Retiring Early? Prepare for Higher Healthcare Premiums.

(Photo illustration by Spencer Platt / Getty Images)

If you are retiring early and expect to buy health insurance on the Affordable Care Act marketplace, brace yourself for higher premiums.

Individual market health insurers are requesting the largest monthly premium increases in more than five years, according to the nonpartisan health policy organization Peterson-KFF. The organization says the median monthly premium increase would be 15%, spurred in part by the extra federal subsidies for premiums expiring this year. Tariffs may make drugs more costly.

Some states may see higher increases. New York is anticipating a 38% increase in premiums, says Elisabeth Benjamin, vice president of health initiatives at Community Service Society, which helps New York residents navigate the exchanges.

Financial advisors say there are a few options to keep healthcare costs down for people who want to retire before they go on Medicare at age 65. It takes planning, careful management of cash flows, and a focus on tax planning.

Brad Clark, investment advisor representative and founder of Solomon Financial, says healthcare costs are a regular conversation with his clients looking to retire early. He is currently working with a married couple where the husband is looking to retire at age 62. It hinges on whether their income will be low enough to take advantage of subsidized health insurance.

“Do you roll the dice on what…insurance costs are going to be, or do you wait [to retire] for Medicare to kick in at 65? These conversations do come up with some consistency,” Clark says.

Congress has until Dec. 31 to extend the enhanced tax credits. If they expire, tax credits will revert to their basic tax credits which limited income eligibility to 400% of the federal poverty level, around $62,000 for a single person. The enhanced tax credits cap how much someone pays for health insurance, up to 8.5% of their income. KFF says if the subsidies expire, 51% of current enrollees ages 50-64 will lose subsidy eligibility.

One strategy for early retirees over age 59 1/2 is to tap Roth tax-free individual retirement accounts to keep their taxable income low. Clark says financial advisors normally advise waiting as long as possible to tap Roth accounts to let those tax-free savings grow. But some early retirees can come out ahead by spending down the Roth now to get avoid big healthcare premiums.

Planning ahead for healthcare costs in early retirement can also keep taxable income down. For example, if you want to retire at age 63, consider putting two years of cash-flow needs in a high-yield savings account. That way you won’t have to tap tax-deferred accounts where any withdrawals are taxable income.

Consider selling assets before you retire so you can avoid capital gains that will lift your taxable income—and insurance premiums—when you need to buy healthcare on the exchanges, Clark says.

If you have been able to fund health savings accounts while working, start spending down this money in early retirement. That will allow you to pay for certain healthcare costs tax-free, though not health insurance premiums. Pairing HSAs and a taxable account gives early retirees flexibility if they are trying to keep their income low enough to qualify for the stricter income-eligibility limits under the ACA’s basic tax credits, says Ben Duncanson, wealth manager at Badgley Phelps Wealth Managers.

“Decreasing your income even by $5,000 could really benefit you when it comes to the exchanges,” he says.

Early retirees who are moving to new states and need healthcare should carefully look at the healthcare options and costs on the exchanges between different states as these can be significant, says Cameron Rosenow, advisor at NorthRock Partners.

Rosenow budgets about $30,000 per person annually for clients who are footing the bill for their health insurance. “If you don’t use all of those dollars, then they get repatriated back into the grander spending plan,” he says.

If you still want to retire early but healthcare costs for those few years look too steep, financial advisors say you may need to cut back on discretionary spending until you qualify for Medicare. If you are retiring early because you have had it with your current job, the advisors say they have had many clients successfully find lower-paying, less stressful jobs in different fields that include healthcare coverage and enjoy the change of pace.

Whatever you choose, don’t forgo healthcare coverage at this stage. “There is too much risk, especially for people who are right around retirement age,” says Bryan Stretton, financial advisor at Wealthspire Advisors.

If you are trying to navigate the healthcare exchanges yourself, Community Service Society’s Benjamin says, like New York, several states have ombudsmen to help you navigate the exchanges for free to find the right plan and max out any financial assistance. Insurance brokers can also help find options, but they may charge a fee or receive a commission.

Her tips to find a plan that works for you include ensuring the network you want has your preferred hospital and doctors, that the medications you take are covered, whether name brand or generics. Check for hidden coinsurance, such as high costs for out-of-network care or emergency situations.

Benjamin says don’t be afraid to ask exchange employees to help you find a plan as well. “They have people who are pretty skilled who can walk you through your coverage options,” she says.

Corrections & Amplifications

Health Savings Accounts can be used to pay for Medicare premiums. An earlier version of this article incorrectly said they could be used to pay for health insurance premiums.

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