Are You Ready for the Retirement Income Gap Years?

You’ve done the math. You have the savings. You’re ready to call it quits at 62, maybe even 60, and waking up without an alarm clock sounds pretty good right about now. No commute. No meetings. No corporate politics.

Then there’s the stretch nobody warns you about.

It’s the years between the day you stop working and the day you turn 65, when Medicare begins. These are the retirement income gap years, and they work like a bridge. You cross them without a paycheck, and you buy your own health insurance in the process. Those two problems are wired together, and most people try to solve them one at a time.

Picture this

Suppose a couple goes at 62. Solid nest egg, they feel good about it, and they’ve mapped out the first year. Pull a little from savings. Travel a bit. Enjoy themselves.

Then they price out health insurance.

COBRA from the old job is one number. The individual market is another. Both are considerably larger than the placeholder they had penciled in. Suddenly the withdrawal they planned for the year covers premiums and not much else. The trip gets smaller. The math they felt so good about six months ago needs to be redone.

Nothing went wrong. They built a plan around the part of the picture that was easy to see.

The gap has two sides

Most people focus on one side. Where does the income come from? Right question, half the picture.

The other half is coverage. You lose employer insurance the day you retire, and you’re too young for Medicare. So you find your own, in a market where premiums move every year, deductibles shift, and networks change underneath you.

There are a handful of ways people bridge that coverage gap. COBRA from the former employer. A spouse’s plan, if one is still working. The individual marketplace. Occasionally a retiree health benefit, though those have grown rare. Each carries a different cost, a different network, and different tradeoffs, and the right one can come down to which doctors you want to keep.

Here’s why the two sides can’t be separated. Higher health costs mean you need more income. More income can mean higher taxes. Higher taxes mean withdrawing still more. It’s a loop, and each turn makes the next one worse. A decision on one side always shows up on the other.

The Social Security tension

There’s a reason a lot of people wait until 65 to retire. It lines up with Medicare, and for some, it aligns closely with their full retirement age. But not everyone wants to wait, and some don’t get to choose.

Claiming Social Security at 62 does fill part of the gap. It also permanently reduces your monthly benefit, under the law as currently written. The size of your benefit depends on your 35 highest-earning years and on when you choose to collect, so the most useful step is to pull your own estimate from the Social Security Administration at www.ssa.gov rather than work from a rule of thumb.

Waiting gives you a larger benefit, but it means funding more of the gap from savings, and every dollar you pull early is a dollar not working for you at 85.

There’s no clean answer. There’s a tradeoff, and where it lands depends on your health, your other income, how long the money has to last, and what you want these years to look like.

The tax surprises nobody mentions

Now add 3 pieces most people never see coming.

One, money you take from a traditional retirement account during these years counts as income. If you withdraw too much, you could move into a higher tax bracket, which increases your tax bill and may force you to take out even more. It is the same cycle again.

Two, if you get health insurance through the Affordable Care Act marketplace, your premium subsidy depends on your income. This piece changed recently, and it changed in a way that matters a great deal for these particular years.

The enhanced premium tax credits in place since 2021 expired on December 31, 2025. Subsidies did not disappear, but they reverted to the original ACA rules, which means the income cliff came back. Help gradually phased out as income rose. Now the subsidy stops entirely above roughly 400 percent of the federal poverty level, a threshold that sits near $84,600 for a couple under the 2026 federal poverty guidelines.

Sit with what that means during the gap years. A withdrawal that pushes your income just past that line does not shrink your subsidy. It ends it. One extra distribution, one conversion, one capital gain, and a household goes from meaningful help to paying the entire premium. The gap between landing just under and just over can be thousands of dollars, decided by a withdrawal made without knowing the line was there.

This is also a moving target. Congress has continued to debate extensions, so confirm current rules before planning around them.

