If there’s a fly in the early retirement ointment–other than accumulating the portfolio needed to make it happen–it’s planning for healthcare. While you’re an employee, you can take advantage of employer-sponsored health insurance. Since it’s a group plan, and usually subsidized by the employer, it’s less expensive than coverage you can buy on your own. But how do you plan for healthcare in early retirement?
And that’s the problem. When you retire early, you probably won’t have the benefit of employer health insurance. And since you’ll be younger than 65, it’ll be too early to qualify for Medicare.
If you’re already in early retirement, you know all about this issue, and you’ve hopefully found a solution. But if you haven’t, or if you’re only in the early retirement planning phase, we’ll help you learn the options available.
If you're already in early retirement, or planning to be soon, here are some strategies you can use to deal with healthcare.
Enroll for coverage with your state health insurance exchange
Since the arrival of the Affordable Care Act (ACA), health insurance is guaranteed regardless of your age or health condition. In fact, even if you have one or more health conditions, your premium cannot be increased as a result. The only premium adjustments possible are due to smoking and age.
This is a big advantage for early retirees
Not only are you guaranteed health insurance coverage, but you might even qualify for a subsidy due to low income. And if you’re retired, that could be you. The IRS even offers a Premium Tax Credit Estimator to give you an idea how much the subsidy will be, based on your income level in state of residence.
You can check out the cost of ACA plans by going to the Healthcare.Gov’s health insurance plans and prices webpage. There you can find specific insurance plans available for you and your family, in your state.
There’s one caveat to getting health insurance on the exchange, and that’s cost. If you’ve never had private health insurance before, get ready for some serious sticker shock!
Also, under the new Trump tax plan, the individual health insurance tax penalty is still in effect for 2018, but will disappear from 2019 forward.
(Important disclaimer on the new tax bill: The plan is still only a few weeks old, and we’re early in the new year. As is usually the case with major tax changes, revisions are always possible. They can be either slight, or complete changes. We’re just giving the information based on current published sources. As of this writing, the IRS has yet to formalize the changes with new regulations.)
Alternate health insurance sources
Let’s say you can’t afford coverage on the exchange–are there any options?
Yes. Try one of these:
Go on your spouse’s health insurance plan
My guess is if you’re going to retire early, your spouse will as well. But in the unlikely event that isn’t the case, and your spouse has coverage at work, problem solved.
Have a side hustle
There are two basic benefits to the side hustle concept:
- You’ll have a dedicated income to pay the (high and ever-rising) cost of health insurance, and
- There are generous tax breaks for the arrangement.
Number one is obvious, but let’s camp out on the second point. The IRS allows you to deduct the cost of health insurance premiums if you are self-employed (even under the new tax plan). You can deduct 100% of the premium paid up to the amount of net income earned from self-employment. That includes coverage for yourself, your spouse and any dependents you have.
If your health insurance premium is $12,000, and you have $15,000 in net income from self-employment, health insurance will be fully deductible. If you earn $10,000 in net income, then only $10,000 in premiums paid will be deductible. This deduction applies only to income from self-employment, and not from W2 or investment earnings.
Health Savings Accounts (HSA)
You can also take a deduction for an HSA. For 2018, you can contribute up to $3,450 if you’re single, and up to $6,900 for a family. The contribution is fully tax-deductible and can be used to pay for out-of-pocket costs, such as copayments, deductibles, and uncovered medical expenses.
Combining self-employed health insurance with an HSA enables you to deduct the cost of both without the need to itemize deductions. You will need a sufficient amount self-employed income to cover both the premiums and the HSA.
Get a part-time job with health insurance
This strategy kind of defeats the whole purpose of early retirement, especially since you’ll be working for someone else. But it’s a viable strategy nonetheless.
There are more part-time jobs with health insurance than most people realize. You can often qualify working as few as 20 hours per week. Potential employers offering health insurance for part-timers include banks, credit unions, local governments, colleges, airlines, coffee shops, grocery stores and retailers.
If nothing else, the part-time route may become desirable on a short-term basis, if one of the other strategies doesn’t work.
Healthcare Sharing Ministries
These plans are growing in popularity, in part because they’re much less expensive than traditional health insurance, but also because they are “ACA compliant”. (That means you aren’t subject to the ACA penalty if you have one of these plans.)
They’re exactly what the name implies, a plan in which many people participate, and share expenses. The major benefit is cost. The monthly payment may be only a fraction of what it will cost for traditional health insurance.
These plans are not perfect, nor are they suitable for everyone
For example, most are oriented toward Christians. They require that you're a member of an acceptable church, and often that you take a pledge to live a life that’s consistent with Biblical principles.
Another problem is that they are not true insurance. The plans pool money, and while most expenses are fully paid, there’s no guarantee. (Of course, there’s never a guarantee of coverage with traditional insurance either.) They may cap coverage at $250,000, or $500,000, which isn’t a high enough threshold that couldn’t be breached in today’s cost environment.
But perhaps the biggest limitation is that you can be excluded for pre-existing conditions
The plans generally favor the healthy. If you had a bout with cancer a year ago, or you have a chronic health condition, like heart disease or diabetes, you may not be eligible for coverage.
If you’re interested in pursuing this alternative, there are several healthcare sharing ministries available. Since this isn’t an industry in the traditional sense, plans can vary widely from one to another.
Going the passive route on healthcare strategies for early retirement
If none of the above strategies appeal to you, you can go the more traditional route of fully retiring, and paying your health insurance and out-of-pocket costs in full–taking the chance that they may or may not be tax-deductible.
Unfortunately, the new tax plan isn’t medical expense-friendly. Unless you have an exorbitant amount of medical expenses in comparison to your taxable income, you probably won’t be able to claim them as an itemized deduction.
For starters, the new tax plan does away with personal exemptions and raises the standard deduction
For 2017, the standard deduction is $6,350 for singles and $12,700 for couples. From 2018 on, it’s increased to $12,000 for singles, and $24,000 for couples, theoretically including the personal exemption(s). You have to have a lot of medical expenses to be eligible to deduct them with those limits.
But it gets worse.
Under current tax law, you’re only allowed to deduct medical expenses–health insurance and out-of-pocket costs–to the degree that they exceed 10% of your adjusted gross income. For 2018 only, that percentage will fall to 7.5% and then go back to 10% going forward.
Let’s work a scenario…
You and your spouse have $50,000 in retirement income. You incur $15,000 in health insurance and out-of-pocket medical costs in 2018. Under the new tax law, you must first deduct 7.5% of your adjusted gross income, which is $3,750. That leaves you $11,250 in potentially deductible medical costs.
But since you automatically get a $24,000 standard deduction, you won’t be able to deduct $11,250 in medical expenses, unless you have other tax deductions that bring you over the $24,000 threshold.
Let’s say that those expenses, including medical costs, come to $30,000. That means that on a net basis, only $6,000 of your medical costs will actually be deductible. (The rest would have been deductible even if you didn’t itemize.) The balance of $5,250 will be lost, as will the $3,750 that had to first be deducted due to the 7.5% income limitation. A total of $9,000 in medical expenses won’t be tax deductible.
And of the $6,000 that will be, and a marginal tax rate of just 12%, the net tax savings will be just $720. That’s a drop in the bucket on $15,000 in out-of-pocket expenses.
Moral of the story: Itemizing medical expenses may not help much in early retirement.
Under the new tax law, planning for healthcare in early retirement isn’t necessarily better or worse than it used to be. But it does require having an effective strategy in place to minimize the cost.