Early retirement is an aspiration many of us have during our working years. For those who’ve been diligent savers and have managed to accumulate a significant nest egg in their early 60s or even before, early retirement may be in reach, congratulations! The joy of this great accomplishment can often be shattered by the sobering realization that out of pocket payments for health insurance can be a significant burden. Few options exist for early retirees, Medicare qualification begins at 65, and COBRA has a few issues, one is the hefty fee of paying both the employee and employer costs of healthcare and in addition, often a 2% administrative fee. The second issue is COBRA coverage is temporary, typically only for 18 months.
The other option is to purchase private individual insurance, which these days is typically found on the government health exchange. However, for those living in Pennsylvania a new exchange is being rolled out for 2021 coverage. You can search for costs of coverage on www.pennie.com (open enrollment is currently under way for 2021). While the cost of coverage without a subsidy is comparable to the cost of COBRA, there are a few benefits. Coverage doesn’t terminate after 18 months. This is key for those seeking early retirement before age 63-and-a-half. The other benefit is the malleability of modified adjusted gross income (MAGI) in retirement, in other words, using similar strategies to lower taxes in retirement, some early retirees may be able to qualify for health insurance subsidies by strategically planning from which accounts and which shares they are creating income. Sound daunting? Don’t worry, we love this stuff!
For example, if an early retiree needs healthcare at age 62 and lives in a household with their spouse, they may qualify for a subsidy if their modified adjusted gross income is $68,000 or less. By waiting to take Social Security and employing retirement income strategies such as using low appreciation stocks for income, some retirees may be able to keep their MAGI levels within the subsidy range and therefore pay lower premiums. This is also a situation where for some folks using a high deductible health plan and contributing the maximum amount to a Health Savings Account will both lower the premium as well as lower MAGI with the HSA contribution.
It is always important to remember that each person’s income and healthcare needs are very individual, there is no grand sweeping strategy to use every time. But by working with us here at Stone Pine, we can help you plan the most effective route for an early retirement even when it involves navigating the world of health insurance. And if you’re considering retiring in 2021, now is the time to start planning!