One of the most common reservations that I hear from clients on retiring prior to 65 is related to health insurance costs prior to Medicare. Yes, you likely can afford it, but it requires strategy. The “sticker price” of health insurance is often shocking, but very few early retirees pay that full amount.
Most early retirees use the ACA (Affordable Care Act) Marketplace, where the cost is tied to your income, not your assets or net worth. If you can keep your taxable income relatively low on paper, your insurance can be heavily subsidized.
Here is the breakdown of how to make it affordable and the specific risks you need to watch out for.
1. The “Secret” to Affordability: ACA Subsidies
If you buy insurance through Healthcare.gov (or your state exchange), you may qualify for Premium Tax Credits. These credits act as a discount that lowers your monthly premium.
How it works: The government looks at your Modified Adjusted Gross Income (MAGI). It does not look at how much money you have in the bank or your 401(k) balance.
The Sweet Spot: If your income is between 100% and 400% of the Federal Poverty Level (FPL), you get significant subsidies.
Cost Sharing Reductions: If your income is specifically between 100% and 250% of the FPL, you also get “Cost Sharing Reductions” (CSR), which lower your deductible and out-of-pocket max, making the insurance much better than a standard plan.
2026 Federal Poverty Level (FPL) Numbers (48 Contiguous States):
- 1 Person: $15,960
- 2 People: $21,640
- 3 People: $27,320
- 4 People: $33,000
Source: https://www.healthinsurance.org/glossary/federal-poverty-level/
Strategy: A couple living on $80,000/year from savings might only show $40,000 of “taxable income” (by pulling from cash savings or Roth accounts), which could qualify them for significant subsidies.
2. Critical Risk: The Return of the “Subsidy Cliff” (New for 2026)
The “enhanced subsidies” that protected retirees for the last few years officially expired on December 31, 2025. As of early 2026, the “Subsidy Cliff” is back, and I feel it is the single biggest financial risk for early retirees.
The Cliff: If your Modified Adjusted Gross Income (MAGI) is even $1 over 400% of the Federal Poverty Level, you lose 100% of your premium tax credits.
Source: https://www.investopedia.com/the-aca-subsidy-cliff-is-back-here-s-how-to-avoid-it-11879946
The Numbers: For 2026, the 400% Cliff is $63,840 for a single person and $86,560 for a couple.
The Consequence: If you are single and your income is above $63,841, then your premium could instantly jump from $200/month to over $1,200/month for the entire year. You would be responsible for paying back every dollar of subsidy you received in advance.
Action: If you are near this 400% line, prioritize withdrawing from cash or Roth accounts (which do not count as MAGI) to help ensure you stay under the cap.
3. Using COBRA as a Bridge
If you leave your job, you can usually keep your employer plan for 18 months via COBRA.
Source: FAQs on COBRA Continuation Health Coverage for Workers by the U.S. Department of Labor, Employee Benefits Security Administration
Pros: You keep your same doctors and network.
Cons: It is usually very expensive (you pay the full premium + a 2% fee).
Strategic Use: COBRA is retroactive for 60 days. If you retire in good health, you can technically wait 59 days to elect it, only paying if you get sick. (If you don’t get sick, you skip it and enroll in an ACA plan).
4. Health Savings Accounts (HSAs)
If you have an HSA, knowing the rules is critical to cash flow:
Can you pay premiums with it? Generally, NO. You cannot use HSA funds to pay standard ACA marketplace premiums tax-free.
Source: https://www.healthcare.gov/high-deductible-health-plan/hdhp-hsa-work-together/
Exceptions: You CAN use HSA funds to pay for:
- COBRA premiums (tax-free).
- Health insurance premiums while collecting unemployment benefits (tax-free).
- Long-term care insurance premiums (up to limits).
5. Managing Your Income (The “MAGI” Strategy)
In my opinion, to afford insurance, you must manage your Modified Adjusted Gross Income (MAGI).
Strategies to lower your MAGI: Living off cash savings, selling taxable brokerage investments with high cost basis (little gain), or withdrawing from Roth IRAs (which doesn’t count as income).
Watch out for: Selling a house with a huge gain, large capital gains distributions, or big 401(k) withdrawals that spike your income and disqualify you from subsidies.
Summary of Options
Option: ACA Marketplace
Best For: Most early retirees (Age 55–64)
Cost Factor: Subsidized based on income. Can be under $100/mo if managed well.
Source: https://moneyedu.iccu.com/public/featured-this-weektopic.cfm?code=ICCU&week=42&day=3&resources
Option: COBRA
Best for: Short gaps (<18 mos) or keeping a specific doctor
Cost Factor: Expensive (Full price + 2%).
Source: https://www.paydayhcm.com/blog/how-much-does-cobra-cost#:~:text=The%20average%20monthly%20cost%20of
Option: Spouse’s Plan
Best for: Married couples
Cost Factor: Often the cheapest option if one spouse still works.
Source: https://www.ehealthinsurance.com/resources/individual-and-family/health-insurance-work-marriage
Option: Private Plans
Best for: High net worth/High income
Cost Factor: Expensive; can deny coverage for pre-existing conditions (unlike ACA).
A Quick Warning on Medicaid
If your income is too low (below 138% FPL, or approx. $20k for a single person), you might be pushed onto Medicaid.
The Trap: In 10 states (including TX, FL, GA, TN), Medicaid was not expanded. If you earn too little in these states, you qualify for zero subsidies and no Medicaid, leaving you in a “coverage gap” with no affordable options.
Source: https://www.healthinsurance.org/medicaid/missouri/#:~:text=Medicaid%20expan
The Fix: If you live in a non-expansion state, you must ensure your reported income is at least $15,060 (individual) or $20,440 (couple) to qualify for ACA subsidies.
