How you can save on health insurance costs when approaching retirement

One of the top concerns for individuals considering retirement is the cost of healthcare. 

If you retire before age 65 (Medicare eligibility), the premiums alone for a silver-level plan on the healthcare exchange for a 62-year-old couple are around $24,000/year. 

But a premium tax credit (PTC) might help.

The PTC is a refundable tax credit designed to make monthly health insurance premiums more affordable for eligible individuals who are unable to obtain coverage through their employer or a government health insurance plan such as Medicare.

How valuable can the PTC be for healthcare costs?  Let’s take a look at an example.

The hypothetical couple noted above, age 62, living in Green Bay, Wis., projected $68,000 of modified adjusted gross income (MAGI) when applying for health insurance through the federal marketplace. That income was too high to qualify for PTC, which means that under the silver-level plan they faced:

  • Annual premiums of almost $24,000
  • A family deductible of $10,400
  • Out-of-pocket maximum of $16,300

If their projected income for 2020 was $67,000 they were eligible for a PTC of $1,417/month, and would now face:

  • Annual insurance premium of $6,504
  • A family deductible of $10,400
  • Out-of-pocket maximum of $16,300

Lowering income by only $1,000 saved them $17,000 in healthcare premiums.

Now let’s take the example one step further. 

Let’s say instead the couple was able to reduce income for tax purposes to $25,000 for 2020. That would make them eligible for a PTC of $1,880/month, which means that under the silver-level plan they face:

  • Annual insurance premium of $950
  • A family deductible is only $500
  • Out-of-pocket maximum is only $2,000

By lowering their income level, the couple would save:

  • $23,050 in annual premiums
  • $9,900 in deductibles
  • $14,300 in possible out-of-pocket costs

Income doesn’t equal cash flow

How can you drop your income in retirement from $68,000 to $25,000? Or far enough to be eligible for PTC?

With good financial planning started years in advance.

When you’re retired, cash flow isn’t the same as income. The income level being assessed is MAGI, which is close to your adjusted gross income (AGI), but adds back in a few items, most notably tax-exempt interest and nontaxable Social Security earnings. 

As a retiree you can be spending $6,000 a month, but that doesn’t necessarily mean your tax return shows income of $72,000. 

It depends on where that cash flow is coming from.  A few key items to consider:

Roth distributions are not taxable and don’t factor into MAGI. You can plan years in advance by building up a healthy balance of retirement savings in a Roth IRA or Roth 401(k) account. Traditional retirement distribution planning encourages you to delay Roth distributions in retirement but qualifying for PTC could be a great reason to pull from a Roth account early.

After-tax (non-IRA) investments in stocks and bonds held in a brokerage account may be used to help fund cash flow. Depending on your cost basis, you may be able to generate sufficient cash flow for retirement while minimizing realized capital gains.

Health savings account (HSA) distributions are not taxable if used for qualified healthcare expenses. Marketplace insurance premiums don’t qualify as qualified expenses, but other out-of-pocket healthcare costs likely will. Also, a little-known fact is you can take a qualified distribution from an HSA for prior year unreimbursed expenses provided you had your HSA open at the time and you retain copies of your receipts.

Consider investments early

How you manage your investment portfolio throughout the year also plays a key role. 

Realizing capital gains, even a few thousand dollars, can have a significant impact on your eligibility. You may want to review your after-tax investment holdings and determine whether they are receiving the appropriate level of tax-management. Active investment fund managers are well known for distributing larger capital gains distributions at year-end when compared to index and other passively managed investments.

Another area of planning impacted is Social Security and pension plans. 

Upon retirement many individuals elect to begin taking their Social Security benefit and/or workplace pension plan payments. Doing so boosts your MAGI and may force you to pay higher insurance premiums.

Often times these elections take place before healthcare planning begins, and by the time you figure out what benefits have been lost it could be too late.

Qualifying for these healthcare benefits can be a multi-year financial planning process, and one that has huge implications for you and your family. There is no better time than now to start planning for these retirement healthcare costs. 

If you have questions or would like help in this planning, please contact a financial planner at Wipfli Financial Advisors.

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How retirees can save thousands in health care costs

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Benjamin Hayes
Benjamin Hayes

CFP®, MBA | Senior Financial Advisor

Benjamin Hayes, CFP®, MBA, is a Principal and Senior Financial Advisor for Wipfli Financial Advisors in Green Bay and Appleton, WI. Benjamin specializes in comprehensive financial planning for major life transitions, focusing on retirement, tax and risk-management considerations.

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How you can save on health insurance costs when approaching retirement

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