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.
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.
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.
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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