We help quite a few people retire before the age of 65 and many times health insurance costs are one of their biggest concerns. And rightfully so because you and I can imagine how pricey it might be for us to pay for health insurance, before we get to the Medicare age of 65.
But, with a little bit of planning and by preparing your retirement accounts and your withdrawal plan in a certain way, you might be able to reduce how much you can pay for health insurance. This could end up saving you thousands of dollars a year.
In this post, I’m going to go over three things that you might be able to do to minimize your health insurance costs if you’re thinking about retiring before age 65.
When it comes to health insurance in your late fifties or early sixties, you have a few options:
1. Keep Working
By working part-time or half-time, you may be able to keep your benefits at work. Many people don’t want to do that.
2. Purchase Private Health Insurance
This could be pretty pricey!
3. Government Subsidies
Before I get into this, I want to be clear about something. We are not health insurance experts at Streamline. We know enough, but really what we’re good at is designing retirement income plans that are sustainable and have a high chance of success. I’m just sharing what some of our clients, people similar to you, are doing to prepare their accounts. They design their taxable income in a way that they qualify for some of these government subsidies.
When considering this approach, note that I said taxable income. Government subsidies are based on your Adjusted Gross Income (AGI) on your tax return. There are some accounts that you’re going to use in retirement that don’t increase your taxable income. AGI limits depending on how many people you have in your household. Most likely I’m guessing you have one or two people. The taxable limits are going to be close to $51,000 for single, and close to $68,000 for two people. And you’ll want to take a look at the exact numbers based on what year it is, because they can change.
Now you might be thinking, when you hear those numbers, that to need a lot more than that to live. But don’t worry. You can create a withdrawal plan that gives you a lot more than that each year, and you can still possibly qualify for the insurance subsidies. It all comes down to your withdrawal plan and then the types of accounts that you’re going to use. It just takes a little preparation. And as planners, one of our favorite things to say is it’s better to prepare than to repair.
Next, three ways that retirees might be able to lower their health insurance costs:
Delaying Social Security
Delaying Social Security could potentially help you to lower your health insurance costs. The Social Security benefit is determined by:
- the age that you start
- the number of years you worked
- how much you’ve paid into the system
You have the option to start taking Social Security, usually, somewhere between 62 and 70. If you’re under 65 and thinking about starting Social Security, because you know that you’re done earning a wage from work, just know that your Social Security can be counted towards your AGI. Some people have seen that delaying Social Security income until 65, or even a little later, allowed them to get larger subsidies for health insurance costs.
Another potential benefit of delaying is that, usually, your Social Security benefit goes up every year that you delay. Now if you’re thinking that you need that money to live, since you won’t be working, stay tuned for the third way you may be able to reduce healthcare costs, coming up later in this post.
Minimize Withdrawals from Pre-Tax Accounts
Withdrawals from your 401ks, IRAs, and other similar pre-tax accounts, in addition to Social Security, are factored into your AGI. Taking all of your income from pre-tax accounts could increase your taxable income above those income limits that I mentioned.
One strategy we’ve seen retirees do, in the years leading up to their retirement date, is start to increase their non-retirement accounts, either their liquid savings accounts or individual investment accounts. They do this with the expectation that they’re going to use those funds in the first few years of retirement, up until age 65 when Medicare kicks in. And this leads directly to point number three.
Start to Increase Your Liquid Savings and Non-Retirement Accounts
Non-retirement accounts–trust or living trust accounts, or liquid savings accounts–are not treated like an IRA or 401k. With an IRA or 401k, everything you take out is taxable income to you. These liquid accounts are treated completely differently. One thing to pay attention to is potential dividends and interest and capital gains that could be incurred within the non-retirement accounts. If you happen to have a sale that gives you a big capital gain, it can count as taxable income and increase your AGI.
There are a few things to think about as you’re doing this but hopefully this post gives you a brief introduction to income planning related to retiring before age 65. The healthcare-cost issue is a common concern, but hopefully with a little bit of planning, you can feel better about the decisions that you have ahead of you and how you’re going to pay for them.