Today, I am answering an email from a reader about health insurance as an early retiree:
Dear Root of Good,
What about health insurance as we get older and won’t have company subsidized health insurance and we won’t be old enough for Medicare benefits?
Good question, as access to health insurance is something that all potential early retirees should be concerned with. Over the last decade or two, health insurance and health care costs have spiraled out of control. Insurance premiums would increase 10% or more per year, and access to health insurance could be limited if you suffered from a pre-existing condition.
Asthma, cancer, or heart disease, even years in the past, meant that your insurance premiums could be hundreds of dollars or even a thousand dollars per month. Insurance plans could deny coverage altogether, forcing you to rely on a much more expensive State High Risk Pool for coverage.
Since most people of working age are employed or have family that are employed, they are eligible for group insurance provided by their or their spouse’s employer. Pre-existing conditions don’t affect your rates as an individual in this case.
Obamacare
You have probably heard about Obamacare, or the Affordable Care Act (“ACA”). The health insurance landscape is changing big time under the ACA.
Health insurance exchanges are about to open up for enrollment on October 1, 2013 to provide coverage starting January 1, 2014. New plans issued under Obamacare cannot exclude you for pre-existing conditions. The premiums are uniform for everyone who applies and only vary based on age, geographic location within a state, and smoker status. How ugly your health history has been is irrelevant.
For example, a 60 year old world class triathlete in Charlotte, North Carolina will pay the same premiums as his neighbor, a 60 year old triple bypass recipient currently undergoing chemo for advanced stage cancer. Assuming they both don’t smoke!
Health Insurance Premiums and Subsidies
In addition to the prohibition against denying coverage for pre-existing conditions, Obamacare will be a huge benefit to middle class America. A key part of Obamacare is the subsidy to help you buy health insurance.
The formula to calculate how much you will pay for health insurance is a little complicated. The amount you will pay for health insurance is based on your income. The more you make, the more you pay. The Kaiser Family Foundation has a nifty calculator that lets you plug in your income, household size, and a few other details and it spits out what you will pay in premiums and what your subsidy will be.
Let’s look at a 60 year old couple’s situation first.
Scenario 1:
Assumptions: A couple of 60 year old non-smokers with a relatively generous income of $60,000.
Results:$5,700 annual premiums or $475 per month. This is for the “silver” plan. A slightly worse plan (the “bronze” plan) that covers a little less will run $2,896 per year. These are the premiums the insured will pay under Obamacare with the subsidy already factored in. For reference, the government subsidy would be $10,682, and without the subsidy this couple would pay $16,382! Good thing for that subsidy.
Pro tip: Be careful to keep your incomes below 400% of Federal Poverty Level! Subsidies go away for anyone making more than 400% FPL. For a family size of 2, if you make more than $60,520, your subsidy goes to zero and you will pay the full unsubsidized amount of $16,382.
Scenario 2:
Assumptions: A family of 2 adults age 35 and 3 children. Non-smokers. Annual income of $37,000. These details are based on the Root of Good family in a few years.
Results:$1,136 annual premiums or $95 per month. This is for the “silver” plan. A slightly worse plan that covers a little less will be free of charge to the Root of Good family. These are the premiums the insured will pay under Obamacare with the subsidy already factored in. For reference, the government subsidy would be $11,989, and without the subsidy this family would pay $13,126! Once again, the Obamacare subsidy makes the insurance premium very affordable.
Obamacare’s Impact on Early Retirement
For the 60 year old couple and the young family of five, health insurance premiums will be very affordable with the subsidies available for most people under Obamacare. Add the affordability of the premiums to the guaranteed issuance without looking at pre-existing conditions, and as an early retiree you can expect to have much more certainty in 2014 over your health insurance costs.
For example, our family can reliably budget somewhere around $1200 per year for health insurance premiums. There is also another cost control provision in Obamacare that limits your annual out of pocket expense for health care spending. In Scenario 2 above, the annual out of pocket maximum for health care expenses would be $4,500. Although we would be unlikely to spend this amount every year, it would be prudent to budget some portion of that expense annually, such as $2,000.
