Planning for Retirement – Smart Choices Part 3

RECAP: Smart Choice #2

Smart Choice #2 might come into play when you first meet with a financial planner, so start thinking about it now (and start discussing it with your spouse or partner as well):  What does retirement look like?

  • Does retirement for you start at 62, 65, 67? What about for your spouse or partner?
  • Will you work in retirement? Volunteer?  Travel?
  • Does retirement mean aging in place? Downsizing your home?  Retiring abroad?  Moving to be close to your children?  Moving to an independent living facility?

Smart Choice #3 comes with quite a bit of strategic thinking and planning ahead.  Early on in my career, health insurance was never really a big part of the conversation, even if the client planned to retire before Medicare eligibility at age 65.  However, with an aging population and healthcare costs rising significantly in the past twenty years, it is now part of almost every discussion with people planning for retirement.  If you are going to retire before 65, what are you going to do about health insurance?

Why is this such a big deal?  Once you leave your employer, you have to determine how to cover health insurance costs until you reach Medicare eligibility at age of 65.  The first option you have – go into the health insurance marketplace and sign up for your own individual health insurance plan.  Depending on your age and income, you are likely to get quoted $1,000 to $1,200 per month for a high deductible (often $7,000 per year or more) health insurance plan.  That’s almost like having a second mortgage payment!  That is often the case these days with health insurance.  If you are lucky enough to be covered on your spouse or partner’s employer insurance plan, take advantage immediately.

Other strategies to consider:

  • I call the first one “Playing the ACA game.” What does this mean?  Under current law, individuals earning more than $12,760 but less than $51,040 qualify for an Affordable Care Act subsidy.  This means you will qualify for health insurance with a lower deductible and premium than a policy not purchased through the ACA exchange.  If you are a family of two, the numbers are more than $17,240, but less than $68,960.  Playing the ACA game can be tricky.  You have to keep your income lower than the upper limits listed above to be eligible for a subsidy.  If you go over the upper limit, the subsidy is charged back to you.  Note that the American Rescue Act temporarily bumps the income limits up for two years.
  • Another strategy is using COBRA as a bridge to Medicare. COBRA allows you to leave your employer and keep your health insurance coverage for eighteen months with the same health coverage you had while employed.  This same rule can apply to your spouse or partner.  The caveat is that you will pay the full cost of the insurance.  While you were employed, your employer was likely subsidizing that cost.  For example, the total cost of your health insurance is $400 per month.  You pay $200 per month and your employer covers the remainder.  If you elect to retire at 63.5 years old and use COBRA, you’ll be responsible for the full $400 per month.  If you plan to use this bridge, be sure you calculate the months correctly.  You do not want to have any period of time without health insurance coverage.
  • I’ve seen an uptick in the number of people using phased retirement as an option to retire before age 65 and still have health coverage. Universities and school systems often allow phased retirement, where professors or teachers slowly decrease their schedules from three semesters per year to two or one over a five-year time period.  More typically, employers stop providing coverage when an employee’s schedule falls below 30 hours per week or 75% of a full-time equivalent employee.  It’s a good idea to reach out to the HR departments at your employer to find out whether a “part-time with benefits” arrangement is possible.
  • A small number of employers are still offering lifetime healthcare coverage to their employees. If you are in the local government, state, or federal system, and have been for a certain number of years, you are likely to have some health insurance coverage throughout retirement.  Early on in my career, most governmental, and some private sector employees had health insurance coverage for life with no premium.    About fifteen years ago, when healthcare costs really started rising, the employers could no longer afford the entire cost of the employee’s premium and starting pushing a portion of the cost to the retired employees.  Even though retired employees are responsible for some of their healthcare expenses, the overall coverage of the plan is often better than having an individual healthcare policy.  Keep in mind if you decide to switch to an employer in one of these systems, there is a requirement that you work a certain number of years before you are eligible for lifetime benefits.

Stay tuned to the final part of this Smart Choices for Retirement Series, #4.

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Any opinions are those of Jennifer Adams and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. The cost and availability of Long Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of Long Term Care insurance. Guarantees are based on the claims paying ability of the insurance company.