A recent New York Times article explored the generational shift among Millennials who favor making financial sacrifices now to retire earlier. Recent studies show that many young professionals focus on maximizing income and savings so they may become stable enough to transition from the workforce to a life of personal pursuits – by as early as age 50. The FIRE Movement (Financial Independence, Retire Early) relies on limited spending to ensure that mid-life satisfaction can be achieved without needing full-time employment. 

The article frames the 15-year difference in retirement aspirations between Millennials and their parents, most of whom will stop working at age 65; however, there is no mention of another important issue that should be addressed covering the same time period – Millennials without employer-sponsored health insurance will have to wait 15 years to be eligible for Medicare, the federal subsidized health insurance program for retirees.  

American workers who receive health insurance through employment (or their spouse’s employment) typically pay only 25-30% of their total medical premiums, while employers cover the remaining expenses for individuals, couples, and family members. Depending on the number of people insured and the type of plan offered, companies typically shell out thousands of dollars per employee to health insurers each year. Unfortunately, workers cannot shift to Medicare until age 65. Those who retire before this age have some options (including COBRA, which has limits on how long it can be utilized), but extended insurance without assistance from an employer is typically quite expensive and will place a substantial (and often underestimated) financial burden on anyone who retires sooner. 

Financial guidelines like the “4% Rule” and income replacement ratios fail to fully consider the impact of healthcare costs, which grow at a higher annual inflation rate than other expenses and cover services that are largely inelastic in demand. 

Self-funding healthcare coverage over the long–term – while not impossible – is a financial challenge that (presumably) few Millennials have factored into their financial plans.  

Consider the case of a 35-year-old California woman who does not have any chronic health conditions or use tobacco products. If she plans to retire at 50 and forfeit her employer-sponsored health insurance, she will have to self-insure for 15 years until she is eligible for Medicare at 65. Over this time period, coverage for hospitalization, doctors, tests, and prescriptions (akin to the level of coverage she was receiving while working) will amount to around $380,000 in today’s dollars (an average of $25,000 annually). This does not include dental insurance or out-of-pocket spending for other services. 

Funding these expenses from age 50-64, even with a sound investment plan, is a major challenge. Addressing pre-Medicare healthcare costs with a one-time investment at age 35 would amount to $188,500, assuming a 6% annual rate of return before and after retirement. Annually, a deferral of $18,309 (not much less than the current 401(k) contribution maximum) would suffice to cover these medical expenses. Further, total premiums while under Medicare coverage (Medicare Parts B and D, and supplemental insurance Plan G) from age 65 to a life expectancy of 90 will exceed $280,000 in today’s dollars. 

For married spouses, the problem is only compounded: a healthy 40-year-old Florida couple seeking to retire at age 50 will face $566,000 in health insurance costs before Medicare eligibility, covering a combined 30 years of unsubsidized premium dues. Then, they are met with another $493,000 in Medicare-age premiums through their respective life expectancies of 87 (male) and 89 (female). 

Private health insurance (from the federal marketplace, for example) provides much-needed protection against significant co-pays and deductibles, especially when catastrophic events occur; however, without subsidization, even the most conscientious saver faces significant health-related expenditures until Medicare becomes an option. 

Financial independence and achieving on-time retirement is a worthy goal, but Millennials who aim to retire early must consider the impact of healthcare expenses. Health insurance premiums alone may make this an impossible task for some. 

Regardless of when someone wants to exit the workforce, proper planning strategies, combined with a sound understanding of healthcare costs and their components, are necessary to achieve any long-term financial goal – especially one as lofty as retiring at 50.