Imagine this: you and your spouse, both 60 years old, still working but dreaming of early retirement. You've saved well, and your financial projections show that your nest egg will comfortably last 30 to 35 years, covering up to 80% of your pre-retirement living expenses. Sounds like you retire early, right?
But here's the catch - many people work longer than they want to because of health insurance costs. While you're employed, your employer covers most of your health insurance costs. Some of our clients even have their health insurance fully paid by their employers. But once you leave your job before Medicare kicks in at 65, you have to self-insure, and that can get really expensive.
In this post, I want to share with you a powerful, often overlooked way to retire early and still get affordable health insurance - or even get it for free.
What Are Advanced Premium Tax Credits?
Introduced by the Affordable Care Act in 2014, Advanced Premium Tax Credits are federal subsidies to help make health insurance premiums affordable for those buying through the Health Insurance Marketplace. These credits lower the cost of your health insurance plan that can be purchased only through the healthcare marketplace and can be applied to bronze, silver, gold, or platinum plans.
Eligibility For Premium Tax Credits
To be eligible for premium tax credits, you must:
Not be enrolled in an employer plan or be eligible for Medicare, Medicaid, or Children’s Health Insurance programs.
Have a household income at or above the federal poverty level.
3. Be a US citizen or a legal resident, and
4. File taxes jointly, if married.
It’s important to know assets are not considered. So even if you have significant assets, you can still qualify as long as your modified adjusted gross income (MAGI) stays under the income threshold.
How is the Premium Tax Credit Calculated?
The idea of the premium tax credit is to limit your health insurance premium costs. Thanks to the American Rescue Plan Act of 2021, there’s no income threshold to qualify. The credit amount is based on your estimated modified adjusted gross income for the year and the cost of health plans in your area. The higher your income, the less credit you receive, and vice versa. Therefore, it is crucial to engage in proactive financial planning and implement strategies to lower your modified adjusted gross income so you can receive more in advanced premium tax credits.
The maximum cost you’ll pay for the “benchmark” silver plan - or the second-lowest cost silver plan available in your area - is no more than 8.5% of your modified adjusted gross income, as per the Inflation Reduction Act, which extends subsidies through the end of 2025.
For instance, if you plan to retire on a $100,000 income, your total annual premium won’t exceed $8,500, which is 8.5% of your income.
COBRA and the Marketplace Eligibility
There are a few important things to know about COBRA and Marketplace plan eligibility. COBRA doesn't immediately make you eligible for a Marketplace plan. For instance, if you're on COBRA, you can't just cancel it mid-year and switch to a plan with advanced premium tax credits. You have to wait until your COBRA coverage ends before enrolling in a Marketplace plan.
However, you can keep your COBRA plan and enroll in a Marketplace plan during the open enrollment period, which is from November 1 to December 15 each year. Then, you can cancel your COBRA coverage when your Marketplace plan begins. This way, you’ll stay covered without any gaps in your health insurance.
Example
Let's look at a hypothetical couple, Jane and John, both 60, residents of Illinois, and planning to retire now on an annual income of $80,000.
Without advanced premium tax credits, their estimated monthly premiums are nearly
$2,000 for the Bronze plan,
$2,700 for the Silver plan, and
$3,300 for the Gold plan.
Annually, that’s $24,000, $32,400, and about $40,000 respectively. This is a significant expense, consuming up to 50% of their income just for health insurance. It's clear that this isn’t feasible, which is why many people continue working until they reach the Medicare eligibility age of 65, even if they want to retire early.
Now, let's see how much these same plans will cost John and Jane with their expected annual income of $80,000.
Based on their income, they qualify for a substantial advanced premium tax credit of $1,127. This credit reduces their monthly costs to
$837 for the Bronze plan,
around $1,600 for the Silver plan, and
approximately $2,200 for the Gold plan.
While it's still costly, the annual expenses decrease by an impressive 34% to 58%, depending on the plan, making their dream of early retirement much more achievable.
Please remember, I selected three plans randomly. Your costs and the size of your premium tax credit can vary based on your specific circumstances, healthcare requirements, and where you live - whether in a different state or county. For instance, an annual income of $80,000 in Texas could qualify you for an estimated credit of $1,266 per month, whereas in New York, it might be around $1,042.
It's also crucial to work closely with a knowledgeable health insurance agent. If you need recommendations, feel free to reach out to us.
Cost Sharing Reduction
Besides advanced premium tax credits, there is also a cost sharing reduction program. The cost sharing reduction program lowers deductibles, copayments, coinsurance, and out-of-pocket maximums for silver plans only.
Cost sharing reduction works only with Silver plans
Eligibility depends on your income, with the most significant reductions for those earning 100% to 150% of the federal poverty level. As your income grows, cost sharing reductions assistance reduces and is fully eliminated when your modified adjusted gross income exceeds 250% federal poverty level threshold.
Conclusion
Early retirement is a dream for many, but the high cost of health insurance often stands in the way. Advanced Premium Tax Credits offer a powerful solution, making early retirement possible without worrying about sky-high premiums. To make this strategy work, you need to understand how advanced premium tax credit function and find ways to reduce your income. This approach can not only trim health insurance premiums but also potentially reduce other out-of-pocket costs.
If you’re interested in lowering your healthcare expenses and discovering a superior health insurance option, don’t hesitate to arrange a call with us.
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