Retiring Early? There is just that one thing…
I heard one time that if you keep having the same conversations with clients, you should probably put up a blog post about it. So, here is goes. I’ve been talking to a lot of clients about “early” retirement. I realize that early retirement can mean lots of different things. But for the sake of our discussion here, early will just mean that you choose to retire before age 65. And the one thing that keeps most people from choosing early retirement is not what you think. It is usually not a savings problem, but none other than good old health insurance.
For many years, the only way to get health insurance without individual underwriting in the United States was to get your insurance through a group. Typically, this tends to be through your employer. Employment and health insurance have been closely intertwined in the USA since around WWII. In 1954, the IRS codified the tax-exempt nature of health insurance as an employment benefit, thereby solidifying employer-based coverage as here to stay.
That changed quite a bit in 2010 when the Affordable Care Act was passed, giving people the chance to purchase health insurance outside of employment, without having restrictions on pre-existing conditions. Good news for those who want to retire early…well, sort of.
As anyone who pays attention knows, the cost for health insurance premiums often goes up by double digit percentages each year. It is no different on the health insurance exchanges. Right now, a couple looking to retire early and not have family coverage, should plan on around $25k per year in health insurance premiums. You can start to see where this tends to throw a wrench into someone’s plan to retire at 55.
Of course, this problem goes away once you hit 65 when one of America’s most successful forms of social insurance policies takes effect, Medicare. So a lot of these conversations I am having with clients is all about how to get from early retirement (before 65), up to retirement at age 65. If this is something that interests you, here are some ideas on how to bridge that gap…
- Cobra- your employer is required to offer you insurance for 18 months, but it is at full cost plus 2% without any employer contributions
- The exchange (Obamacare)- go out and buy your own insurance on the exchange
a. It’s done by state
b. One major caveat, these policies do not tend to travel well if you are a snowbird or spend any significant time away from home - Part-time work- sometimes you can find employers who will hire part-time workers with health insurance benefits
- Have a spouse still working- I like to joke with my clients that the best way to retire is for you to have your spouse still working with health insurance benefits
- Save those HSA funds for retirement. While you can’t really use these funds to pay insurance premiums, you can use them to pay for medical expenses incurred, even if they were in the past
- Start a business. Make self employed health insurance part of your plan and write off the expense
