"...it is crucial that you know what your income needs to be in order to qualify for subsidies."
Hey guys, Mike Frontera here with a new edition of Retirement Theory. New name, same great information. You know, more and more, my clients come in with the goal of retiring before 65. And if you’re thinking “hey that’s my goal too,” the same red light should be going off in your head. That is “what do I do about health insurance??” You see, Medicare provides reasonably priced health insurance since it’s government… I mean, tax-payer, subsidized. But you can pretty much only get it once you’re 65 years old. So how do we bridge that gap between when work ends, and when Medicare begins?
Well you’ve got a few main options. Not counting the option of taking a part-time job that offers health benefits. If you’re willing to do that and you can actually
find a part-time job offering health insurance…that’s fabulous. For everyone else, we’re going to look at three other ways to tackle this. And this is such a complex topic that I really won’t be going into a ton of detail on each. What I want to do is give you some good ideas and a starting point for what you need to be thinking about.
Alright so the first option that we'll be looking at is COBRA.
When you leave employment whether it was your employer’s decision or your decision, you have the right to continue the health insurance that you had through that job. That’s great and it's often a desirable option as most people like and want the insurance that they had while employed. The downside is that you have to pay the whole premium. When you’re working, your employer likely picked up
a substantial portion of that premium. So it may be a bit of sticker shock when you see that your premium has gone from, say $400 per month, to $1200 per month. So here’s your first tip.
Before saying adios to your career, find out what portion of the premium your employer was paying, so you know what you might be on the hook for. Under COBRA, you’ll also usually pay a 2% administrative charge since now the insurance company has to keep track of you separately from your former employer.
Time-wise, you generally have 60 days from the time you leave employment to elect if you want to have coverage under COBRA. And you can stay on that COBRA coverage for up to 18 months. These are general numbers for employers that have more than 20 employees. If you work for a smaller company, you’ll need to check
with your specific state to see if they offer what’s called mini-COBRA. Many states do but they vary quite a bit on their terms, including how long you can stay on it.
One final note about COBRA is that premiums, they're treated differently for taxes. When you’re working, your health insurance premiums generally come out pre-tax. That helps minimize the pain of paying. Not so when you buy coverage on your own. You’re paying with after-tax money. You may possibly get some relief if you’re able to claim it as an unreimbursed medical expense, but those cases are going to be few and far between because have to exceed 7.5% of your income in order to claim them and you have to be able to itemize to see any benefit. With the new higher standard deduction that will be a very
tough hurdle indeed.
OK, so after COBRA, we have the healthcare exchanges through the Affordable Care Act aka Obamacare aka ACA. When you leave employment, you’ll generally qualify for a special enrollment period just like COBRA of 60 days.
If you don’t know how or where to get started for an ACA plan, go to www.healthcare.gov. That’s the Federal ACA site and they run the exchanges for a number of states, including Florida. In a lot of other states though, like NY, MA and VT for example, you will be redirected to that specific state’s exchange website. Either way, you should be able to price out a plan within a few minutes and without having to enter too much information.
OK, here’s what you’ll find in general. ACA plans tend to be very expensive
versus similar benefits under COBRA. It’s always worth comparing the plans side-by-side but that does tend to be the case. Here’s a couple examples from Brevard County, FL, where my parents live. We have a 62 year old male and 61 year old female with $75,000 of income in this example.
And here’s the lowest premium I found….and the highest. Yes, those are monthly numbers. I know.
However, and my second tip, is that in many cases you may qualify for a government subsidy for your ACA premiums. If you’re a family of two and your income falls between 100 and 400% of the federal poverty line, you are likely eligible for subsidies. This part is critical. Look what happens to the monthly premiums when I make the income $60,000,
rather than $75,000.
Here’s the lowest premium, $0. And here’s the highest. It's still up there but that's much better.
So the key thing here is if you retire before age 65 and you’re no longer eligible for COBRA, it is crucial that you know what your income needs to be in order to qualify for subsidies. If you’re able to draw Roth IRA assets tax-free or use cash savings during this time, you may be able to get your income underneath those thresholds in order to get your premiums reduced or even eliminated. This may go against the standard advice of delaying Roth IRA withdrawals as long as possible, but for those in this situation it could be very well worth taking those distributions earlier.
So then we get to the last option for discussion.
That is Healthshare plans. Healthshare plans are typically set up as religious, often Christian Ministries whereby participants pool resources to cover members’ medical costs. Everyone in the Healthshare plan pays a share each month, like a premium, and they receive benefits for a covered illness.
Now, there are many pros and cons to this type of system. If you’re going to consider this route, you need, need, need to do your research. What people do tend to like about them is that the “premiums” are generally much lower than those that you'll get through the ACA or even COBRA. If you’re in good health, your total out of pocket outlay can be much lower too. And they qualify as health insurance coverage, so you avoid being considered uninsured and paying that penalty on your taxes.
On the other hand,
Healthshare plans may not take you if you have pre-existing conditions. They usually don’t have comprehensive prescription drug plans either. Finally, your values may not line up with the faith-based values of the plan. Certain procedures, or services they might not even be covered if they run counter to the plan’s moral beliefs. Bottom line is that this can indeed be a very viable option, especially for those of faith who are in good health.
In any case, for those of you looking to retire pre-Medicare, it’s super important that you know your options ahead of time and how best to plan for them. Health insurance is such an integral part of your financial life, and planning properly here can make such a difference.
So, do you have questions for me? Let me know.
Give me a call at (518) 612-1060, or just visit me at www.retirementtheory.com . Do you follow me on Facebook? I think that you should. You'll see videos like these, and get blog and article shares on everything retirement planning. Once again, thanks for joining me. See you next time.