Budgeting for Healthcare in Early Retirement

[Many FIRE walkers (including myself!) underestimate the cost of healthcare in retirement. It could be because we don’t track our costs accurately, don’t monitor our employer contributions, or forget to account for healthcare completely! Guest authors The Dragons on FIRE explain in today’s post the importance of tracking, budgeting, and planning for healthcare, as well as how to include it in your FIRE strategy. This is advice I wish I had read 5 years ago!]

Open enrollment season is upon us. Time to sign up for 2021 health insurance at work or online at healthcare.gov if you buy it on your own. Most people pick a plan and then don’t think about it until next year, or when they have to use it. 

I retired early last year at the age of 43 and my wife Dragon Gal retired three years ago at the age of 40. 

In 2011, I was diagnosed with leukemia. I have been in remission for the last 5 years and was able to stop my daily medication last year. As a cancer survivor, healthcare costs were the number one issue preventing me from early retirement. I had to really understand all the costs I was paying and make sure I had sufficient savings to cover all of those costs. 

Common FIRE Problem: Not Accounting For Health Insurance Premiums

One cost that I really had to pay attention to was the insurance premiums.

According to the Kaiser Family Foundation (KFF), employer sponsored insurance covers approximately 157 million people. On average, workers pay 17% of the cost of premiums for single health coverage ($1,243 per year) and 27% of the cost of the premiums for family health coverage ($5,588 per year). 

For those of us with workplace insurance, the cost of premiums is usually deducted from our paycheck. Although this is convenient from a net pay standpoint, it makes it easy to ignore the cost in our expense tracking or budgets.  

Over the years of reading finance blogs, I noticed that many people in the FI community do NOT include healthcare premiums in their expenses.

As finance nerds, we are known to track every single penny that goes out the door. For health care, we track our doctor visits and prescription drugs costs. So why wouldn’t we do the same thing for health insurance premiums?

Why Track Health Insurance Premiums?                             

Not including premiums in your expense reports results in a skewed view of what you pay for healthcare. Here are reasons it is important to track your health insurance premiums:

  • It is a real expense

By definition, your healthcare premiums are a real expense. But because most of us don’t swipe a credit card, write a check, or pay cash for it, we overlook this cost because it’s mostly deducted from out paychecks of included in our employer health benefits.

  • Employment situations can change

You might say that you don’t need to track health insurance premiums because the costs are low or you never want to quit your job so you will always have employer provided health insurance. But the reality is, there is no guarantee your situation will remain constant.

At the beginning of 2017, we knew nothing about the FIRE movement. Dragon Gal was working and we both had insurance provided by our employers. The combined cost of our portion of the premiums was about $150 per month. After Dragon Gal retired that summer, I put her on my workplace insurance. This increased our monthly premiums by over 3 times! Not only were we not receiving her paycheck, my net paycheck was now smaller because of the increased insurance costs (to the tune of almost $3,500 per year). 

  • Having non-employer sponsored insurance

If you didn’t get insurance from your job, you would most likely budget and track the costs of the plans you have to pay for on your own (which would probably be much higher than the premiums you pay through your workplace insurance). So why track the costs you pay on your own, but not the costs you pay that are netted from your paycheck? Self-employed, freelancers, or contract workers are all people that would need to pay for insurance on their own, and would most likely be tracking the expense.

  • Implications for financial independence and early retirement

People who don’t track costs for premiums are underestimating their FI number or retirement savings.

When I was still working, we paid roughly $500 per month in premiums, via my workplace insurance. Now we are paying $1,100 per month in premiums: Dragon Gal has an insurance plan on the marketplace (Obamacare) and I have COBRA coverage through my former employer.

If I didn’t include any of those costs in my budget, using the 4% rule of Financial Independence, I would be understating my FI number by $330,000!

 $1,100 monthly expense*12 = $13,200 annual expense

$13,200* 25 = $330,000

Likewise, if I ignored the $500 per month we paid last year with my employer insurance, my early retirement budget would show the full increase of $13,200 per year. By including the premiums from my work insurance, I was preparing myself for the costs when I needed to buy insurance on our own. Early Retirement didn’t mean a $13,200 increase per year; it only meant a $7,200 increase per year. That is still a large increase, but seeing a $7,200 increase is much more manageable than a $13,200 annual increase.

Without tracking any of the premiums, I would have underestimated our retirement savings goal by $330k. But by tracking the premiums I paid through my job, I was only understating our FI number by $180k ($7,200*25).

How We Tracked Our Premium Costs

For most of my working career, I did not track our health insurance premiums. But when I found out about Financial Independence in 2017, I changed that. 

I track all of our investments and expenses in Quicken. In the past, I would enter the net amount of the paychecks we received. Once I decided to track health insurance premiums, I started to gross up the income for the premium cost, and then input the premium as an expense.

