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The Hidden Costs of Retiring Early
Back when Mark Turetsky was an entrepreneur, building a business empire that sold pork rinds, cotton candy and beef sticks in bulk, he seldom worried about insurance. His only health hiccups were high cholesterol and acid reflux—common problems for a guy his age. So he had no qualms about coverage when he decided to take the plunge and retire early, at age 55.
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The qualms kicked in later, when Turetsky, still eight years away from qualifying for Medicare, looked into buying new health coverage. His insurer told him that now that he was buying on the so-called individual market instead of through his company, the annual cost of covering himself, his wife Stephanie and son Jacob would more than double, to $27,600, or the price of a Honda Accord. And when Turetsky shopped for a better deal, things got Kafkaesque. The local Blue Shield affiliate told him it didn’t cover anyone in Greenfield Park, N.Y., the rural township where he lives, because the area is “riskier than average.” The AARP’s “young retiree” health plans, he learned, aren’t even offered in his state. Turetsky joked with Stephanie that he’d become a greeter at Wal-Mart if it would keep his medical costs down. Ultimately, he bought the only policy he could find, which doesn’t cover some routine doctor visits—and still costs him almost $13,000 a year. Suffice it to say, this wasn’t part of Turetsky’s script for retiring young. “This whole insurance thing,” he says, “entirely blindsided us.”
Almost everyone fantasizes about swapping the cubicle and BlackBerry for a life of permanent leisure while they’re young enough to enjoy it. Untold millions put in long hours to make the fantasy a reality, and in these rough economic times, others have taken buyouts or been laid off. Unfortunately, America’s patchwork health care system is making those transitions much harder. Too young to qualify for Medicare and rarely covered by their employers, early retirees can face premiums they neither dreamed of nor planned for—often three or more times what they paid while they were working. And that’s for the healthy ones; others, who suffer from ordinary middle-age ailments—arthritis, elevated blood pressure, even back trouble—wind up paying far more or are simply rejected. Caught in this ugly collision of costs and restrictions, the only answer for some is to go without coverage. The public-policy research group The Commonwealth Fund found that in 2007 about 35 percent of people between the ages of 50 and 64 were uninsured or underinsured—up from 26 percent five years ago.
Headaches over insurance may not seem dire when compared to the damage the credit crisis has inflicted on many people’s nest eggs. Certainly, some Americans are already putting off early retirement to recover from that hit. But in a sense, medical costs are a more insidious problem. Historically speaking, investment portfolios usually bounce back from bear markets—but health care prices and insurance premiums almost never stop climbing. For its part, the insurance industry says it has little choice but to raise rates on early retirees. Statistically, older people get sicker than younger ones, people with previous ailments tend to get sick more frequently, and health costs for everyone keep skyrocketing.
But that kind of calculus is hard to take if you’ve been dreaming of spending more time with your family and less with the insurance agent. Already, some boomers have signed up for insurance marketed to young retirees only to watch their premiums shoot up. Some are forgoing necessary surgeries or uprooting their lives to move to states where they can obtain coverage. “You basically can’t count on insurance remaining even mildly affordable in individual markets,” says Karen Pollitz, research professor at the Health Policy Institute at Georgetown University. And that dawning reality is fundamentally changing what it means to cash out early.
In the decades after World War II, of course, most retirees could count on generous health perks, and those who retired before 65 could usually get the same bounty if they’d logged enough years with their employer. But over the past two decades, even as the average retirement age has dropped, soaring health care costs have cut holes in that safety net. Today, just 29 percent of large private companies provide insurance to younger retirees, according to the Kaiser Family Foundation. The picture isn’t much better for those who leave the workforce earlier than they planned: This spring, the Society of Human Resource Management found that less than half of workers laid off or bought out were offered continuing health benefits. That leaves many younger retirees with only one place to go—the individual-insurance market.
That’s not friendly terrain, especially for fiftysomethings. Unlike in employer plans, where all members pay similar premiums regardless of age or health, here each consumer gets examined for risk based on his or her own health history. Insurers often react to even minor preexisting health conditions the way an auto insurer reacts to speeding tickets or accidents: by charging steep rates or rejecting the applicant altogether. And many policies are “durationally rated,” meaning premiums increase dramatically as you age, whether you get sick or not.
In this tougher climate, even diligent retirees like Bill and Mac Thompson, of Ocean City, N.J., can get caught off guard. When Bill left the workforce in 1996, the Thompsons knew enough to factor health expenses in to their plans—after all, Bill was a property- and casualty-insurance executive. But since then Bill’s annual premiums have almost doubled, and Mac’s have more than tripled. The couple spent more than $32,000 out of pocket on health care in 2007, and such expenses have led them to put off other splurges. They’ve been slow to buy new cars and join the local country club. The insurance bills “put a major crimp in our lifestyle,” admits Bill.
