One of the challenges of an early retirement includes the need to budget for increased health insurance expenses prior to the onset of Medicare at age 65. During our working years, health insurance is typically provided at no cost by our employer or at a significantly reduced cost with employer assistance. A failure to appropriately account and plan for health insurance costs in retirement can derail a plan and create unpleasant surprises.
Those who retire prior to age 65 and without any retiree insurance typically rely on the government health insurance exchange to purchase coverage. The average cost of this coverage far exceeds what retirees were typically used to during their working years. These costs are also very specific to each state and county, so be sure to use the tools referenced below to closely examine all relevant costs based on where you’re located.
For example, let’s look at a married couple living in Arlington, Virginia with the following characteristics:
Using the health insurance cost calculator on the health exchange website we determined that for a middle-of-the-road plan (Gold rated) the estimated monthly premium is approximately $2,135 (or $25,620/year).
The bad news? These premiums represent a significant retirement expense and are likely to rise each year going forward.
The good news? With the right advisor and financial plan, you can offset these premium costs by taking advantage of health insurance tax credits offered as part of the Affordable Care Act (ACA).
Let’s look at how these tax credits work:
i) $51,040 if you’re single and
ii)$68,960 if you’re married (or have an eligible child in your household)
i) $12,880 to $51,040 for a single individual (the lower threshold is $17,774 if you’re in a state that has expanded Medicaid)
ii) $17,420 to $68,960 for a couple (the lower threshold is $24,040 if you’re in a state that has expanded Medicaid.
Using the health insurance cost calculator on the health exchange we now determine that the couple qualifies for a monthly premium tax credit of $1,671/month for potential annual savings of $20,053.
When it comes to planning for health insurance costs, a retiree must develop a structured plan to generate the necessary funds for living expenses while NOT generating income over certain thresholds. In the case of the ACA insurance subsidies, if your income is too high–even by $1–you get nothing. That’s a big risk and emphasizes the need for careful planning.
Hopefully, this explanation provided valuable insight. Please consult with our team if you have any follow-up questions regarding retirement strategies.
Adam Newman is a Partner and a Senior Wealth Advisor at Burney Wealth Management. Adam is responsible for the preparation and ongoing management of client financial plans, annual financial planning updates, and investment portfolio reviews. His expertise is in comprehensive financial planning, retirement income planning, tax planning, and investment policy development.
He is a CFA Charterholder as well as a CERTIFIED FINANCIAL PLANNER™ Practitioner. In 2020, Adam completed additional technical training in retirement planning through the Retirement Income Certified Professional® program at the American College of Financial Services. Adam leads our office in Nashville, TN while continuing to work with clients around the country.
This form uses grid for its layout. Adjust and reorganize the divs inside the Form Grid to fit 1 or 2 grid columns as needed.