Wall between us and early-retirement

Retirement doesn’t mean what it used to mean. In a lot of ways. Yes, far fewer Boomers have traditional pensions than did our parents of the Greatest Generation. But don’t be blind. Many of our parents never enjoyed a pension, much less a fat pension. But that’s not the only change. Health insurance is dramatically different for Boomer early retirees. It’s a narrow path from employer-sponsored health insurance to age-65 and Medicare eligibility. For many Boomers? High health insurance and early-retirement are mutually exclusive. Our new Catch-22.  Individual health insurance is the high wall between us and early-retirement.

Health Insurance Winners

For some, with pre-existing conditions and no prior coverage, the Affordable Care Act (aka as ACA or Obamacare) is a win. For these, the ACA means access to coverage at insurance rates that are cheaper than the direct cost of uninsured care.

Another winner? Large employer group plans won favorable rules. Group employers generally pay the average cost of those healthy enough to work. Yes, group employees can get sick. And group insured family members can get sick. But the risks are younger and different. And spread over a larger group. Proof? The different rates of premium increases. Individual market rates are going up much faster than group rates.

Health Insurance Losers

But there are losers under the ACA. The successful self-employed and healthy early-retirees are among the ACA losers.

The cost of guaranteed-issue is narrowly focused on the individual market. It is not truly shared by large employer self-funded employer plans. If you’re healthy enough to work? You’re probably not that expensive. Work is a hidden form of excluding the sickest.

Buyers in the Individual Market

If you can’t work or are self-employed? You’re in the individual market, not the group market. And many people drop out of work and the group market because of poor health. This concentrates the high-cost risk in the individual market. And in a small cost-sharing pool.

Within the individual market, the self-employed subsidize the sick-and-can’t work. The result? Dramatic rate increases concentrated in the individual market, especially in smaller states.

So, the ACA losers? Those relatively healthy individuals who used to be able to afford individual coverage, but who cannot afford the new much higher price. The self-employed healthy pay for their own coverage and the individuals’ too sick to work.

Our Rate in Iowa

It’s daunting to see annual premiums in the $25,000-$30,000 range, even for the least expensive plans on the ACA Insurance Exchange.

In our state, Iowa, and rural location, the least expensive 2018 option is a high-deductible Medica Health Savings Account (HSA) plan for $28,409. That’s annual premium. Next year’s rate will be higher. This year’s rates reflect a 43.5%-60% rate increase (depending upon the plan).  And without regulatory changes, no insurer may be willing to offer individual policies next year.

https://www.healthinsurance.org/iowa-state-health-insurance-exchange/

https://www.desmoinesregister.com/story/news/health/2017/10/11/iowa-health-insurance-market-flux-just-three-weeks-before-open-enrollment-starts-under-obamacare/749703001/

Premium Death Spiral

Iowa’s individual market is in a premium death spiral. That is, the rate keeps going up. Higher rates drive out relatively healthy insureds willing to risk going without insurance that is too expensive compared to the perceived risk. The higher rates increasingly leave only the sickest individuals in the pool. The ones who know they will have expensive claims. It feeds on itself. Driving rates even higher the next year. The pool is just too small to spread the risk.

Individual Market Example

Iowa has a total population of 3,123,899. Of that total, approximately 52,000 Iowans bought health insurance through the ACA Exchange in 2017. The ACA Exchange offers income-based subsidies for families earning up to 400% of the Federal poverty line. There were also individual policies sold outside the ACA Exchange by insurers like Aetna and the local Blue Cross/Blue Shield affiliate, Wellmark. But both insurers stopped the ACA bleeding and exited the Iowa individual market for 2018. Before their exit, the total individual market was about 70,000, both in and outside of the ACA Exchange.

So, for a state of 3.1M residents, 70K bear the brunt (and benefits) of guaranteed-issue. That’s about 2% of the population. And it’s worse. About a quarter of the 70,000 buying individual insurance were beneficiaries of reform with pre-existing conditions and new access to private insurance, regardless of prior contributions (or lack thereof) to any prior insurance pool (group or individual). Remember, pre-ACA reforms provided for portability between carriers or insurance pools if you maintained coverage. So that means that about 52,000 Iowans are subsidizing the approximately 17,500 with pre-existing conditions.

So, 1.5% of the population pays for that .5% of the population benefitting from guaranteed-issue.  The absolute numbers will obviously vary state-to-state, but the relative percentages will be similar.

Now you know why individual health insurance is so expensive. And rising fast. And failing.

List Price vs Your Price

But wait! That’s still not the whole story. Remember that ACA income-based subsidy available within the ACA Health Insurance Exchange?

If you’re eligible it can make a huge difference. The list price may have little relationship to what you really pay. There’s list price and your price. The subsidy is driven by 400% of the federal poverty rate and the cost of insurance in your state. The federal poverty rate is the same for all states in the lower 48 and the District of Columbia. For 2017 it is $16,240 for a family of two (e.g., a typical married couple). For an individual, it is $12,060. (The health insurance subsidy formula uses last year’s poverty level because it is the most currently available at the time of annual enrollment.) https://www.healthcare.gov/glossary/federal-poverty-level-FPL/

health insurance for retirees under 65

Climbing the health care insurance wall

ACA Premium Subsidies

Four times the individual poverty level is $48,240. And for couples, $64,960 ($65,000 rounded.)

