Can the Affordable Care Act Help You Retire Early?
October 2, 2013
I'm 61 and considering early retirement. I've heard that the new healthcare law will make it easier to get health insurance on my own. Is that true?
Great question. According to the 2012 Health Confidence Survey1 sponsored by the Employee Benefit Research Institute, 27% of workers said they'd retire earlier if health insurance weren't an issue. So you're in good company!
And the good news is that you've heard correctly—as of October 1, many states and the federal government began offering health insurance plans, with coverage beginning in January 2014.
In many cases, insurance premiums may be more affordable relative to the cost of current policies—especially for those of us who are 50-plus. And subsidies are available at certain income levels, potentially bringing the costs down even more. Plus, and perhaps most importantly, you can't be turned down because of a pre-existing condition.
So, yes, the new healthcare law may make it easier for you to take early retirement—but there are still a number of things to consider before you do.
Research your options
The first thing to do is get the basic information from either your state's exchange or the federal exchange. You can go to healthcare.gov to get started. You'll find details on the types of plans offered, what they cost and how to enroll. Plans are categorized as Platinum, Gold, Silver and Bronze. All cover certain essential benefits, but premiums and out-of-pocket costs vary.
As you research the plans, keep your retirement budget in mind. Figure out how much you can afford to spend on premiums each month and how much you could handle in out-of-pocket expenses to cover deductibles, copays and coinsurance, as well as anything that may not be covered.
As an example, using the calculator developed by the Kaiser Family Foundation (kff.org/health-reform), a Silver policy for an over-21 nonsmoker making $60,000 a year would have an annual premium of about $3,000 with maximum out-of-pocket expenses of $6,350. A Bronze plan would have lower premiums with a higher out-of-pocket maximum; a Platinum plan would have higher premiums with a lower out-of pocket maximum.
Costs do vary depending on where you live and your age (premiums for an older person can't be more than three times that of a younger person), but this gives you a general idea.
Manage your income to get possible subsidies
Your income also comes into play. If your modified adjusted gross income (MAGI) is below certain levels, you may qualify for subsidies in the form of a premium tax credit. For instance, a family of two with an MAGI of up to $62,040 would qualify for a subsidy.
Your MAGI is made up of your household's adjusted gross income plus added income such as Social Security, interest or foreign income. As a retiree, you may be in a position to control your MAGI with a bit of smart money management.
For instance, if you postpone taking Social Security until age 65 when you'll be eligible for Medicare, you'll lower your income as well as pave the way for a larger Social Security payout. (Health insurance aside, it's generally a good idea to wait at least until your "full retirement age"—or perhaps until you turn 70—to file for Social Security benefits in order to get the maximum payout over time. It's important to do the math!) Or perhaps you can minimize withdrawals from your retirement accounts to keep your taxable income lower.
When it comes to selling investments in taxable accounts, you could offset capital gains with capital losses.
This type of income management may sound simple, but it involves an honest assessment of your complete financial picture to determine how ready to retire you really are. This brings me to my next point.
Don't stop at health insurance
Health insurance is important, but it's only one piece of your retirement plan.
Before you say goodbye to your employer, make sure you:
- Have a realistic budget for everyday as well as periodic expenses—and a reliable income stream to cover them.
- Pay down consumer debt such as credit cards and car loans.
- Set aside enough cash to cover at least one year of spending.
- Decide what to do with your 401(k).
- Review your investments to make sure they still match your goals and your feelings about risk..
Retirement isn't a point in time—it's an ongoing experience. The new health insurance options may bring some costs down, but it will be up to you to make your money last. If you haven't done so already, talk to your accountant or financial advisor to make sure your timing is right.
1. Sick Sense? Health Care Concerns and Retirement Plans, ebri.org, May 10, 2013.
The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.