Why it Pays to Keep Your Income Low
You may have noticed in Scenario 2, which is based on the Root of Good family’s retirement income and ages, that I listed an income of only $37,000. When possible, we intend to manage our income (actually the fancy IRS term is Modified Adjusted Gross Income or MAGI) to come close to $37,000 each year in order to keep our health insurance premiums relatively small.
We may actually spend more than $37,000 in a given year, but our “income” for Obamacare and tax purposes could still come in around $37,000. This is where the clever finances come into play. Some of our living expenses will be from the sale of mutual funds and investments that have appreciated over the years. When sold, only the gains on an investment are “income”
I might sell $40,000 of an investment that has doubled in value since I bought it. $20,000 of that sale would be included in income, the other $20,000 is not income, but return of my original investment. In this manner, we could spend $50,000 or more and still have a taxable income of only $37,000 by carefully managing which accounts we pull money out of.
Check out all the options available under Obamacare and see how it will impact your finances and access to health insurance. For many people with low to moderately high incomes, it could save you a lot of money and provide more certainty in budgeting.
For a more detailed analysis of the impact of a rising Adjusted Gross Income (AGI) on health insurance subsidies under the Affordable Care Act, check out this more recent article.
Readers, go check out the Kaiser Family Foundation calculator and input your ages and expected retirement income and report back what your premiums and subsidies will be. Surprised? Shocked? Ecstatic?
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Interesting article,but I think that the cap on out of pocket spending has been delayed until 2015.
Thanks for the comment, Jennifer! Obamacare is very complex. I believe the out of pocket expenses you are referring to are the maximum out of pocket expenses that any plan can have. Those limits are currently $6,350 for individuals and $12,700 for a family plan. You are correct that these limits were originally scheduled to go into effect in 2014 but mandatory implementation has been delayed until 2015.
However some insurers have already placed those out of pocket maximums into the policies they are offering on the various state exchanges. This is a pure guess, but I would expect many policies to have some limit on out of pocket expenses that are reasonable, as this has been the case on many policies pre-Obamacare.
Now to draw a distinction: the $4,500 out of pocket maximum I mentioned in this post refers to a separate provision that appears to be on schedule to be implemented in 2014. This is a cost sharing provision that limits further the out of pocket expenses of those making 250% of the federal poverty level or less. For example, at the $37000-38,000 income range and a little higher, you will qualify for a policy that has $4,500 maximum out of pocket expenses.
When I look at California’s plans (as an example), I also see that they have lower co-pays for those in the lower income ranges. $3 to $6 copays are typical whereas the copays for those with higher incomes might be $40-100.
I hope to revisit the Obamacare topic as details continue to develop.
Thanks for the reminder. I will check it out now.
We can handle $1,200/year. That’s not bad at all.
$500/month is pretty tough for older folks though.
Joe, the good news with Obamacare is that if you qualify to receive the subsidy, your premium ends up being the same regardless of age. The only difference for older people is that the subsidy gets larger as you get older in order to cover higher premiums.
The formula for what you pay for health insurance under Obamacare is basically somewhere between 2% to 9.5% of your Adjusted Gross Income (AGI), with the exact percentage determined by comparing your AGI with the Federal Poverty Level. An AGI close to the poverty level means you pay 2-3% of your AGI each year (the ~$1200 figure I cited in the article). An income 3-4x the federal poverty level means you pay 9.5% of your AGI (the $5700 figure I cited for the 60 y.o. couple). A 60 year old couple that didn’t quite make it to age 65 (full Medicare age) could end up paying less than $1000/yr for insurance premiums if there income is close to the federal poverty level.
This is the best insight on Obamacare that I have read yet. Thanks!
Thanks for stopping by, Michael! Glad you enjoyed my piece on Obamacare.
