Until Medicare Kicks In...

Finding affordable health insurance may be the hardest part of early retirement

Your pension and portfolio may be ready for an early exit from the work world, but the dealmaker—or breaker—is health insurance. "It can be tremendously expensive, shocking to the point that it could have a direct impact on the retirement decision," says Laurence J. Kotlikoff, economist at Boston University and president of the personal finance firm Economic Security Planning.

Indeed, early retirement is probably out of the question for two groups of people: those who can't afford to absorb expensive annual health-insurance costs until Medicare kicks in at age 65 and anyone with a serious medical condition, such as diabetes or heart disease, that makes it next-to-impossible to get decent coverage.

Everyone else should get ready to shop around and learn about deductibles, co-pays, networks, out-of-network costs, and other nuances of health-insurance policies.

TAKE COBRA. The health benefit provisions of the 1986 Consolidated Omnibus Budget Reconciliation Act are a lifeline if you're going off on your own. Under the law, you can keep your group health plan at work for up to 18 months after leaving. But you'll pay the full premium yourself, plus a 2% administrative charge. Typically you'll have to come up with $350 to $1,000 a month, or $6,300 to $18,000 over 18 months.

Nevertheless, COBRA buys you peace of mind while pursuing alternatives. "Don't drop COBRA until you're sure you can replace it," warns Bob Brow, an independent insurance broker in Indianapolis with Health Quotes USA. "Once you don't take COBRA, you can't get back in."

LOOK AT HIGH-DEDUCTIBLE PLANS. The higher the deductible, the lower the premium. Take a 56-year-old man living in Los Angeles' 90015 Zip Code. According to EHealth Inc., he could find a policy for $244 a month with a $1,000 deductible and 80% coverage after the deductible is exhausted. He could slice that premium to $212 a month with a $2,200 deductible and 80% coverage or to $207 monthly with a $5,000 deductible. It also matters where you live. In Chicago, a 56-year-old man could find an individual policy for as little as $172 a month with a $5,000 deductible and 20% co-insurance. A similar policy in Baltimore is $105 a month.

Of course, you have to look beneath the raw figures and delve into policy features. The most popular high-deductible plans are those with preferred provider organizations that give price breaks for staying within a network. Still, coverage can range from bare-bones (read cheaper) to reasonably comprehensive (read expensive). Among the questions to investigate: To what extent are prescription drugs covered? Is preventive care, such as mammograms or annual physicals, fully covered? How much will the insurer pick up if you need surgery or an emergency room?

CONSIDER A HEALTH SAVINGS ACCOUNT. You use these tax-advantaged savings plans in conjunction with a high-deductible policy. For an individual in 2007, the catastrophic insurance policy has a minimum deductible of $1,100 and an out-of-pocket limit of $5,500. The maximum an individual can contribute into the tax-sheltered account is $2,850. (The comparable figures for a family are $2,200, $11,000, and $5,650, respectively.)

HSA contributions are made with pretax dollars, and any unused money in the savings account is rolled over for future use. Withdrawals are tax-free so long as the money goes toward qualified medical expenses.

INVESTIGATE OTHER SOURCES. Professional associations, trade groups, and even chambers of commerce offer group health plans to members, but they will probably be more expensive than an HSA or a high-deductible plan. Wal-Mart Stores and a number of other companies offer health discount plans that help save somewhere between 10% and 50% on a wide range of medical services and products.

GO BACK TO WORK. Yes, you're retired, but you may be able to score health insurance by working part-time. For instance, you can join the health-insurance plan at Starbucks (SBUX ) as long as you put in a minimum of 20 hours a week. A number of other brand-name companies offer health insurance to their part-timers, including Costco (COST ), Fred Meyer, FedEx (FDX ), Target (TGT ), Trader Joe's, and United Parcel Services (UPS ). One more idea: If you make a career shift and labor for the federal government for five years, you may be able to maintain your coverage in retirement until Medicare kicks in and pay the same premium as a current employee.

By Christopher Farrell

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