Health Insurance for Early Retirees: Your Income Sets the Price

Medicare starts at 65. Anyone who stops working before then has to buy health coverage for every year in between, and for many early retirees that is the largest cost the plan has to absorb after housing. This chapter covers the options (COBRA, the ACA marketplace, a spouse's or part-time employer's plan, Medicaid), how the premium tax credit works now that the enhanced version has expired, and why the income you report each year is the main lever you control.

Why this gap is different

While you work, an employer usually pays most of the premium and the cost is hidden in your paycheck. After you leave, you pay the whole premium yourself, and the price depends on your age, where you live, which plan you choose and, through the premium tax credit, your income.

Two features make health care harder to plan than other costs. Premiums for individual coverage rise with age, so the years from 55 to 64 tend to cost the most. And a serious illness can bring a full year's out-of-pocket maximum on top of the premiums. A plan for this gap should budget for both: the premium every year, and the out-of-pocket maximum in a bad one.

The options

COBRA. When you leave a job, federal law generally lets you keep your employer's group plan for up to 18 months. You pay the full cost, employer share included, plus up to 2% for administration. It is often expensive, but it keeps the same doctors and the same deductible progress, which can matter in the middle of treatment. It works best as a short bridge.

One trap: losing job-based coverage opens a 60-day special enrollment period on the ACA marketplace. If you pick COBRA instead and later drop it voluntarily, that does not open a new special enrollment period, so you may have to wait for the next open enrollment.

The ACA marketplace. HealthCare.gov or your state's exchange sells individual plans that must accept you regardless of health and cover a standard set of benefits. Plans come in bronze, silver, gold and platinum tiers, which differ mainly in how costs are split between premium and out-of-pocket spending. For most early retirees this is the main option, and the premium tax credit, below, decides what it costs.

A spouse's plan or a part-time job with benefits. Coverage through a working spouse, or a part-time employer that offers health insurance, can be the cheapest route. This is much of the logic behind barista FIRE.

Medicaid. In states that expanded Medicaid, adults with income up to 138% of the poverty line are generally eligible for Medicaid instead of marketplace subsidies. Rules and how income is counted vary by state, so check your state's Medicaid agency if your planned income is low.

Health care sharing ministries are sometimes marketed as an alternative. They are not insurance: they do not have to pay any particular claim, may exclude pre-existing conditions, and do not qualify for the premium tax credit or for HSA contributions. Read the membership terms closely before relying on one.

How the premium tax credit works in 2026

The premium tax credit lowers the cost of marketplace coverage. Its size is set by comparing two things:

1. The premium of the benchmark plan: the second-lowest-cost silver plan available to you.
2. Your required contribution: a share of your household income, set by law and adjusted each year.

The credit is the difference. For 2026 coverage, the required contribution runs from 2.1% of income at the bottom of the scale to 9.96% for incomes between 300% and 400% of the federal poverty line. You can apply the credit to any metal tier, so a cheaper bronze plan can cost very little after it. If your income is at or below 250% of the poverty line, silver plans also come with cost-sharing reductions that lower deductibles and copays.

The enhanced credit has expired. From 2021 to 2025 a temporary law removed the upper income limit and lowered the required contributions. It expired on December 31, 2025. As of late September 2026 no extension had been enacted: the House passed a bill in January 2026, but the Senate had not acted. If Congress restores the enhancement, the figures below change, so check the current law before you rely on them.

The cliff is back. Without the enhancement, the credit stops entirely once household income goes above 400% of the poverty line. For 2026 coverage in the 48 contiguous states, that limit is $62,600 for a household of one and $84,600 for a household of two. For 2027 coverage, which uses the newer poverty guidelines, it is $63,840 and $86,560, and the top required contribution rises to 10.22%. Alaska and Hawaii have higher limits. One dollar over the line can cost the whole credit, which for an older couple can be a large share of the premium.

Advance payments are now settled in full. Most people take the credit in advance, based on an estimate of the year's income. From tax year 2026, if your actual income turns out higher than your estimate, you must repay all of the excess advance credit when you file; the earlier caps on repayment no longer apply. An early retiree whose income is uncertain should estimate carefully and update the marketplace during the year if it changes.

From 2027, eligibility for the credit is also narrowed for some lawfully present immigrants. If that might apply to you, check the marketplace rules for your status.

Income is the lever

For the credit, "household income" means modified adjusted gross income: your adjusted gross income plus tax-exempt interest, untaxed foreign income and untaxed Social Security. What counts depends on where the money comes from, and that is what makes it plannable.

• Counted in full: traditional 401(k) and IRA withdrawals, Roth conversions, wages, interest and dividends.
• Counted only as the gain: sales from a taxable account, where only the profit above what you paid counts.
• Not counted: withdrawals of your own Roth IRA contributions, and spending from cash savings.

So an early retiree can often choose what income to show. Drawing living costs from cash, Roth contributions and taxable sales with little gain can keep reported income low; a large Roth conversion in the same year can push it over the cliff. This is the trade-off introduced in Chapter 5: the same low-income years are wanted for conversions, for 0% capital gains and for health insurance credits, and you have to decide how to split them. HSA contributions, if you have a qualifying high-deductible plan, also lower your income for this purpose; the 2026 limits are $4,400 for self-only and $8,750 for family coverage.

The ACA subsidy calculator shows your credit at a given income, how close you are to the cliff, and what each extra dollar of income costs you in lost credit.

Choosing a plan

Look past the premium. Compare each plan's deductible and out-of-pocket maximum, check that your doctors and prescriptions are covered, and work out the worst-case year: twelve months of premiums plus the full out-of-pocket maximum. A plan with a low premium and a high deductible can be the right choice if you are healthy and have cash set aside for the bad year. Budget for that bad year in your FIRE number, not just the average one.