In plain words
Medicare usually starts at 65. If you stop working at 55, 60 or 62, you need another way to cover health care for those years. For many early retirees this is the single biggest budget surprise.
The main options:
- COBRA. Keeps your employer’s plan, usually for up to 18 months. You pay the full premium plus up to 2% for administration. It is simple and keeps your doctors, but often expensive.
- Retiree health cover from a former employer, if offered. Fewer employers provide it today.
- A spouse’s employer plan, if your spouse is still working.
- The Health Insurance Marketplace (ACA plans). Individual plans that cannot turn you down for health reasons. Premium tax credits can lower the cost based on your income.
- Part-time work with benefits, which some early retirees use as a bridge.
- Medicaid, in states that expanded it, for people with very low income.
The 2026 subsidy cliff
From 2021 through 2025, extra federal help made Marketplace premium tax credits available at all income levels, with a cap on premiums as a share of income. That extra help ended after 2025.
For 2026 coverage, the original rules apply again: premium tax credits are generally available only if household income is between 100% and 400% of the federal poverty level. For 2026 coverage, 400% of the poverty level is about $62,600 for one person and $128,600 for a family of four. Earn one dollar more and the credit disappears. For a couple in their early 60s, the full-price premium can be well over $1,500 a month.
The income that counts is your modified adjusted gross income. That is where planning comes in.
How it helps real people
Early retirees often have a lot of control over their taxable income. Money from savings, cash and Roth contributions may not count as income at all. Withdrawals from traditional IRAs, Roth conversions and capital gains do. By choosing which accounts to draw from each year, a household can sometimes keep income under the cliff and save thousands in premiums. Wealthy families plan income like this all the time. It is just as useful at a normal income.
A worked example
Illustrative. Real premiums and credits depend on your state, age, household and plan.
Kofi and Ama, both 61, retire with $300,000 in a taxable brokerage account, $90,000 in cash, $700,000 in traditional IRAs and $80,000 in Roth IRAs. They need $80,000 a year to live on.
| Plan A: draw from IRAs | Plan B: shape income |
|---|---|
| $80,000 from traditional IRAs | $25,000 from IRAs, $20,000 from cash, $35,000 from brokerage sales (about $12,000 of it gain) |
| Income about $80,000 plus dividends, near or over the cliff for two | Income about $40,000 including dividends |
| Full-price Marketplace premium, about $20,000 a year | Premium tax credit lowers their cost to a few thousand a year |
Plan B keeps their income well under the cliff. They will draw more from IRAs after 65, when Medicare starts, and they plan to do modest Roth conversions in those years too, mindful of Medicare’s income surcharges.
Who it’s for
- Anyone thinking of retiring, or being offered a buyout, before 65.
- People with a mix of taxable, tax-deferred and Roth savings.
- Couples where one spouse reaches 65 years before the other.
Who it’s not for
- People with retiree health cover they’re happy with.
- People whose pensions alone put them well above the subsidy limit; they should plan for full-price cover or COBRA.
Risks and trade-offs
- The rules can change. Congress may change the credits again, so plan each year.
- Repaying credits. Credits are estimated in advance and reconciled on your tax return. If your income ends up higher, you may owe some or all of them back.
- Network limits. Many Marketplace plans have narrow networks and high deductibles.
- Shaping income can conflict with other goals. Keeping income low may mean skipping Roth conversions in those years. Weigh the trade.
- Big health events. Budget for the plan’s out-of-pocket maximum, not just premiums.
Common mistakes
- Underestimating the cost. Health care for two early retirees can easily exceed $20,000 a year before subsidies.
- Letting COBRA run out without a plan. Losing COBRA is a qualifying event for the Marketplace, but you must act within the window.
- Forgetting the spouse. When the older spouse goes on Medicare, the younger one still needs cover.
- Taking a large IRA withdrawal or gain by accident. It can wipe out a year’s tax credit.
- Ignoring the HSA. If you had a high-deductible plan, HSA money can pay many medical costs tax-free, including COBRA premiums and premiums while you receive unemployment benefits.
FAQs
Can I tap my 401(k) before 59½ without penalty?
If you leave your job in or after the year you turn 55, the IRS generally allows penalty-free withdrawals from that employer’s plan (the “rule of 55”). Other options include substantially equal periodic payments. Taxes still apply.
Does Social Security count as income for the Marketplace?
Yes. Taxable and non-taxable Social Security benefits both count toward modified adjusted gross income for premium tax credits.
Is COBRA or the Marketplace cheaper?
It depends. COBRA has no subsidy. With low income, the Marketplace is usually cheaper. With high income, COBRA may be similar and keeps your doctors.
What happens when I turn 65?
Sign up for Medicare during your seven-month window. Marketplace credits generally stop once you’re eligible for premium-free Part A.
Can I change plans each year?
Yes. Open enrollment usually runs from November 1. Review your income and plan every year.
Related strategies
Your next step
Talk to a strategist about an income plan for your years before Medicare.
Education, not advice. Examples are illustrative. VeraLife.ai is not a registered investment adviser, broker-dealer or insurance agency.