Three, Medicare runs its own income test, and it reaches backward. It is called the Income-Related Monthly Adjustment Amount, or IRMAA, and it works on a two-year lookback. The income reported on your tax return from two years earlier determines whether you pay a surcharge on top of the standard Part B and Part D premiums.

Here is why that matters. If you retire at 62 and enroll in Medicare at 65, the return that sets your first Medicare premium is the one you file at 63, right in the middle of the gap. A large withdrawal, a conversion, or a property sale that year can raise your Medicare cost two years later, after the decision is made. The surcharge applies only above published income thresholds, which Medicare updates annually.

A single withdrawal decision can move your tax bill, your health insurance subsidy, and your future Medicare premium at the same time. Most people are making that decision without knowing it does all three.

What this looks like if you are retiring in the Triangle

The mechanics of the gap are the same everywhere. Some of the numbers are local, and they matter if this is where you plan to spend these years.

Individual market costs vary by state, county, and age, and networks vary by county as well. Two couples with identical savings can face very different premiums simply because of where they live and how old they are when they retire. A quote from another state, or a number a friend mentioned years ago, is not a useful stand-in. Pull your own for your county and your age, before you set a date.

North Carolina saw some of the steeper increases going into 2026. Insurers filed rate requests ranging from roughly 6.9 percent to 36.5 percent, the largest in five years, as reported by North Carolina Health News in August 2025. The effect showed up in what people bought: per healthinsurance.org, 64 percent of North Carolina enrollees chose Bronze plans for 2026, up from 45 percent, which generally means lower premiums and higher deductibles.

A lot of people move here from higher-cost parts of the country assuming things cost less. In many categories, that holds. But Wake County property taxes follow home values, which have climbed, and homeowners insurance has risen accordingly. A budget built on what things cost when you first looked at the area may already be out of date.

None of that changes the strategy. It changes the numbers you plug into it, and in these years the numbers are the whole game.

The questions you probably cannot answer yet

Most couples I talk with have a general sense of these years. A rough number. What they haven’t done is run them.

• What do you actually need each year between your retirement date and 65?
• What will coverage cost you in each of those years, and what does that do to your withdrawal rate?
• Is claiming Social Security early worth the permanent reduction in your case, or is funding more years from savings the better tradeoff?
• How do your withdrawals affect your tax bill and your health insurance subsidy at the same time?
• What happens to the plan if premiums rise faster than you assumed?
• What do these years do to how long your portfolio lasts?

If those are hard to answer, that’s the normal place to be. These aren’t questions anyone answers off the top of their head.

These years also create an opening

This stretch is not purely a matter of survival. For many people, it is the lowest-income period of their entire adult lives. The paychecks have stopped, and required distributions have not started.

That can matter. Some households consider moving money between account types during those lower-income years or realize gains while in a lower bracket. Whether any of it fits depends on your income, your other accounts, and how it would affect your subsidy. The same interaction that creates the trap can create the opening.

These years deserve a plan of their own. Handled without one, they get expensive. Handled deliberately, they are one of the more useful planning windows you get.

What working through it together looks like

This isn’t really a decision to make alone, and not because it’s mysterious. There are simply too many moving parts that interact. Income, coverage, taxes, and Social Security timing all pull on one another, and changing one changes the rest.

What we do is model these years specifically. We start with what you’ll actually need, year by year, not an average. We put a real number on coverage instead of a placeholder. We compare claiming ages side by side in your own numbers. Then we look at how a withdrawal plan interacts with your tax picture, your subsidy, and your future Medicare premium, because those don’t sit in separate boxes.

For tax specifics, we can work alongside your CPA, and for legal structure, your attorney. What we bring is coordination, so the pieces are no longer planned one at a time.

The goal isn’t a perfect answer. It’s a bridge you’ve looked at before you start crossing it.

See where you stand

Before you set a retirement date, it helps to see which parts of your plan are already clear and which are not. The Retirement Confidence Checklist is a short self-assessment across income, taxes, investment risk, timing, and how it all fits together. Download the Retirement Confidence Checklist.