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Advisor Perspective

Advisor Perspective

Navigating Healthcare Insurance Options During Early Retirement

Tim Stringer

Principal, CFP®
For Tim, the most rewarding aspect of being a financial advisor is reaching that “aha” moment with clients when there’s mutual recognition of their goals – and then building a road map for achieving them together.

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While there can be many perks to retiring early, most would not consider the health insurance landscape among the benefits. It can be both confusing and expensive to secure proper health insurance during this ‘gap period’ – after traditional employer-sponsored coverage ends but before Medicare begins at age 65. Further, many do not consider the planning techniques that can help reduce the burden of these healthcare expenses.

Understanding the Landscape

Most employees receive health insurance through their employer at a heavily subsidized rate while employed. At retirement, many will be offered a temporary continuation of their health insurance through COBRA. This allows individuals to keep the same coverage during the initial phase of the retirement transition, but likely at an unsubsidized rate. The full price of this insurance can be significant, especially when a spouse or children require coverage. Further, COBRA usually lasts only 18 months, at which point the individual must find insurance elsewhere.

This is when the questions typically begin: “Wow, this is more expensive than I expected. Should I go on COBRA or explore other options? What are the other options? What should I do when COBRA ends? Is there anything I can do to avoid the high expenses?”

The Easy (And More Affordable) Options

For many, the burden of health insurance in early retirement stems from the lack of subsidy, which was previously offered by the employer. This is often the first time an individual must pay full price for health insurance. Thus, if a subsidized plan is available elsewhere, it can be an easy choice.

Consider a few possible options for affordable, subsidized healthcare:

  • Spousal Benefits: If a spouse is still working, it often makes sense to switch to their employer-sponsored plan.
  • Retirement Health Coverage: Some are fortunate enough to be offered a ‘retirement package’ from their employer that includes health insurance. This is often the best choice when offered.
  • Maintain Part-Time Employment: This allows someone to enjoy a quasi-early retirement while retaining health insurance through an employer.
  • Maintain Self-Employment Income: If self-employed, continuing some business activities in ‘retirement’ may allow you to deduct health insurance premiums on your tax return. While not a direct subsidy, the tax deduction can result in significant net savings.
  • Other options: Government benefits, VA benefits, or other coverage may be available to certain individuals. Please consider all parties requiring insurance when exploring these options. While the individual may be insured, coverage may not extend to a spouse or dependents.

The More Common (But Often Less Affordable) Options

Many are not offered any of the options noted above. In this situation, the choice may be a bit simpler, albeit more expensive. The individual should decide if it is better to transition to COBRA while available (usually 18 months) or find insurance through the public Health Insurance Marketplace (known as a ‘Marketplace plan’). Many choose to stay on COBRA while available, as it is often a similar cost to a Marketplace plan, is familiar to the individual, and does not involve a reset of deductibles. They will then transition to a Marketplace plan once COBRA ends.

Consider if it makes sense to transition to a Marketplace plan before COBRA expires. For example, someone who moved onto an 18-month COBRA plan beginning October 1, 2023, may choose a Marketplace plan beginning January 1, 2025, rather than wait until March 31, 2025. This would avoid potentially paying deductibles within two medical plans in the same year.

Below are a few considerations when enrolling in a Marketplace health plan:

  • Enrollment Window: The enrollment window begins on November 1 for the following year, unless you qualify for a Special Enrollment Period.
  • Coverage Options: There are many plans available through the Marketplace. They are divided into four broad categories, based on the division of costs between the individual and employer: Bronze, Silver, Gold, and . Bronze plans have lower premiums, but the individual pays a greater share of any medical costs incurred. Platinum plans offer the opposite.
  • Insuring Dependents: Children can be insured through your Marketplace plan until age 26. This is similar to other plans. However, it may be more affordable for your children to insure elsewhere if available.
  • Consider the Premium Tax Credit (PTC): This is a tax credit that helps reduce the cost of Marketplace health insurance. Those with lower reportable income receive a larger PTC.

Understanding, and planning for, the Premium Tax Credit

The Premium Tax Credit is a refundable credit that can offset a portion of Marketplace insurance premiums, depending on income levels. Individuals reporting higher income on their tax return will receive a reduced credit. However, the gradual phaseout of the credit occurs at relatively high income levels, particularly for retirees, and even affluent taxpayers can often benefit. For example, a ‘silver’ Marketplace plan may cost a married couple approximately $20,000 per year. Even with an adjusted gross income of $125,000, roughly half of this cost could be subsidized via the Premium Tax Credit.

Careful tax planning is crucial for many enrolled in a Marketplace plan. If realized income is higher than necessary, it could cost the taxpayer thousands in reduced PTC each year. Likewise, one may be able to avoid income in a certain year and receive a meaningfully higher tax benefit. Using the married couple from the previous example, they may choose to reduce realized capital gains, shift to a more tax-efficient portfolio, and limit Roth conversions during the year. If this reduces their income to $75,000, the PTC would increase from 50% to nearly 75% of the healthcare premiums, saving them roughly $5,000.

Determining the best health insurance path during early retirement is unique to one’s specific circumstances. Feel free to contact your JMG financial if you’d like to discuss the best choice for you and your family. They can provide customized guidance and connect you with partners who specialize in the Marketplace and Medicare landscapes. We invite you to share this article with others who may also find it insightful.

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