopsis.
Assets to fuel the F.I.R.E.
The chart below displays estimates of the funds that F.I.R.E. members need to build a bridge to Medicare coverage. I use the yield on Vanguard’s Federal Money Market Fund to gauge what F.I.R.E. members can expect to earn on savings dedicated to health-care costs. I assume that health-care costs will increase by 5.5% annually. I source health-care premiums from the Pennsylvania marketplace. I use these inputs to calculate the savings we need today to pay for medical care in the years until we reach Medicare eligibility.
I estimate costs for three age groups: 55, 60, and 64. And for each age group, I calculate costs for a family of four, a couple, and singles. I assume no government subsidies.
For simplicity, I use premium estimates for Pennsylvania’s “Gold” plans–the most expensive, but most comparable to my current coverage. “Bronze” and “Silver” plans are less expensive. But our physician doesn’t participate in these plans, and they exclude some of our prescription drugs.
Tempering the F.I.R.E.
Workers, like moths, are drawn to F.I.R.E. In a 2020 survey, Vanguard found that more than one-fifth of Millennials hope to leave the workforce before age 60. Who among us doesn’t want to own our time? But F.I.R.E. is expensive.
As we work and earn, we need to accumulate fuel for the F.I.R.E., conscious of health care’s enormous costs. Early retirement is possible. But it isn’t cheap.
–A. Clarke