Three Strategies for Early Retirees to Reduce Health Insurance Expenses. By: Kathy Hollingsworth
Until you are eligible for Medicare, you’ll have to get health insurance by yourself, which can be costly. Subsidies provided by the Affordable Care Act (ACA) can be quite beneficial, but you must manage your income in order to qualify. Here’re three tips to help you get there.
Rising healthcare expenses could be a risk at any age. Since Medicare doesn’t start until age 65, healthcare expenses are an especially important component of retirement planning if you want to retire early. That means you’ll have to obtain health insurance at a time when you’re vulnerable to rising expenses and also don’t have a salary.
The ACA was designed to make insurance more affordable and equitable by removing pre-existing condition requirements and connecting income to federal health insurance subsidies. These subsidies are activated, assuming your income reaches certain thresholds when you purchase health insurance through the federal healthcare exchange (healthcare.gov) or a state insurance exchange. There were 15 state-run marketplace exchanges serving residents of those specific states in 2021; the federal ACA marketplace exchange will cover everyone else.
President Biden’s American Rescue Plan included specific regulations for 2021 and 2022 that were meant to enhance health insurance affordability for individuals with existing marketplace coverage, uninsured, and those who lost employment coverage during the pandemic. Subsidies have increased for all income levels, and premiums are now limited to 8.5% of Adjusted Gross Income (AGI).
As a result of these modifications, an additional 3.7 million people are now eligible for subsidies, saving an average of $70 per month for those with incomes between 400% and 600% of the federal poverty level. The new level raises the subsidy limit to $76,560 for singles and $157,200 for families of four. For ACA subsidy purposes, income is calculated using your tax return’s Adjusted Gross Income (AGI) plus any tax-exempt foreign income, tax-exempt Social Security benefits, and tax-exempt interest.
The Act also eliminates the taxpayers’ obligation to repay tax credits that exceed their adjusted income. Those who lost their employer-sponsored health insurance during the pandemic will have their COBRA premiums paid in full through September of this year.
For the time being, better insurance coverage is offered at an all-time low price. Unless Congress moves to make it permanent, this will end in 2022. Meanwhile, if you are considering retirement, here are three strategies to help you lower your health insurance expenses between retirement and age 65 by maximizing the savings available through ACA subsidies. While obtaining a subsidy is important, you also want to be able to live comfortably and sustainably in your retirement.
Strategy #1: Deferring Social Security
The amount of Social Security you get is determined by a sliding scale established by the Social Security Administration depending on your age, the number of years you worked, how much you contributed to Social Security, and when you file your claim. Although you can start claiming at the age of 62, the payments increase for each month you defer claiming until 70 when your benefit reaches its maximum.
Social Security income is considered as part of your total income when computing insurance premiums on the marketplace. As a result, claiming Social Security later lowers your income and allows you to get larger subsidies in the years between retirement and the age of 65 when Medicare starts.
Delaying Social Security can benefit your overall retirement strategy since it results in more continuous income when you may need it most in middle- or late-retirement stage. Married couples, in particular, can benefit from Social Security claim strategies to reduce healthcare expenses. For example, the lower-earning partner might file early while the higher-earning partner waits – this reduces the couple’s income that counts for the current health insurance subsidies.
Strategy #2: Reduce Retirement Accounts’ Withdrawals
Withdrawals from 401(k)s, IRAs, and other accounts alike, along with Social Security, are considered toward the income that determines the healthcare subsidy level you get. As a result, if you intend to retire early, it’s critical to avoid withdrawing significant sums from tax-deferred retirement accounts, which might affect your potential subsidies.
Since you aren’t required to receive distributions until you reach age 72, smart planning can help you avoid the types of excessive withdrawals that might raise your healthcare costs. Consider increasing your IRA withdrawals in the year or years before retiring and placing the money in a liquid savings account, which you may then use in early retirement to cover your expenses between the time you retire and age 65.
If you have any leeway in your tax planning right now, you should consider converting your Traditional IRA to a Roth IRA to minimize the taxes you’ll have to pay after you’re retired and collecting distributions. If you already have a Roth IRA, you can make early withdrawals in this manner if needed because Roth withdrawals are not classified as income under the ACA.
Strategy #3: Create a Cash Reserve
There is a lot you can do in the years leading up to retirement to reduce your exposure to any unexpected healthcare expenses. Before you retire, you should generally direct any additional funds into the above-mentioned liquid savings account. At least a year before you plan to retire, consider moving any capital gains from taxable investment accounts into that account as well. Do the same with any unexpected windfall, such as a job bonus, an inheritance, or a gift.
The goal is to accumulate enough liquid funds in this account to pay all or most of your expenditures in the year or years between retirement and the age of 65 when you get access to Medicare. However, this financial cushion isn’t only intended to cover your healthcare costs; its larger goal is to ensure that you live the retirement lifestyle you wanted before retirement.
Many retirees take up part-time employment during these years to earn extra income and bridge the gap between their costs on the one hand and their savings and Social Security income on the other, a strategy that’s worth considering in the intermediate years.
A Final Word
Healthcare costs in retirement can cause difficulties and even negative financial implications. You may optimize your ACA health insurance subsidies by postponing Social Security and reducing withdrawals from IRAs and other retirement assets in early retirement. Before retiring, you can accumulate a liquid savings account to cover health-related expenses incurred between the time you retire and when Medicaid becomes the primary payer for your healthcare needs.
You should not have to waste time, energy, or your mental well-being worrying about whether you’ll be able to fully pay for the healthcare costs you may require during what should be times of leisure and enjoyment. Fortunately, with good planning ahead, we can reduce or eliminate these issues entirely.
