“Can I retire now?” That’s a key question that drives many people to seek out a financial planner in their late 50’s. Though they have saved and invested smartly over the years, one key issue can still create great uncertainty: health insurance.
How can you cover your healthcare costs until Medicare kicks in at age 65? Several options abound.
For many people, the first move is to elect COBRA, which means that your former employer will still pay part of your healthcare premiums for the first 18 months of retirement (and up to 36 months in special circumstances). Your COBRA payments will almost always be less than the cost of health insurance that is paid for fully out of pocket. Know that COBRA is only mandated for employers with at least 20 employees.
Even once the COBRA phase has ended, you may still be able to stay with the same insurer by switching from a “group plan” to an “individual plan,” which costs slightly more.
Thanks to the Affordable Care Act (ACA), early retirees can line up an even better deal. The recently-created healthcare exchanges provide for generous levels of subsidies that can sharply lower a monthly healthcare bill. Yet there’s a catch: the retiree must have fairly low levels of income.
And that may not be as easy as it sounds. Some retirees, for example, enjoy pursuing part-time work in retirement, and the more they make, the smaller the subsidy they’ll be eligible for. Also, if retirees are living on the proceeds of their retirement accounts (such as IRAs), then they’ll need to recognize the withdrawals as income for tax purposes.
As a result, if you aim to tap into the benefits of your state’s healthcare exchange, then it’s wise to withdraw funds from your taxable brokerage accounts or Roth IRAs. Generally speaking, it’s often best to avoid tapping into a Roth IRA until much later in life, but it can be a wise move in the early retirement years if securing low-cost health insurance is a key goal before age 65.
The usual disclaimer here applies: work with a fee-only financial planner to ensure you are making the right moves now that won’t lead to costly mistakes as you juggle your various financial options.