And while the poverty level is constant in all but Alaska and Hawaii, the cost of health insurance is not. So, the subsidy also varies based upon where you live and the cost of health insurance available in your state and county.

Sounds complicated? Right. It is. But we found a great tool to help answer the key question. What will health insurance cost me, after any subsidy?

Net Health Insurance Cost Estimator, (List Price Premium – Subsidy) = ?

We recently found a great resource for quickly estimating your individual subsidy. And without the hassle of doing a full insurance application. Precisely the tool you need for planning an early retirement. At age-65 we can get Medicare. Until then, we’re on our own if we retire.

ACA Health Insurance Premium and Subsidy Calculator This tool is by www.healthedeals.com.  We’re not endorsing them as an agent or source. We don’t have direct experience with their customer service, but we’re impressed with the calculator as it fills a planning gap. The slider for income makes it easy to look at a range of “what-ifs.”

You can also look at different places to live and local results by changing the ZIP Code field. We looked at a short-list of possible locations, including our current residence. This helps plan GEOarbitrage and your relocation options.

Keep Your Income Below the Subsidy Threshold

Remember to use your anticipated income in retirement. And if you’re spending from a 401k or IRA savings, you have a lot of control over how much income you’ll receive. But that requires that you control your expenses. If you can stay under the eligible subsidy income level in a place you want to live? Early retirement is not such an impossible dream.

Individual Health Insurance Premium Tax Credit

The premium subsidy is in the form of a premium tax credit. The credit can be used two ways.

  1. First, you can pay the insurance premium, file your annual tax return, and get the premium credit back in your tax refund.
  2. Second, you can receive a credit against your premium and pay nothing for the premium (or if you choose a higher priced plan, your premium is reduced by the credit).

Most people don’t want to manage the cash flow burden of a nearly $30,000 premium. So almost everyone chooses the second option of the premium offset.

Medicaid

And it’s worth noting, those at or below 100% of federal poverty are Medicaid-eligible. The ACA gave states the option to expand Medicaid eligibility up to 138% of federal poverty level. Not all states did. Iowa is at 133%. http://dhs.iowa.gov/ime/members/who-receives-medicaid So, Medicaid eligibility in Iowa is at or below $22,411. Here’s a Medicaid-eligibility calculator from Healthcare.gov. https://www.healthcare.gov/lower-costs/ And, it goes into more detail on the premium subsidies.

But also, be aware that Medicaid-eligibility is based on both low-income and low-wealth. If you have substantial assets, you must spend the assets down to become Medicaid eligible, even if your income is low. Some assets like your home are exempt from being counted. But the asset limits are severe. If you’re a saver or investor, you’re not counting on Medicaid. You’re waiting for age-qualified Medicare at 65 and buying individual health insurance if you’re not on an employer-sponsored plan before age-65.

https://www.medicaid.gov/medicaid/by-state/by-state.html; https://www.medicaid.gov/medicaid/eligibility/index.html; https://www.medicaidplanningassistance.org/medicaid-eligibility

Medicaid is a backstop but not a primary source for pre-retirement planners.

Our Results – We Can Retire Today

We’re living on a take-home income approximately equal to our area’s median family income of about $45,000. If we had to pay $27,000 in annual health insurance premium, those numbers clearly don’t work. But here, premiums are subsidized up to incomes of about $65,000. We’re under the threshold.

One perversity is that subsidies drop off precipitously. The difference between $65,000 income and $63,000 is the loss of $26,156 in premium tax credits. That is, you go from paying nothing for your individual health insurance premium, to paying the full cost. Ouch. Talk about an incentive to minimize income. Stay under $64,960!

We’ve modeling retirement based on maintaining our current lifestyle, so our $45,000 in annual income is well within the tax credit subsidized level. We would receive up to $28,241 in premium tax credits to pay for insurance that will cost at least, $26,155. (The lower cost Bronze level premium is cheaper than Silver or Gold plans.)

Can you live on less than $65,000?

So now, only the share of the 52,000 Iowans not receiving premium tax credits are subsidizing guaranteed-issue to the pre-existing condition insureds. Federal taxpayers are subsidizing those of us under the income subsidy cap. Complex and confusing, yes? At the policy level, for sure. But right now, we just want to know if we can retire early and still afford health insurance.

We’re not arguing for or against guaranteed-issue or the ACA. Them’s the rules and we’ve got to play by the rules.

So long as we can live on less than $65,000, we’re good to go without worrying about the cost of our health insurance premium in early retirement.

Conclusion? If we had to, or wanted to, retire today. We could. We’re not eligible for Medicare until age-65, so we have about five to seven years still to get through with either the employer market or the individual health insurance market.