It always amazes me that “the worlds richest nation” can’t afford a universal health programme for its citizens similar to the one that operates in the UK or France.
Health care should be a fundamental right, not an option
Thanks for the accolades for the US of A! Unfortunately we have dropped to #14 on the list of “highest per capita GDP in the world”.
But I’ll qualify that and say the US is richest nation in the world among highly populous nations. 🙂
It means a lot that you are based in the UK and would recommend a universal health system like the NHS. I agree the US system to date has been bizarre and inequitable (increasingly so over the years). Here’s to hoping Obamacare works out better!
We are the most indebted country in the HISTORY of the world.
Healthcare is not a right anymore than you have the right to enslave others to pay for it for you.
Nice work my friend! I just ran mine on the Kaiser calculator. At 35K our 2 adults, 1 child premium came to $100 a month (silver). Now that is cheap thrills.
One thing you mentioned is the selling of mutual funds. I haven’t read all the site yet but you are at a point where it makes sense from a tax standpoint to buy individual company stocks.
Let’s say you buy Emerson Electric (EMR a very fine company). You could literally hold that stock until your death in 60 years. (A 70K stake could be worth 70 mill at the time of your death). Other than the dividend taxes you would have no capital gains taxes for 60 years. My understanding of current law is that when you pass this on to your great grandkids (skipping generations) that only the basis is taxable.
For someone like you — you could easily be looking at a multibillion dollar estate if you live until your 90s.
Whew! Talk about long term planning! lol
Our mutual funds are all index funds and don’t have much of a tax impact. I haven’t had a capital gains distribution in a long time, and if I do have them, they will be small. I swore off individual stocks after suffering too many bad picks. I like to spread the risk around. I might not be a billionaire, but the portfolio will probably continue to grow over time if we’re only spending 3% of it each year.
A couple of HSA questions you might know the answer too —- Under the silver plan would one still be eligible for an HSA contribution?
Also, since you mentioned you wife was HSAing in a previous post, do you have a recommendation for a good plan administrator? One that allows investment in Vanguard type funds perhaps?
And, When HSAs first came out the nonprofit I ran was an early adopter. It was my understanding that money going in was tax deferred and if held until age 59 could be drawn out for anything at all without tax consequence. Is that still the case.
If you don’t know these answers off the top of your head, no need to dig. I can do that and let you know.
Thanks, Bob
I suppose some silver plans could qualify for HSA contributions. I know when I put my data into healthcare.gov they offered me at least a few HSA compatible plans but I don’t recall the metallic type exactly.
For HSA’s, I’ve heard good things about HSA Administrators. Someone else recently mentioned Wells Fargo. We personally have about $55k in our HSA at Fidelity. I understand they only offer HSA’s to employer provided plans so I don’t think individuals can access these accounts.
Taxation of withdrawals after age 65: you can withdraw funds from an HSA for any reason, but ordinary income tax is due on all amounts withdrawn and not spent on qualified healthcare expenses. The main difference is after age 65 you don’t owe a 10% penalty, just ordinary income tax.
Sweet thanks for that reply. I was reading the article and a little miffed at the end of subsidies at the 60K mark. It appears that just a few dollars either way could make a huge difference in subsidy rates. (10K!)
I assume this includes dividends and cap gains as well. I’m not anywhere near that situation but it would be worth if for those that are to defer or something to stay below the 60,500 cliff.
Yes, it includes divs and cap gains (even if they are taxed at zero percent). Unfortunately, the ACA created an effective second set of tax brackets for divs and cap gains since they count against an ACA subsidy just like ordinary income.
And it would definitely pay to postpone of tax loss harvest to get below the $60,500 income cliff in order to continue qualifying for ACA subsidies. Making an extra few hundred dollars can cost you thousands of dollars in lost subsidies. It’s an unfortunate part of the ACA that there’s no real “phase out” window for subsidies, but instead a very steep cliff.
