Your bridge to Medicare

Although you may have done a good job of planning your retirement, approaching age 65 is still full of complexities—including how your health care coverage will change and how you will pay for it.

For many people who have gap years between when they actually retired and when they had planned to retire, it can be a mad scramble to find affordable, quality health care coverage until they are eligible for Medicare at age 65.

Even after Medicare eligibility kicks in, there are still additional costs to cover. Health care is one of the biggest expenses for retirees.

4 key health care options between early retirement and Medicare

"With more and more employers dropping their pre-65 retiree medical plans, the questions of where and how to get the right coverage did not disappear with the Affordable Care Act and may still create indecision and uncertainty in someone who is otherwise ready to retire," says Greg Gagliano, senior vice president of product management at Fidelity.

If you are retiring before age 65 and you don't have access to retiree health care coverage from your employer, there are 4 main ways to obtain health care coverage to bridge the period between retirement and Medicare:

1. COBRA coverage. The Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, allows you to continue your current health care coverage for a certain amount of time, but you may be required to pay the full cost of your health coverage plus an additional 2% charge. While you are working, your employer will typically cover a significant portion of the cost of your coverage, reducing the cost for active employees, but that is rarely the case for those who continue coverage through COBRA.
2. Spouse's plan. If your spouse or domestic partner is employed and has health coverage, you may be able to get covered on their employer's plan—and this may be your best and most cost-effective option. If your spouse or partner is already retired and has retiree medical coverage, you may be able to be added to that coverage as well.
3. Public marketplace. The marketplace was established by the Affordable Care Act and provides plan options available to anyone who is not yet eligible for Medicare. You can no longer be denied coverage for any reason, including a pre-existing condition. This was often a significant issue for those contemplating early retirement because affordable health insurance coverage was hard to find and obtain, particularly for those with pre-existing medical conditions. Costs for these plans can vary widely, but some people qualify for government-provided subsidies through premium tax credits that can make the coverage more affordable. Under the Inflation Reduction Act of 2022, premium tax credit/subsidies are extended until 2025. Under the American Rescue Plan Act (ARPA), the 400% federal poverty level (FPL) requirement to qualify for subsidies (also know as the "subsidy cliff") has been removed until 2025.
4. Private insurance. To obtain coverage, you can also look to your local health insurance agent, trade or professional associations, and other so-called "private exchanges" that offer plans from multiple carriers. You may have more plan options available to you through these outlets than the public marketplace, but note that government-funded premium tax credits cannot be applied to these plans. These plans can be found through insurance companies, agents, brokers, and online health insurance sellers.

"The public marketplace is usually a good outlet for pre-65 retirees who do not have access to an employer-sponsored retiree medical plan," says Gagliano. "These plans, which are sometimes referred to as 'on-exchange' plans, have stabilized since first introduced, but there are other private or 'off-exchange' plans available in every state (except Washington, DC) that provide even more choice and can offer coverage regardless of your health status."

Getting ready for Medicare

Once you've figured out how to bridge the gap to Medicare, you'll need to explore Medicare itself as you approach 65, the age when most people become eligible. There's a lot to learn. If you're like most people, you may be confused about how and when to transition from your interim coverage to Medicare—and when you need to do it. And remember, Medicare coverage is provided to each eligible individual who enrolls. You cannot cover your spouse under your Medicare coverage; they will have to enroll on their own when eligible. Here are answers to 6 common questions:

1. I'm eligible to claim my Social Security benefit as early as age 62. Will Medicare kick in at the same time? The answer is generally no. For most of us, the age to qualify for Medicare is 65, with a few exceptions: people with certain disabilities, end-stage renal disease (ESRD), or amyotrophic lateral sclerosis (ALS) may qualify at a younger age.
2. Will Medicare contact me directly prior to my becoming eligible? If you are already receiving Social Security benefits or railroad retirement benefits, Medicare will mail you a Medicare enrollment kit a few months before you become eligible. If you are within 3 months of turning age 65, reside in the United States or one of its territories or commonwealths, and don't want to apply for monthly Social Security retirement benefits just yet, but do still want to apply for Medicare benefits, you can enroll in Medicare online.
3. Are there deadlines for Medicare sign-up? Yes. Retirees who are already receiving Social Security benefits are automatically enrolled in Medicare Parts A and B, and coverage generally begins the month they turn 65. But retirees who haven't claimed Social Security will need to take action to sign up for Medicare. You can first sign up for Medicare Part A hospital insurance and Medicare Part B medical insurance during the 7-month initial enrollment period that begins 3 months before the month you turn 65. If you enroll in Part A and/or Part B the first 3 months of your Initial Enrollment Period ("IEP") before you turn 65, your coverage will go into effect on the first day of the month you turn 65.
   