A $5,000 net paycheck would be adjusted to $5,500 gross pay and an expense of $500 would be deducted for health care premiums. Pre-2017 I would just input a total net salary of $5,000. This was a simple change that added just a few extra seconds to the task of inputting my paycheck. But now I had the additional costs included in my tracking. I could then incorporate this cost into my budget.

Focus on the Total Cost of Healthcare       

It is tempting to just pick the health plan with the lowest premiums, but that may mean you pay more in total costs when you need to use the services (go to the doctor or hospital). 

If you use a lot of services, it might make sense to get a health plan with higher premiums and a lower out of pocket max.  

Let’s take a look at two plans my former employer offered (numbers rounded):

Healthcare Scenario 1: Doctor Visits Only

Monthly Premium (Employee Only) $100 $50
Annual Premiums $1,200 $600
Doctor Visit $25 copay Full cost up to deductible (assume $150)


In Plan A, if I have one visit to the doctor (aside from the annual physical, which is free), my total annual cost would be $1,200 for premiums and $25 for the doctor visit, or $1,225 total. In Plan B, the same costs would only be $750 total ($600 premium plus $150 doctor visit).

Plan B is cheaper in total. But if I wasn’t including the premiums in my expense tracking, I would show that I spent more in costs with Plan B ($150 for the doctor visit versus only $25 for the doctor visit in Plan A).        

As a cancer survivor, I have learned to look at the total cost of health care when building my budget (premiums plus out of pocket spend). I know that I need to see my oncologist for lab work at least two or three times a year. Because I will need more services, I am more likely to choose a plan with a higher premium, but lower out of pocket costs.

Now let’s look at the cost of lab work for the two plans:

Healthcare Scenario 2: Lab Work

Monthly Premium (Employee Only) $100 $50
Annual Premiums $1,200 $600
Doctor Visit $25 copay Full cost up to deductible (assume $150)
Lab Costs $0 (insurance pays 100%) Full cost up to deductible (assume $1,000 per event)
Deductible $1,750 $2,250
Total Cost of 1 Doctor Visit and 2 Labs $25 ($25 doctor + $0 Lab 1 + $0 Lab 2) $2,150 ($150 doctor + $1,000 Lab 1 + $1,000 Lab 2)
Total Healthcare Cost with Premiums $1,225 $2,750


Although Plan A has higher premiums, the labs are free and thus the total cost of premiums and labs is significantly lower than Plan B.

Based on my health care needs, although Plan A has higher premiums, I would spend a lot less money in total than with Plan B. On the flip side, Dragon Gal does not use the doctor as much as I do. So Plan B would make more sense for her. 

See how this can be confusing if you don’t track the premium costs? Your total costs can vary depending on what your needs are. So it is important to look at all health care costs in your budgeting.

Estimating Non-Workplace Health Insurance

The premiums you pay for workplace insurance are most likely not the full amount. But it’s still important to think about the full amount in terms of understanding your FI number or if you have a change in job situation.

Here are a couple of ways to estimate the cost of non-workplace health insurance premiums:


In most cases, if you leave your job, you are entitled to 18 months of company-provided health insurance through COBRA continuation coverage. But you must pay 100% of the premiums plus a 2% administrative fee. For Plan A above, the $100 monthly copay is almost $700 per month under COBRA. For the $500 per month plan that Dragon Gal and I had, COBRA is about $1,600 per month.

COBRA is expensive! But it still might offer better health coverage than plans in the open market. Although I might find cheaper premiums in the open marketplace, I would spend significantly more to go to the doctor or have lab work done. So those high COBRA premiums made sense to me. 

If you don’t know the price of COBRA continuation coverage, using estimates from the KFF survey, assume your single health coverage is 15% of the total (so take your premium and divide by 0.15) and assume your family health coverage is 30% of the total premium (take the premium and divide by 0.30).

  • Healthcare.gov or ehealthinsurance.com

Healthcare.gov is home to the health insurance marketplace (Obamacare). If your state has its own marketplace, this website will direct you to your state specific site. You can find prices of plans and see which doctors and hospitals are in-network.

Ehealthinsurance.com is an aggregator site that shows prices for Obamacare as well as short-term plans and small business plans.

Regardless of the ways you estimate health care cost, don’t just look at the total health insurance premium costs; you need to also look at the cost of utilizing services. One easy way is to take the annual premium costs and add in the out of pocket maximum. This is the most you would pay for health care in a year. 

Insurance as Part of “The Big 3” Expenses

We all think of housing, transportation, and food as the big 3 expenses. But by including your health care premiums, insurance costs might actually become part of your big 3. 