Great read, as always. One quick question in regards to the selling of shares and the income that is generated from the profits. I’ve never heard of long term capital gains being considered income. I know some bond funds kick off taxable “income” and some mutual funds kick off short term capital gains which are considered “income” by the IRS, but I thought LTCG were considered their own thing.
Do these LTCG still count as income and thus we really need to consider them as income for Obamacare subsidy qualification? Same thing with qualified dividends?
LTCG and qualified dividends add to your AGI even if you end up paying 0% tax on them (as you would if you’re in the 10-15% bracket). So yes, you definitely need to consider the impact on your AGI when you’re planning on LTCGs and qualified dividends, since these two types of income will still “cost” you in the form of lost ACA subsidies.
That answers my question. Thank you so much for the quick reply!!!
Sure thing! It was a little surprising when I found out 0% tax on LTCGs and Qualified dividends doesn’t mean they are tax free because I treat the ACA subsidy loss as an implicit tax of around 15-18% of an extra dollar added to AGI.
“LTCG and qualified dividends add to your AGI even if you end up paying 0% tax on them (as you would if you’re in the 10-15% bracket). So yes, you definitely need to consider the impact on your AGI when you’re planning on LTCGs and qualified dividends, since these two types of income will still “cost” you in the form of lost ACA subsidies.”
That’s interesting. So, it sounds like it would be good to harvest LTCGs only during years when we’re living outside of the U.S. and don’t need ACA. If we’re living in the U.S., we may not have to pay any taxes on LTCGs if we’re in a low enough tax bracket, but the loss of the ACA subsidy would kill us.
That’s really important to keep in mind. Thanks.
Definitely. That’s a great way to keep your AGI low while you need ACA subsidies, then have a huge AGI like 90k (mostly LTCG’s) when you’re out of the country and don’t need ACA subsidies.
May I ask a few questions from reading several of your (great) posts? Thanks in advance!!
During the first 5 years in early retirement, it seems all sources of income will count towards AGI that will affect ACA subsidies, including any money earned from part-time work, any Roth IRA conversions, and LTCG and qualified dividends. Is my understanding correct?
Are there any other types of income I may be missing in the list that will affect ACA subsidies?
For the 0% tax (10-15% tax bracket), is there a maximum to the LTCG and qualified dividends one can claim?
Would U.S. citizens be required to pay penalty for not having an insurance while living outside of the U.S.?
I just turned 50 and am too late to partake the ER movement (in 30s or 40s). If I plan on retiring at 55, would it still make sense to do the Roth Conversion Ladder from 56-59.5 and live off of savings during those 5 years?
For a one-person household (no children), what’s the maximum Roth Conversion one can do per year without triggering any tax? Or what one may do to keep tax as low as possible during those 5 years (56-59.5)?
Hello, what are you going to do for health insurance if the Affordable Care Act is repealed? Premiums could increase substantially or your only option for health care is employer provided? A lot of “what if” scenarios but with the current administration it looks like affordable health care could be gone.
So far the odds are around 60-70% that ACA will remain substantially intact in its current form, subsidies and all. If not, we might be totally okay under an ACA modification/replacement bill (like the AHCA that just failed), just pay several thousand extra dollars per year. Also see my discussion on health care in my latest monthly financial update from March 2017 for more of my thoughts on “what ifs”.
Thanks for the reply! That makes sense. Lots of good info on your blog.
any updates you’d like to share? I’m personally a little worried, b/c I have a child with a pre-existing condition. Sounds like it might be left up to each state, but either way, kind of scary.
Thanks!
Check out my discussion on the proposed AHCA in my latest Monthly Financial Update (and check out all of the monthly financial updates from Jan-March if you want more of my thoughts on the changes to ACA).
As far as pre-existing conditions, the way I understand it, you’re protected from price increases as long as you maintain continuous coverage w/o gaps exceeding 63 days. And that’s just the House version the AHCA before the Senate takes a stab at it and then the two houses have to agree on something.