   If you enroll during your birth month or the following 3 months in your initial enrollment period, your coverage will become effective the first day of the next month. If you were born on the first of the month, everything will occur 1 month earlier. For example, if you were born on September 1, your IEP would begin on May 1. If you enrolled in the first 3 months of your IEP, your coverage would begin on August 1, and your IEP would end on November 30. Regardless of how you get Parts A and B, you must sign up for Part D if you want prescription drug coverage. (See the section about Medicare Part D for important information about penalties.) Or, if you prefer, sign up for a Medicare Advantage Plan (Medicare Part C), which replaces parts A, B, and often D. Medicare Advantage Plans, a private-sector alternative to original Medicare, have the same initial enrollment period, as does Part D for prescription drug coverage.
   
   If you don't enroll in Medicare during the initial enrollment period around your 65th birthday, you can sign up between January 1 and March 31 each year thereafter for coverage that will begin on the first day of the month after you sign up. However, you could be charged a late-enrollment penalty when your benefit starts. For example, if a penalty applies, monthly Part B premiums increase by 10% for each 12-month period you delay signing up for Medicare after becoming eligible for benefits, and this penalty will remain for as long as you receive Medicare coverage.
4. How do I sign up for Medicare if I am still working at age 65? If you retire after age 65 and have employer-sponsored health coverage, you will have an 8-month special enrollment period to sign up for Part A and/or Part B, which starts the month after your employment ends or the group health plan insurance based on current employment ends, whichever happens first. Usually, you don't pay a late-enrollment penalty if you sign up during a special enrollment period.
5. Can I make changes every year? Yes. The Medicare open enrollment period runs from October 15 through December 7 annually. This gives you the opportunity to re-evaluate your situation every year and make any changes.
6. If I retire outside the United States, can I bring my Medicare coverage with me? In most cases, no. The US government generally precludes Medicare from paying for medical services for retirees outside the country and its territories. A possible silver lining: You may be able to purchase affordable health insurance in some countries or tap into their private health care systems. But, some insurance companies operating outside of the United States and its territories may limit your participation or acceptance based on your age.

Read Viewpoints on Fidelity.com: 6 key Medicare questions

Remember to also sign up for Medicare Part D

Whether you are currently taking prescription medications or not, you need to know the ins and outs of Medicare Part D—the Medicare Prescription Drug Plan. Prescription drug coverage may be included as part of a Medicare Advantage plan. There are lots of options to compare. When you first enroll in Medicare, it's important to plan for your future needs. Take the time to look into Medicare Part D prescription drug coverage.

Keep these 2 additional things in mind when enrolling in Medicare Part D:

1. If you don't enroll in Medicare prescription drug coverage when first eligible, you may be hit with a late-enrollment penalty, which will apply for the rest of your life. If you waited 63 days or more since you were first eligible for Part D coverage and did not have "creditable coverage" (such as employer-sponsored coverage with prescription drug coverage that is as good as or better than what is offered under Medicare Part D), you will be subject to permanent financial penalties of an additional 1% per month that you go without coverage. This penalty is added to the premium for the plan you enroll in. Tip: Don't delay signing up for Medicare Part D if you don't have other prescription drug coverage. Say you delay enrolling for 20 months from when you no longer have creditable prescription coverage; when you finally sign up, your premium will be 20% higher.
2. For stand-alone Part D prescription drug plans, the maximum deductible is $590 in 2025. A deductible is the amount you pay toward your costs before the insurance plan starts to contribute. After reaching your deductible, you'll pay your plan's copays and coinsurance for your covered drugs, based on the tiers within your plan's covered drug list (also known as their formulary). Major reforms are coming to Part D coverage in 2025. Starting in January 2025, the annual maximum out-of-pocket threshold for all Part D plans will be $2,000. Part D beneficiaries will not be responsible for any cost sharing for drugs covered by Part D above this amount. You can learn more about the different phases of prescription drug costs on the Medicare website. Tip: You may want to consider scheduling a Medication Therapy Management consultation with your local pharmacist to explore combinations of prescriptions that may help you maintain your health, but at a lower cost. Then go back and discuss the pharmacist's recommendations with your doctor. All Medicare prescription drug plans (Part D) cover this consultation.

There are lots of health care and financial decisions to make as you transition to retirement. In addition to needing a strategy to generate retirement income and claim Social Security, you may need to develop a strategy to help you bridge the gap until you are eligible for Medicare coverage at age 65. Once you are eligible to enroll in Medicare, be sure to get the health care part of the equation right.

The Medicare system is different in many ways from employer-sponsored health coverage, so take time to understand the basics of Medicare. You and your spouse or domestic partner may have different needs and may be better off choosing different Medicare plans. So do your homework, shop around, and compare prices. Remember, as long as you remain enrolled in the Medicare system, you can make changes every year as your situation and health care options and needs change and evolve.