Retiring before 65 in Arizona: covering the health gap

If you retire before 65, you need health insurance until Medicare begins. Your main options are COBRA from your last employer, a Marketplace plan on HealthCare.gov (Arizona's Marketplace), a spouse's employer plan, a retiree plan if your employer offers one, or AHCCCS if your income is low enough. For many early retirees the Marketplace costs the least, because premium tax credits are based on your income in retirement, not your old salary. In 2026, though, credits stop entirely above 400% of the poverty level, so how you draw your retirement income now has a direct effect on what your health insurance costs.

Your options for the gap years

Retiring is a qualifying life event when it ends your employer coverage. That opens a 60 day special enrollment period for a Marketplace plan, and you can usually choose the plan before your last day at work so there is no gap.

If your spouse is still working, compare joining their employer plan with buying a Marketplace plan for yourself. The employer plan may be simpler, but the Marketplace may cost less if your share of the employer premium is high and your household income qualifies for a credit under the family affordability test.

Why your retirement income decides your premium

Marketplace credits are based on your modified adjusted gross income for the year of coverage. In retirement you have more control over that number than you did when you were working, because you choose when and how to draw from savings.

For 2026 coverage, 400% of the poverty level is $62,600 for one person and $84,600 for a couple. For 2027 coverage it is $63,840 and $86,560 (HHS poverty guidelines). One dollar over that line and the credit disappears, so the difference between a well planned withdrawal and a careless one can be thousands of dollars of premium.

• Withdrawals from a traditional IRA or 401(k) count as income.
• Qualified Roth withdrawals generally do not.
• Spending cash savings, or selling investments with little gain, adds little to MAGI.
• Claiming Social Security early adds income, including the untaxed part.
• A pension or part-time work counts in full.

A Chandler couple, two ways

Picture a couple in Chandler, both 62, retiring in 2026. If they take $90,000 from a traditional IRA, they are above 400% of the poverty level for two and receive no premium tax credit. If instead they take $60,000 from the IRA and cover the rest of their spending from cash savings, they are around 284% of the poverty level and are expected to pay about 9.5% of income toward the benchmark Silver plan, with the credit covering the rest.

Premiums for people in their early 60s are among the highest on the Marketplace because ACA plans can charge older adults up to three times what they charge younger adults. That makes the credit worth more to early retirees than to almost anyone else.

This is exactly the kind of planning that pays for itself. A few thousand dollars of extra withdrawals in the wrong year can cost more in lost credits than the withdrawals were worth.

Health Savings Accounts and the road to Medicare

If you have an HSA, it can be one of the most useful tools in early retirement. Money you saved while working can pay deductibles, copays and prescriptions tax free. Once you are on Medicare it can also pay Medicare premiums, though not Medigap premiums.

Since 2026, Bronze and Catastrophic Marketplace plans count as HSA compatible (IRS Notice 2026-5), so an early retiree on a Bronze plan may be able to keep contributing. The 2026 limit is $4,400 for self-only coverage and $8,750 for family coverage, plus a $1,000 catch-up at 55 or older.

The critical rule: you cannot contribute to an HSA once you are enrolled in any part of Medicare (IRS Publication 969). If you sign up for Medicare after 65, Part A coverage can be backdated up to six months, so stop HSA contributions six months before you apply to avoid a tax penalty.

Planning the hand-off to Medicare

Your Medicare Initial Enrollment Period is the seven months around your 65th birthday: the three months before, your birthday month and the three months after. When Medicare starts, your Marketplace credit ends, and you should end your Marketplace plan so you do not pay for coverage you cannot use.

Arizona does not tax Social Security benefits, which helps, but the federal rules for when to claim still matter. Our guide to retirement income planning covers claiming ages, and our Medicare guides cover the move from a Marketplace plan to Medicare step by step.

Plan the hand-off in writing. Note the first day of the month you turn 65, the date your Medicare coverage will start, and the date you will ask HealthCare.gov to end your Marketplace plan. Ending it too early leaves a gap; ending it too late means paying a full premium without a credit.

A checklist for the year before you retire

• Find out exactly when your employer coverage ends and what COBRA would cost.
• Estimate next year’s income in retirement, line by line.
• Check your premium tax credit on HealthCare.gov with that estimate.
• List your doctors and prescriptions and check them against Marketplace plans.
• Decide what happens to your HSA, and mark the date to stop contributing before Medicare.
• Put your 65th birthday window on the calendar now.

COBRA or the Marketplace for an early retiree

Early retirees often default to COBRA because it feels safe: same plan, same doctors. For a few months, especially if you have already met this year's deductible, that can be the right call. For longer gaps, the full COBRA premium usually adds up quickly, and COBRA normally ends after 18 months, which may be well before 65.

A Marketplace plan renews every year until Medicare, and its premium after tax credits depends on the income you choose to take. Our ACA vs COBRA guide walks through the comparison in detail.

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The bottom line

Retiring early is very doable, as long as the health insurance plan is part of the retirement plan rather than an afterthought. Visit our Individual and Family Health page, and come to one of our seminars or book a sit-down with Viola. She will map your coverage from your last day at work all the way to Medicare.