While I was working, the $500 in monthly insurance premiums ($6,000 yearly) was more than our food expenses for our family of two (groceries and restaurants, including travel). This cost was also more than the cost to own and maintain our two Toyota Prius cars. (We don’t have any more car loan payments.) Only our housing costs and travel expenses (we like to travel) were more than the costs of the workplace health insurance premiums. 

In 2020, under our new early retirement insurance, the $1,100 per month in premiums will be our largest expense for the year. 

Typically, we like to know what our big 3 expenses are so we can find ways to shave our costs. But unlike food, housing, or transportation, you probably feel you have less control over healthcare costs. However, by doing a little research on the plan options, you can have some control over the costs. 

Based on how you’ve used healthcare historically, you can think about how to optimize your costs. For me, it makes sense to pay higher premiums in exchange for lower out of pocket costs. Dragon Gal rarely goes to the doctor outside of her annual checkup, so it makes sense for her to pay lower premiums and higher out of pocket costs. We are essentially using her insurance to cover her in case of emergencies. 

Final Thoughts on Budgeting for Healthcare

As you go through the open enrollment season at work or think about your budget for 2021, include health care premiums as one of your expenses listed in your budget. Just because your health premiums come directly out of your paycheck, it doesn’t mean they’re not a cost you aren’t incurring.

Since I started tracking health insurance premiums and researching our plan options, I have become more aware of our true health care cost. This awareness gave me a realistic view of our FI number and allowed us to be better prepared as early retirees. 

With the pandemic, we are in an increasingly volatile job market. I think it is important for everyone to understand what your health care costs may be without employer sponsored insurance. Hopefully, you don’t have to think about that situation, but by doing a little research, you can be better prepared for any curveballs that may come your way.

Dragon Guy retired in 2019 at the age of 43 after a 20-year career in finance. He is a 9-year cancer survivor, having been diagnosed with leukemia in 2011. He has been married to Dragon Gal for over 18 years. Together, they blog at The Dragons on FIRE, where they write about their early retirement experiences, living with cancer, and traveling around the world.

(Visited 48 times, 1 visits today)

Get blog posts automatically emailed to you!


  1. The Millennial Money Woman November 9, 2020 at 5:54 AM

    Joel – and Dragon Guy –

    I thought it was great to post an article about health care.

    Honestly, I’m surprised to see that not that many personal finance blogs discuss health care and the many options for healthcare, since it really is very expensive.

    It seems like healthcare and college are 2 of the few costs steadily increasing at a 6+% increase each year – which is very steep.

    Thanks for detailing this information!

    The Millennial Money Woman

    1. Dragon Guy November 9, 2020 at 8:22 PM

      Glad you enjoyed the post. There are definitely a lot of different options for healthcare, well beyond the scope of this post :) And many of those are probably cheaper than what I have highlighted here. I’m wondering if it is not talked about as much in the FI world because if people are generally healthy, then they don’t think as much about the costs. I was probably in the same boat before my cancer diagnosis. Once I started needing to use the insurance more, I developed a greater understanding and appreciation of the costs.

  2. Megan Garcia November 9, 2020 at 9:26 AM

    It’s pretty insane how much health coverage costs on your own. I’d be interested to see what those cost would be without insurance. Could it be cheaper at that younger age?

    1. Dragon Guy November 9, 2020 at 8:25 PM

      In my mind, the main reason to get insurance is to protect against any medical emergencies. A cancer diagnosis can costs tens of thousands or hundreds of thousands of dollars without insurance. Or the random situation of getting injured in a car accident. So yes, a singular doctor appointment may be cheap and not worth the insurance costs, but it’s for those bigger events where insurance ultimately pays off.

      1. Joel November 10, 2020 at 9:24 AM

        I tried doing some of these figures comparing insurance vs. paying out of pocket… And there is no clear winner. It comes down to peoples risk tolerance, their lifestyle, and sadly, what they can afford.

  3. Simone November 9, 2020 at 10:07 AM

    Congrats on being in remission! Many continued years. Seriously healthcare is overlooked and not discussed enough. We really have to look at those costs when planning for the future. It’s something that we discuss due to chronic disease hitting home. But we take health and insurance for granted until we are really faced with something that could jeopardize them. Take care.

    1. Dragon Guy November 9, 2020 at 8:30 PM

      Thank you Simone. Yes, before my cancer diagnosis, I did not think much about the cost (heck, I didn’t even go to the doctor for a regular checkup!). But now I am all over those costs and expect them to continue to be one of our largest expenses for years to come.

  4. Kane Hanashi November 9, 2020 at 11:50 AM

    Really great article, thanks for sharing!

    1. Dragon Guy November 9, 2020 at 8:30 PM

      Thank you! Glad you enjoyed it!

