Ryan A. Dunn, CFP®
Retiring Before 65? You Have the Income, But What About Healthcare?
Updated: Jun 13, 2022
The high costs of health coverage are one of the biggest factors preventing clients from retiring before they’re eligible for Medicare—or starting their own business.
The American Rescue Plan made many higher-income individuals eligible for healthcare subsidies.
If you were thinking of retiring before age 65, starting a business, or going through another transition in your life, it used to mean lots of sweaty palms decision over healthcare if not covered by your spouse’s plan (or former employer’s plan). It used to mean one of three options, none of them ideal:
(a) Continuing to work full-time, just so you could maintain health coverage. (b) Paying a huge premium via COBRA to stay on your former employer’s plan temporarily.
(c) Paying $15,000 to $25,000 a year out-of-pocket for substandard insurance.
But since the American Rescue Plan was passed back in March, you may now be eligible for healthcare subsidies even if your income is close to $275,000. An important new provision, buried deep in the legislation, changed how healthcare subsidies are calculated. Instead of subsidies being indexed to the Federal Poverty Level (FPL), they are now pegged at 8.5% of your adjusted gross income. In other words, the government does not believe you should be spending more than 8.5% of your gross income on healthcare premiums. This has been a game changer for many successful people in their late 50s or early 60s who want to retire before age 65, start their own business, are between jobs, or who want to transition out of the 40-60 hour full-time work week and become independent contractors, consultants or gig economy workers.
Before the American Rescue Plan was passed, healthcare subsidies stopped for couples with income over $70,000. But now those of you earning more than three-times that income can qualify for assistance. Not only is this a great benefit, but it opens the door to several important retirement and tax planning opportunities. More on those in a minute.
If you are no longer covered by your employer’s, spouse’s or ex-spouse’s health plan, you can shop for your own healthcare, and compare plans and rates in your state at the government-run HealthCare.com. Once you find the coverage and price range that meets your family’s needs and budget, you can enroll directly at HealthCare.gov.
The site also makes it easy to see if you qualify for healthcare subsidies or premium tax credits and how much your subsidies will be. See handy Health Insurance Marketplace Calculator.
Without healthcare subsidies, an empty nest couples in their early 60s would typically looking at premiums of roughly $24,000 a year ($2,000 per month) for the popular basic Silver Plan. That’s before deductibles and out of pocket costs.
Real World Example
Let’s say a couple in their early 60s is in transition and no longer has health coverage from an employer. Assuming they no longer need coverage for their adult children, and they have a combined income for consulting and freelance work of $100,000. Going on the open exchange, they found a Silver Plan that meets their needs. Before March, that plan would have cost them about $23,848 a year ($1,971 per month) on the open exchange. But thanks to the American Rescue Plan, they would qualify for $1,262 per month in subsidies. That brings their monthly premiums to roughly $700 per month ($8,400 per year)—that’s a more manageable 8.5% of their gross income. Now they can avail themselves of a number of interesting tax planning strategies.
Married couple, early 60s
Children needing coverage
Adjusted gross income (AGI)
Annual Premiums for Silver Plan on open exchange
% of AGI
Unfortunately, current legislation states that the healthcare subsidies under the American Rescue Plan will expire at year-end 2022 and then revert to a threshold of no more than four-times the Federal Poverty Level of income. I’m confident that if the current healthcare provision is not extended, there will be compromise legislation that keeps healthcare premiums set at a reasonable percentage of income for the vast majority of Americans.
Conclusion The big takeaway here is: Don’t let fear of losing health coverage get in the way of your early retirement or life transition dreams. If you or someone close to you has concerns about maintaining healthcare before being eligible for Medicare, please don’t hesitate to reach out. We’re happy to help.
Associate Wealth Manager at Novi Wealth