Making the Most of Open Enrollment: A Pre-Retiree’s Guide
Every November, pre-retirees face a familiar challenge: the annual open enrollment packet stuffed with healthcare plan options, premium changes, and confusing fine print.
For anyone approaching Medicare age, open enrollment decisions carry higher stakes. Rising medical costs and the impending Medicare transition make it essential to weigh today’s choices against tomorrow’s needs.
The Pre-Retiree Healthcare Challenge
Healthcare spending climbs with age. The average monthly cost of healthcare is around $1,300 by age 60. For pre-retirees, choosing coverage isn’t just about the coming year; it’s about preparing for Medicare and safeguarding retirement savings.
Tip: Think beyond 12 months. The coverage you choose now should help ease your transition into Medicare.
Evaluating Employer Coverage
Many pre-retirees rely on employer-sponsored plans. High-deductible health plans (HDHPs), now common, often pair with Health Savings Accounts (HSAs). These can be powerful tools for retirement planning.
HSA contributions are tax-deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free. After 65, funds can also be used for non-medical expenses (taxed, but without penalty). In 2025, individuals with self-only coverage under a HDHP can contribute $4,300 ($8,550 for families), plus a $1,000 catch-up for those over 55.
When reviewing employer options, consider:
- Provider networks: Are your doctors and hospitals included?
- Drug coverage: How does the plan handle your prescriptions?
- Premiums vs. out-of-pocket costs: A higher premium may actually cost less if you have ongoing medical needs.
Tip: If eligible, max out HSA contributions in your final working years. These funds can help cover retirement healthcare costs tax-free.
Bridging to Medicare
If you retire before 65, you’ll need “bridge coverage.” The Consolidated Omnibus Budget Reconciliation Act, also known as COBRA, lets you stay on your employer plan for up to 18 months after losing coverage. However, you’ll be responsible for paying the full premium—both your portion and the amount your employer previously paid on your behalf. For an average individual policy, this could mean jumping from $114 a month to roughly $760 per month.
Marketplace plans under the Affordable Care Act (ACA) may be more affordable, especially if you qualify for subsidies. Timing your retirement around plan years and income can help you manage costs effectively.
Watch out: Retiring early in the year may affect your eligibility for ACA subsidies since they’re based on annual income.
Medicare Basics
Understanding Medicare before you reach 65 is critical. It has four parts:
- Part A: Hospital insurance
- Part B: Medical insurance
- Part C: Medicare Advantage (private plans)
- Part D: Prescription drug coverage
Your Initial Enrollment Period spans 7 months around your 65th birthday. Miss it, and you could face lifelong penalties.
Watch out: Medicare penalties are permanent. Missing enrollment windows can cost you in the long term.
Medicare costs also vary by income. The standard Part B premium in 2025 is $185, but higher earners may pay more due to Income-Related Monthly Adjustment Amounts (IRMAA).
Tip: IRMAA surcharges are based on income from two years prior. Smart timing of withdrawals and Roth conversions can help manage costs.
Prescription Coverage Matters
Drug costs can be a budget-buster. Formularies (lists of covered medications) change annually, so review them carefully during open enrollment. Don’t just compare premiums, factor in deductibles, copays, and out-of-pocket maximums.
Medicare Part D has its own rules. If you lack “creditable” coverage when first eligible, you’ll face permanent premium penalties.
Watch out: Even a short gap in prescription coverage can mean higher Part D costs for life.
Long-Term Care Planning
Long-term care isn’t part of standard health insurance, but open enrollment is a good time to explore employer-offered group policies. With expensive nursing home costs planning is essential.
Employer coverage may be cheaper and easier to qualify for than individual policies, but it usually ends when you leave your job. Alternatives include hybrid life insurance with long-term care riders, annuities, or dedicated savings.
Flexible Spending Accounts (FSAs)
FSAs let you set aside pre-tax dollars for medical expenses, but they’re “use it or lose it.” Conservative estimates work best. For those supporting aging parents, dependent care FSAs (up to $5,000 annually) can ease the financial load.
Tip: FSAs are best for predictable costs like dental work, eyeglasses, or routine prescriptions.
Planning for Healthcare Inflation
Healthcare costs rise faster than inflation. A Fidelity report estimates a 65-year-old in 2025 will need about $172,500 in after-tax savings for healthcare in retirement.
HSAs are the most efficient tool, but taxable accounts earmarked for medical expenses can also work.
Making Your Best Decision
Open enrollment isn’t just a box to check—it’s a critical part of retirement planning. Start by listing your current healthcare needs: medications, preferred providers, and upcoming procedures. Compare plans based on both premiums and out-of-pocket costs and consider how they align with your retirement timeline.
“Open enrollment decisions for pre-retirees require looking beyond just the next year,” says Michael Norton, Senior Vice President, Investments at David Lerner Associates. “The choices you make during your final working years can significantly impact your retirement security.”
Take the time to weigh your options. Smart decisions today can set the stage for a healthier, more financially secure retirement.
Material contained in this article is provided for information purposes only. It is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. These materials are provided for general information and educational purposes, based on publicly available information from sources believed to be reliable. We cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual’s circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her circumstances.