Some numbers have long been vital for retirement planning. At age 59 and a half, you can tap retirement plans without paying a 10% surtax. At 62, you can begin to collect Social Security retirement benefits. And at 65, workers and their spouses qualify for Medicare, the federal health insurance program. In recent years, a new number has been added to that list. "I celebrate the 63 and a half birthday for clients," says Dave Gardner, who heads Yellowstone Financial in Boulder, Colo. "That is when they've reached the point where COBRA coverage can take them all of the way into Medicare eligibility."

Sixty-three point five has become a key milestone for a couple of reasons. First, there's the decline in employer-provided health benefits for retirees. Just as pensions are waning among private employers, so too are fewer companies offering group healthcare coverage to long-serving employees. Only 33% of employers with more than 200 employees provide retiree health benefits, down from 66% in 1988. Among small employers, such benefits are almost nonexistent.

Second, the acceleration of medical costs shows no sign of slowing. Today, a modest outpatient procedure such as kidney stone removal can cost upward of $20,000; without some health insurance, a few days' stay in a hospital can decimate a retirement portfolio that took decades to accumulate.

"I have had clients who said they were in perfect health, so they figured they could go without health insurance for a few months until they were eligible for Medicare," says Ernest Hathaway, co-founder of Financial Strategies Institute in Midvale, Utah. "Bad idea! A fall, a heart attack or any another medical problem could totally wipe out their retirement savings."

Are Your Clients Insurable?

Making preretirement planning all the more urgent is the fact that, these days, private health plans may turn down as many as 30% of early retirees. "I am surprised by the number of seemingly healthy clients who do not qualify for individual coverage," says Linda Campbell, senior financial planner with Budros, Ruhlin & Roe in Columbus, Ohio.

Examples of seemingly minor conditions that have resulted in underwriting declines, riders, exclusions or significant premium increases include allergies, asthma, treatment for depression or attention deficit hyperactivity disorder, periodic injections for back pain, "white-coat syndrome" (blood pressure readings that are high at a doctor's office but normal at home), and multiple C-section deliveries, according to Campbell. Michael Chamberlain, a financial planner in Santa Cruz, Calif., adds hemorrhoids and bunions to the list. Only five states—Maine, Massachusetts, New Jersey, New York and Vermont—have so-called "guaranteed issue" laws that ensure coverage for all individuals at standardized prices. While this system results in higher premiums for everyone, it prevents such discrimination.

Therefore, for many under-65 retirees, the most important question is "How's your health?" says Kathy Bailey, president of The Summit Agency, an insurance agency in Austin, Texas. "Each carrier has a list of declinable health conditions," she says. "Also, if someone has a preexisting condition, such as a bad knee, or has had knee surgery, for example, he or she might be accepted with an exclusion rider on the knee." So the first question to discuss with clients is how much of a battle it will be to get coverage; next, of course, comes how to get it most effectively.

The Policy Hunt

As soon as a client starts talking about the possibility of retiring early—whether willingly or because of downsizing—it's time to start developing a strategy for continuing health coverage. Here are some routes to explore.

Count on COBRA. Under COBRA, a federal law, employers with 20 or more employees must allow departed workers to maintain their group health coverage for up to 18 months, albeit at a much higher cost. In some cases, COBRA may be extended for up to 36 months, but 18 months is the norm. Thus, many employees stay on the job until age 63 and a half, when they can retire and use COBRA to fill the gap until age 65.

But the COBRA-to-Medicare route does not always work. COBRA doesn't protect employees of very small companies, nor employees of companies that closed down and ended their health plan. Some clients will retire earlier than 63 and a half, voluntarily or involuntarily. In such circumstances, COBRA won't fill the pre-Medicare gap. Among married clients, one spouse's group health insurance may cover the vulnerable spouse. If that's not the case, you'll have to explore other arrangements.

Make a deal. "One approach is to negotiate with your employer to keep you on the company plan at your own expense," Hathaway says. "This works best with smaller employers." Hathaway has one client who continued to do some consulting work for his employer and stayed on the payroll. "He made a lot less money, worked a few hours that he controlled, but got medical insurance benefits."