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.

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.