How To Plan for Healthcare if you Retire Before 65…Without Paying an Arm and a Leg.

In today’s workshop, we will discuss How To Plan for Healthcare if you Retire Before 65…Without Paying an Arm and a Leg.

Last week I asked you what retirement issues were on your mind. 

Well, 183 comments later, I’m still sifting through to grab the most popular questions to answer. 

But, there was definitely a standout and that was around planning for the ‘potentially’ large cost of healthcare if retiring before 65 and qualifying for Medicare. 

Alan asked “I'm 59 and my wife is 62. I believe we are set financially for retirement. (No debt & quite a bit in retirement accts.)Would like to retire now but the only thing holding me back is Health Insurance. If I retire, I will lose our very generous health insurance plan.”

Lisa asked “I too would like to know how to navigate the decision to retire based on healthcare. My husband and I would retire next year if we were confident we could afford healthcare for the next 7 years (Both age 58).”

Alisa asked “Best ways to bridge the gap with health insurance if you retire before 65.”

Joyce asked “How to retire before 65 and not pay and arm and a leg for health insurance.”

Joyce’s question was my favorite and I think sums up exactly what we all want to know.

Where to start:

This workshop assumes you will not be utilizing COBRA or any other healthcare option and will need to use the ACA marketplace to fund your healthcare.

1. The first thing you need to understand is what your retirement income need will be. Having a detailed plan for expenses is the first stop to answering this question.

2. Compare your income need to the ACA Program Eligibility by Federal Poverty Level. Here is the California chart but includes general federal info as well. Keep in mind 13 states run their own healthcare exchanges and others are at least partially federally run. See your state here. 

If your income need is between the 100%-400% of federal poverty level, then you may be able to qualify.

3. Once you have your expenses mapped out, next will be to add up any fixed income sources like pensions. You’ll need to verify whether your sources on income either count or do not count as income for ACA. See this link for more info. [What counts as income for ACA purposes?]

3a. If your guaranteed income sources are below the 400% FPL, then we may have a chance to lower your healthcare costs.

There are two websites which are great places to start, Healthcare.gov and one of the online Health Insurance Market Calculators. Here’s one that I like.

4. Once we understand where we need to keep your reportable income (MAGI) for ACA, this is where your strategy has to be a bit more customized. Your next step will be to create your retirement income plan utilizing various accounts. 

You may have a combination of pre-tax, taxable brokerage/cash, and tax-free Roth like accounts.

When reviewing your accounts for purposes of qualifying for ACA, you will possibly take a different strategy than just considering the most tax-efficient strategy.

For example, it generally makes most sense (from a tax perspective) to leave your Roth accounts to use for last. 

Since withdrawals after 59.5 years old from Roth accounts are tax-free (removal of contributions is always tax-free), you may want to supplement your income need to stay under the ACA limits from this account whether it makes the most sense from a tax perspective. 

Even better is if you have cash/brokerage accounts to draw from while doing your best to avoid capital gains (as capital gain income does count for ACA). You can use these funds, especially if it’s cash, to fund your income need until 65 or you qualify for Medicare.

Many clients come to us when they have 1-3 years to plan for retirement thinking this is enough time. 

Many times it’s fine. 

However, if you are considering retiring early, starting your planning earlier can be quite a good idea. 

If we know you will want to retire before 65, then we can review your ‘contribution’ strategy and help you make the best choices instead of what many do and put 100% of contributions pre-tax into 401(k)'s or IRA's.

You may also be able to claim additional tax deductions to help you qualify.

-Alimony paid (only if your divorce or separation was finalized before January 1, 2019)

-IRA contributions (if you don’t have a retirement account through a job).

-Educator expenses (if you’re a teacher and pay for supplies out-of-pocket)

-Student loan interest

-Health Savings Account (HSA/HRA) deposits

For example, say you are a couple make $80,000 per year household income which is over the $67640 limit. But, then you enroll in a HDHP that qualifies for a HSA. Instead of paying the full premium, (assuming you have earned income) you could contribute $7000 each to IRA’s ($6000 + $1000 catch up) plus an additional $7,100 to a HSA for the year. That would bring your income to $58,900 which would be within ACA limits.

Many times 100% pre-tax is the right decision, but in other circumstances, having “tax diversification” with multiple buckets to draw from can be quite useful and could possibly save you over $20,000 PER YEAR in healthcare costs!!