By Stephen Hassell, CFP®
I wanted to address a topic that comes up a lot when we're talking about retirement planning with individuals who want to retire early. And what we mean by early is prior to age 65. So, at age 65, as you're probably aware, from a health insurance perspective, you move on to Medicare. It's an affordable government-based plan.
And so, prior to that, a lot of individuals tend to have health insurance coverage through their work. And a big hang-up for a number of people considering early retirement is the health insurance cost if you had to go and get private coverage.
And so what I'd like to show you in this video is just options available to you that, if you know to take advantage of them or if you plan ahead enough, you can make these private insurance premiums not be such a big line item expense. And this boils down to premium tax credits.
So premium tax credits on private health insurance—this is not Medicare related, and this is not employer health insurance related. This is if you had to actually go out to the marketplace and get your own coverage. These plans offer premium tax credits, which are—think of them as large discounts from the stated premium.
A lot of times, if an individual is 60 years old, their concern is that they might end up paying $1,500 a month or more for coverage. And while that's true if they had to pay full price, if they're eligible for a premium tax credit, the cost is substantially lower. So I'll show you in this video how that is the case.
First of all, these credits are available to individuals that keep their income below a certain amount. And so, through the website here at healthcare.gov, you can find out if your estimated 2021 income is in the range to qualify for a premium tax credit.
Basically, the way the math is going to work out is—let's just say you're a married couple, two people in the household, and you’re residents of Louisiana. And your income range here, you could define this—now, it's important to think about what income is. The income that's going to be used here is modified adjusted gross income, which is adjusted gross income with a bunch of add-backs, like non-taxable Social Security amount added back, tax-exempt interest added back, things like that.
But the important part is it's income. So that could be income from a job. It could be income from Social Security. It could be income from an investment portfolio. It all counts.
The important part, when planning for this level of expenses, is making sure you have either a low enough living-expense need or enough money in non-retirement accounts that you're able to pull money from and not have those withdrawals, if you will, count towards income. Because if you were to take the withdrawals from, say, a 401(k) or an IRA account, all of that counts as income.
If, on the other hand, you have a savings account and you just take a withdrawal from a savings account, that does not count as income. If you earned any interest on a savings account, that would count as income. But anyway, the limit is about $69,000.
So if I pick this last range—if you were able to manage your reportable income to be somewhere at $68,960 or less, you're going to be eligible for credit. It says here, if your income is between this level, you may qualify for a marketplace plan with lower monthly premiums. And you can actually click here to preview plans. So I'll go ahead and look in our local area.
And you'll have to tell them something about your household. So your household, if you're a married couple, you and other people—are you married? Yes. Will you claim any dependents? Let's say no. And let's just say I'm 62 years old and I'm not eligible any longer because I retired or I'm thinking about retiring. So I want to simulate that, hey, I'm not eligible. So none of these. And my spouse is 65. So the spouse is already on Medicare, let's say, so I would select here “Eligible for health coverage through a job, Medicare, or Medicaid.”
I can go ahead and confirm this information, and here's where we have to estimate income. So again, we're shooting for income below that $68,000 range, roughly. So if we were to type in reportable income of $50,000, estimated savings, you may be eligible for a premium tax credit of up to $977 a month.
So earlier I mentioned that a big concern a lot of retirees have is that the premiums will cost $1,500 a month or more. While that's true, this is a very large amount to receive as a discount on coverage.
Group two, this is the individual at 65. They're already on Medicare, so they wouldn't qualify for credit.
You can click to view plans and click through here. I can say, “See all plans,” and you can filter plans. You can add doctors, drugs you might be taking, facilities you need to visit to kind of zone in on what's the right plan for you.
But just this first plan that pops up, it's an HMO plan. The estimated monthly premium is free, basically. This includes a $976.70 tax credit. Originally, the stated premium amount was $917.
So hopefully what you can see here is that health insurance can be affordable even if you decide to retire early. This would apply even if both spouses decided to retire early. So you don't need to worry about trying to use COBRA, which can be very expensive, and you don't need to worry about necessarily working longer simply to preserve that health insurance.
Now where the planning comes into play is, if the bulk of your investible assets is in retirement accounts, it's not easy to get that money out and not have it reported as income. So any reported income obviously is going to impact your eligibility for these credits.
And so, from a planning perspective, which you may want to think about doing prior to retirement, if you've not already done so, is establish either a non-retirement investment account or a savings account where you have a pool of money you can live on in those early years of retirement until both spouses, both members of the household, reach Medicare age of 65.
Hopefully, this was helpful and helps put to rest some of the concerns you may have about excessively expensive insurance premiums if you decide to early-retire. We encourage you to work with a financial planner to make sure that all other aspects of your plan are in good shape before moving forward with early retirement—but, certainly, don't want you to stay in a job longer than is necessary simply for the health insurance.
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