Premiums, Co-Pays, Deductibles, and Maximum Out-of-Pockets

Okay, even if the premium is survivable with a subsidy. You still need to be aware of the high cost of accessing coverage as Co-Pays, Deductibles, and Out-of-Pocket Maximums are dramatically higher now than ten years ago. These are all forms of so-called patient cost-sharing, intended to make you spend insurance dollars like your own money.

Most minimum deductibles are now over $10,000 before coverage kicks in. There are some screening tests and well-care that are now mandatorily covered without a copay or deductible. But any significant health surprise can be very expensive to address out-of-pocket before your ACA individual insurer will pay anything.

Planning an early-retirement still requires thinking about how you will handle a significant claim that falls below the amount covered by your individual health insurance policy. There’s still an issue with health insurance for retirees under 65 if you actually want to use your insurance. You need your emergency fund or rainy-day fund for health insurance cost-sharing. And ideally, you need a pool of savings for which you’ve already paid income tax (e.g., a Roth IRA.)

Don’t Forget Prescriptions

Prescription drugs are a source of a lot of out-of-pocket medical spending. Here’s a quick list of ways from Kiplinger to control prescription costs. 10 Ways to Spend Less on Prescription Drugs.

Hidden Income

Remember that our individual health insurance premium list price is at least $27,000.

For comparison, we’re currently insured through Dan’s employer, a small community college. Our two-member family coverage costs $16,549 of which we pay $3,110. So individual insurance is approximately $10,000 more expensive every year than our current group insurance. Or 60% more expensive in relative terms.

And that group coverage is better coverage than available on the ACA Health Insurance Exchange. But still not as rich as many large-employer plans, public or private, in the state. It’s far from a Cadillac.

These employer benefits are “hidden income” because we don’t always realize the full-cost of our benefits as most of us manage our take-home income. And not our nominal income. And most of us are unaware that we cost our employer something like 120-140% of our salary or hourly pay. It pays to understand your total compensation package and what it costs your employer, not just your pay-rate or take-home pay. These hidden benefits are real benefits.

Taxes Change the Picture

Dan’s employer makes it easy by providing an annual summary of the fully-loaded costs of benefits and who pays what (employer vs. employee). But you can tease this out of your paystubs or W2 as well.

Our $45,000 take-home pay? It starts with a nominal salary of more like $65,000. Our share of benefits and taxes come out first. And the fully-loaded employer cost after the employer’s share of taxes and benefits? $100,000. Wow. We take home less than 45% of what it really costs Dan’s employer. This is why you also have to think about your taxes in retirement.

Health Insurance for Retirees Under 65

If you’re dealing with or thinking about health insurance for retirees under 65, there are two key lessons from all the above.

  1. It’s not enough to know list price for individual health insurance. You need to understand your price. And if you are eligible for an ACA individual health insurance premium tax credit. Use the planning tool.
  2. And don’t forget, as a saver or investor you may be able to choose your income from now until Age-65 (and Medicare-eligibility). Stay below the ACA’s subsidy income cap.  That assures you will be eligible for the premium tax credit. It may require a change in lifestyle or location (geoarbitrage). You can control expenses and therefore necessary income to withdraw from savings. Here’s where having a variety of tax-deferred and Roth assets may help. We plan to withdraw from our Roth assets first. We’ve already paid income taxes on the Roth investments.

A recent article we liked on how to think about and plan for early-retirement is an article from Marketwatch, by Chris Mamula, There’s another option when the answer to ‘can I retire’ is ‘not yet’

Good News?

For us, we’re now less worried about either the choice or risk of early retirement. Our current lifestyle wouldn’t be broken by the cost of having to buy an individual health insurance policy on the ACA Health Insurance Exchange. Our premium would be subsidized and not “list price.” That’s a relief. High health insurance and early-retirement are not mutually exclusive. It’s worth checking the calculator so you know your situation. The list price is still scary. We’re eligible for premium tax credit subsidies at a comfortable and current lifestyle level. But we can make lifestyle and location adjustments if need be. Maybe you can too.

About the Authors.

Articles on www.AgingwithFreedom.com are authored by the Aging with Freedom team, Dan and Lori. This is all original content.

We’re trailing-edge boomers in our late-fifties. We’re debt free. (That’s a story in and of itself.) And have saved a decent nest egg now north of seven figures by paying ourselves first and living below our means. When work peers were in bigger houses and fancier cars, we prioritized savings and investment. At times we spent too much and relied too much on debt, but we recovered. We did it on average incomes. Not high-flyers. We’re hardly error-free. We learned too much the hard way. One reason we want to share today. Maybe we can spare you some of the mistakes. Maybe you’ll benefit from our planning and experience. We’d sure like to hear from you. We think a great Third Act (previously known as retirement) is a team effort. We’d like you on our team so we can learn from you.

Aging With Freedom curates lessons from other sources on our Facebook page at www.facebook.com/AgingWithFreedom and on Twitter @aging_freedom.