Retiring early is the dream of many. It is a time when you can finally truly be in the driver’s seat. You can make decisions about how to spend the finite time you have left on this earth. Whether you choose leisure, travel or even passion work in your retirement, your possibilities are limited by your imagination – and the retirement vision you’ve set out for yourself. But often, there are two particular hurdles that stand in the way of an early retirement. One, enough money to cover your living expenses for the remainder of your life; the other, paying for health care in early retirement. You need to consider the time between when you retire and when you become Medicare eligible, typically at age 65.
The good news is that there are strategies and options for affording and paying for health care in early retirement. Fear not my friend.
Coverage through the Affordable Care Act (ACA) using the Health Insurance Marketplace
The Affordable Care Act (aka Obamacare) outlines a number of provisions to give more Americans access to affordable health insurance coverage. There are three major things within the ACA that are relevant to early retirees. One, the ability for those with preexisting conditions to get coverage. Two, the offering of subsidies from the government to help cover premiums. And three, the coverage of preventive care at 100%.
The Health Insurance Marketplace offers the government’s subsidies and available plans. It is an online store, offering health insurance coverage from hundreds of insurance companies across the country. And subsidies are automatically applied at the time you purchase a plan if you qualify.
Some things you may not know about the ACA and Health Insurance Marketplace
- Subsidies offered are not based on your net worth. Subsidies are based on annual income. Therefore, you can hold a fortune in your 401ks, IRAs and other accounts and still qualify for a hefty subsidy. Your income just needs to be below a certain threshold. You control your annual income when you are retired. It is, therefore, very manageable to keep below the threshold for a subsidy. Subsidies are based on the year you want coverage, not your previous year’s income. So, let’s say you retire at the end of the year in December, and you need coverage starting in January. You would base your income on the year that starts January. To find out the estimated subsidy you could get, visit healthcare.gov’s estimator. [And remember, if you are doing this for future planning, put an estimate of your retirement income, not your active working income.]
- The plans offered are from the same companies who offer insurance on the private insurance market. Many people believe that health insurance offered through the government’s Health Insurance Marketplace is inferior. This is untrue. Yes, there is an array of plans, some with extremely high deductibles. These are offered to ensure that there is something for everyone. And a high deductible isn’t necessarily a bad thing, especially if you’ve taken advantage of an HSA during your working years.
- Your health coverage will be provided by the insurance company you purchase from, not the government. While the government offers the online platform to purchase the plan and the subsidies to offset health insurance premiums, they do not administer the actual insurance. Private health insurance companies do. It is likely you can find a plan from your current health insurance company on the Health Insurance Marketplace. Staying with the same carrier may be an option.
- Preventive care on all plans is covered at 100%. Preventive care, such as wellness visits to the doctor, immunizations and other services are covered at no cost under the plans. Even certain preventive prescriptions have 100% coverage.
Using a Health Savings Account (HSA) with a Health Insurance Marketplace plan
A Health Savings Account or HSA in your retirement is invaluable. If you are still currently working and have access to a health plan that allows you to sign up for an HSA, you should consider it. With this account, your contributions are tax free, the earnings are tax free, and your qualified medical expenses paid with the account are tax free. In short, there’s a triple-tax advantage to a Health Savings Account.
When it comes time to retire, and you have not yet reached that magical Medicare-eligible age of 65, your HSA can be used to help bridge you to that time. So, if you were to enroll in an ACA plan through the Health Insurance Marketplace, you can use those HSA funds you stored up during your working years to fund your copays, deductibles and other qualified medical expenses. Signing up for a higher deductible plan is one way to keep your premium costs way down. This is especially true if you use health insurance more infrequently (and remember, preventive care is still covered at 100%!). You can cover the higher deductible by using those HSA funds for out of pocket expenses until you hit the deductible.
How to estimate the cost of a Health Insurance Marketplace plan
Still years away from retirement? It is good to get a sense of what your expenses, including health care, might look like for advance planning.
- Visit Healthcare.gov to begin exploring options for pre-Medicare health insurance.
- Plug in your zip code to see plans and prices
- Answer a few questions about your household, including who you’re covering, marital status, whether you have dependents, your age and gender. For the purposes of estimating, you can use a planned retirement age, such as 55.
- Next, input your planned ‘early retirement’ income. We’ll use a retirement income of $70,000 for this example. This would be income from your investments, retirement account, perhaps a part-time job as well.
- You will see an estimate of the subsidy you could qualify for. With the $70k retirement income for a married couple (with no dependents counted), the subsidy estimate is $431 per month.
- Next, “view plans” will show you all of the plan options and prices (including the subsidy). I saw over 100 options in my case. The lowest being just over $200/month for a couple and the highest being just over $1,100/month for a couple. By choosing a plan with a higher deductible, you will pay a lower monthly premium. And as mentioned earlier, if you have saved money in a Health Savings Account, you can probably handle a higher deductible plan.
By going through the steps to get an estimate, it will make things more real for you. When you are planning for retirement, it is important to know what the actual expenses are versus hearsay or hypothetical numbers from other people.
Paying for health care in early retirement can be within reach for you
During your working years, focus on bringing down your monthly living expenses. Doing so will put early retirement completely within your reach. Having fewer housing expenses and car expenses, for example, makes your income needs lower. This means you don’t need to withdraw as much from your retirement accounts. And when you have a lower income, you can qualify for subsidies for health insurance premiums during early retirement. Affording health care coverage and other expenses, such as my favorite, travel, are within your reach. And that’s good for your wealth.