  5. KellyB November 9, 2020 at 1:03 PM

    This is a great post on a very important expense that is rarely written about in much detail. Like you, as I got closer to retirement and building out the budget for expenses, I realized I had only tracked my out of pocket expenses. I started looking at the employer paid premiums to add those in. Then I asked my HR what costs were to stay on the plan after retirement, and upon hearing the 102% of the ENTIRE amount I used that. What I didn’t get right is that I budgeted all my expenses with an annual increase of 3%, but healthcare costs unfortunately have risen TEN PERCENT each year! It’s crazy that when I budgeted $2800 per MONTH (not a typo!) in 2018 rose to $3000 in 2019 and $3300 in 2020. So that’s been a budget shock and has required some belt tightening in other places.

    The other area to make sure to budget is taxes. Again, they are taken out before you get your net pay and can be easily overlooked when planning. Make sure to build in federal, state, and city if you have them. They certainly take another big bite out of your final number, so make sure you’ve covered that too.

    1. Dragon Guy November 9, 2020 at 8:45 PM

      Wow, $3,300 per month is crazy high! How many people does that monthly cost include? I agree with you that the annual cost increases are the biggest wildcard. I was assuming 5% for premiums and out of pocket maximums increases, but that is definitely not going to be enough. If Dragon Gal keeps the same plan next year she will pay over 12% more per month in premiums. Time to update our budget!

      Good point on not ignoring taxes. When I was working those were by far our largest expense. I’ve started projecting taxes in my futures budgets, based on potential investment income and any side jobs we may do in early retirement.

      1. KellyB November 10, 2020 at 11:25 AM

        That amount is for 2 people. I should add that it was for an ex-employer plan. Due to the huge cost I am looking into the ACA for 2021 and my research shows I can get back to the $2800/month range for a similar plan under ACA. Unsure what I will do if the Supreme Court takes the ACA away, will have to see if I can get private insurance. Healthcare is really an area of high cost for early retirement folks, everyone make sure to look at every option available.

    2. Joel November 10, 2020 at 9:18 AM

      Great point on taxes Kelly! I think many people under prepare in retirement and it’s probably a big reason retirees move to cheaper states for a lower tax burden.

  6. Adam November 9, 2020 at 2:28 PM

    This is one of the few reasons I’m glad our FIRE date is 8-10 years into the future. Maybe by then the USA might figure out healthcare decoupled from employment. I’d love to be able to buy into M4A or TRICARE or something.

    Meantime my wife’s generous employer covers 100% of our HDHP premiums (along with kicking a few grand into an HSA each year). We’re incredibly lucky; today’s market excitement has pushed our total HSA balance up over $50k, and ten years from now — assuming nothing too catastrophic with either health or investments — it ought to be around $175k. So at least we won’t be completely SOL. Probably.

    1. Dragon Guy November 9, 2020 at 8:56 PM

      I think getting insurance from our jobs is just silly. But unfortunately I don’t see Washington getting it’s act together to offer better options. But it would be nice if we could at least have the option to buy into a nationwide plan similar to Medicare.
      At least you have time until your FIRE date to see your investments grow and account for whatever the costs may be in a decade!

      That’s awesome you get the premiums covered 100%. Cheers to a fast growing HSA account!

      1. Adam November 10, 2020 at 8:10 AM

        I live two miles from DC. Washington has been doing things for more than two centuries! I blame the fractious fools the rest of the country insists on sending us every two to four years. ;)

  7. Shay November 9, 2020 at 6:37 PM

    I am almost 62 and am seriously examining leaving my very stressful job in healthcare soon. I would be responsible for 3 years of insurance at some very high prices. It has caused me to see if I can hang on a little bit longer. Thanks for addressing this VERY important topic for retirement planning.

    1. Joel November 10, 2020 at 9:30 AM

      Hey Shay, I can see why that’s such a tough decision… If you saved the $$$ on 3 years of high premiums that could be some nice extra padding for your retirement fund.

  8. Dragon Guy November 9, 2020 at 8:59 PM

    With Medicare only 3 years away, the decision to leave now is definitely trickier. Hope you are able to handle the stress or find a solution that works for you!

  9. Max @ Max Out of Pocket December 14, 2020 at 10:46 PM

    Nice work here, Dragon Guy.

    I was (and still am) guilty of not reporting health insurance as a line item in my annual expenses. I agree with you, it isn’t best practice,

    That said, my plan is valued at $22,450 and I pay about $5,000 of that which is subsidized by FICA and Federal taxes. I think if I were to retire early, I would probably figure something else out for insurance because I feel pretty comfortable navigating the system. I think odds are one of us will likely always work at least part-time for an employer that covers us. We have almost $60,000 in our H.S.A. account at this point, so I feel pretty protected from out-of-pocket costs regardless of plan design.

    Finally, I love the side by side, and people should also go through that exercise when considering a new position at a new company.

    Take care!