When I talk to people who tell me they would like to retire early, I ask, what does “early” mean to them? Any age they tell me before 65 instantly leads to my next question. What are their plans for health insurance? Are they married and does their spouse have access to insurance through their employer or will they be needing to obtain an individual policy?
If an individual policy is the route you will be going, one great resource to do some research is the website, HealthCare.gov. This is the official website for the Affordable Care Act (ACA) that was set up in October of 2013. Here you can research different health plans that are available to you based on where you live, the number of people living in your home, and taxable income. This article is going to focus primarily on the income aspect. The premium amount you will be paying is largely determined by your annual taxable income. Once your annual income is calculated, that will dictate how much of a tax subsidy you qualify for, which reduces your annual health insurance premium.
The maximum subsidy amount can vary from county to county but can be quite substantial (currently up to $10,560 per year), where we recently helped a client in Outagamie County often being the game changer retirees need to pull the trigger on their early retirement. The income ranges are based on the Federal Poverty Level (FPL). In 2021 for a family size of one, the lowest eligible income is 100% of the FPL ($12,760) and the highest eligible income is 400% of the FPL ($51,040). For a family of two, the lowest eligible income is 100% of the FPL ($17,240) and the highest eligible income is 400% of the FPL ($68,960). The lower you can keep your income, the bigger your health insurance subsidy. Don’t think of “income” as the same thing as “cash flow”. It is possible to have plenty of cash flow to meet your living expenses, while having very little taxable income.
When I know someone has a goal or retiring before age 65 (which is when they become eligible for Medicare) I encourage them to start a savings plan in accounts they can draw money out of that will minimize taxation of the funds to provide the needed cash flow until they reach 65. There are about a half dozen different funding options that can be coordinated to minimize taxable income and thereby drive down the cost of your health insurance considerably.
It can certainly be tricky trying to coordinate multiple types of accounts that have different tax consequences. That is why we recommend talking with your Financial Advisor, Accountant, and Health Insurance Agent to help you navigate this exciting moment in your life. So, if you think retiring early would be too expensive, think again. It may be closer to reality than you think.
Bob Pencil is a CERTIFIED FINANCIAL PLANNER ™ professional with Independence Financial who helps individuals and small business owners grow and protect their wealth with comprehensive goals-based planning.