Then again, at least the Thompsons have insurance. Health-care advocates have documented instances of older people being denied coverage because of such minor maladies as high blood pressure, or because they had been mildly depressed after the death of a spouse; others have been turned down because their records show they’ve taken medications for arthritis or allergies. “I used to joke that just living past 45 was a preexisting condition,” says Anthony Wright, executive director of advocacy group Health Access California. Even industry-reported figures show that 20 percent of individual-insurance applicants in their 50s, and almost 30 percent of those age 60 to 64, are rejected. And about one in 10 is offered coverage only if they agree to waivers exempting the insurer from covering treatment related to a previous condition—a diabetic’s insulin shots, for example.
These hurdles have remained in place even as insurers have courted young retirees. Humana and Aetna, for example, have introduced policies geared toward 50- to 64-year-olds. Many offer a trade-off: lower premiums but higher out-of-pocket deductibles. Frank McCauley, head of Aetna’s individual-insurance division, says Aetna’s young-retiree policies cost as little as $110 a month for those willing to shoulder a $5,000 annual deductible. He acknowledges, though, that middle-aged applicants are just as likely to get rejected for these policies as for the company’s other insurance. “We just don’t have the option to let in people who aren’t viable, because they cost too much,” McCauley says.
Still, seemingly healthy retirees are frequently surprised to learn they aren’t “viable.” Three years ago Rudy Lacoe retired at 56 from his job with a mortgage broker, and he and his wife, Peggy Hammett, applied for insurance with Kaiser Permanente. The Sonoma, Calif., couple are long-distance hikers, sometimes putting in 20 miles in a day, and they say their only medical issues are Lacoe’s occasional back problems and allergies and, for Hammett, a minor heart-valve defect that has never affected her health. So when Kaiser rejected them, Lacoe says, “our doctors were just stunned.” Only after Lacoe wrote an angry letter to Kaiser’s president did the couple get covered. A Kaiser spokesperson declined to comment on the couple specifically but says that consumers “must be of reasonably good health” to qualify for individual coverage.
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Insurance executives defend their underwriting practices as the only way to keep up with the costs of care, pointing out that age and changes in someone’s medical history can make any customer riskier to insure. “It’s not like we’re running a pirate ship,” says Richard Collins, president of UnitedHealthcare’s individual-insurance unit; insurance “is one of the most regulated industries in America.” Still, even those regulations have loopholes that can let companies shift more of the financial burden to customers. Although all states prohibit insurers from dropping consumers who develop health problems after they enroll, some let insurers purge those who allegedly commit fraud on their applications—leading some companies to comb patients’ medical records for signs they should’ve known a health problem was looming. In other cases, insurers restructure their policies in ways that result in healthier consumers switching plans, leaving the sickest to face unaffordable premiums. Consumer protections can be so spotty, “it’s like being in the Wild, Wild West of health care,” says Wright of Health Access California.
Fortunately, some younger retirees can tame the frontier. Holding on to group coverage is one key to staying insured without breaking the bank. Retirees willing to keep a foot in the workplace as consultants can catch a break if they live in one of the 13 states where self-employed people can get group rates. For those who would otherwise face pricey individual coverage, Carolyn McClanahan, a physician turned financial planner in Jacksonville, Fla., recommends exhausting the standard Cobra coverage—the 18 months of insurance workers can buy when they leave a job. As long as they act within two months after Cobra expires, most retirees can then enroll in a special insurance pool that all states offer. Coverage in these pools can be expensive and spotty, but they aren’t allowed to exclude people with preexisting conditions.
On the individual market, early retirees can boost their odds by shaping up and losing belly fat before applying. It’s also worthwhile to go over their medical record with their physician, to correct and update diagnoses that turned out to be inaccurate. The effort to keep a clean record, however, can curdle an early retirement even before it starts. Pat Gulliford, a 53-year-old IT manager in Phoenix, hopes to retire in two years, but the wait is getting literally uncomfortable. She wants to get surgery to remove fibroids, noncancerous growths in her uterus, but she’s holding off because an insurance agent told her the operation could torpedo her applications. The current plan is to retire, get the insurance, then get the surgery. “I’m a conservative,” Gulliford says, “but going through this process makes me want socialized medicine.”
Unwilling to give up on cashing out, some young retirees have found insurance through professional associations, fraternities or even their churches. But faced with the crazy-quilt patchwork of health care options, others have had to accept some pretty big compromises. Bill and Mac Thompson, for example, are itching to move from the Jersey Shore to their golf-course home in Sarasota, Fla. But for almost a decade, they have spent most of the year up north with their clubs because Mac, who has a rare skin condition, can’t get insurance in Florida. While they’ve waited for Mac to qualify for Medicare, they’ve watched the value of their Ocean City home plummet in the real estate slump—eroding their net worth and making retirement even more challenging. Bill says with a chuckle, “I never dreamed I’d be held captive in New Jersey.”
