While success can be defined in a multitude of ways, most boil down to one simple desire – financial freedom. So what happens when a client reaches this goal sooner than expected? While plan projections to determine a successful outcome are often based on current spending, it’s extremely important to account for the potentially new expense of healthcare.
Many pre-retirees have been educated on the costs of Medicare, which I ballpark to cost a senior $4,500/year if enrolled in a supplement and Part D or advantage plan. It’s significantly more when purchasing directly or through a COBRA plan, not necessarily due to premiums but the cost of various deductibles, co-insurance, and co-pays. This means that when adjusting a retirement projection to illustrate early retirement, there should also be an expense adjustment to account for health care, which can vary depending on the client’s situation and attitude toward insurance.
What are the options?
DO NOTHING: Some individuals have rolled the dice in deciding to forego insurance due to the expense. Barring any major catastrophe, they feel better off paying for care directly. This route also incurs a penalty based on the greater of two calculations. The first is 2.5% of household AGI. The second is a flat fee per uninsured individual; in 2017 it’s $695.00 per adult and $347.50 per child. The penalty is capped at $2,085.00, which translates to about $80,000 AGI or a traditional family of 4. That means adding a potential expense of $173.75/month to the budget for the penalty alone.
When advising clients deciding to go this route, I first suggest they review their explanation of benefits from the prior year to determine what the insurance was billed for the care the individual expects to receive. While insured we’re paying predictable co-pays and co-insurance, making it easy to underestimate the true cost of a simple doctor’s visit. It would also be wise to call the doctor’s office prior to making a decision to self-insure to see if they’ll offer a negotiated rate for private pay patients. Doing all this ahead of time will give a more defined expectation for self-insuring so it can be correctly factored into budgeting. Figuring out the affordability of this option also means having a conversation about increasing cash reserves to pay for any emergencies.
EXCHANGE: The exchange is usually the first place people check when reviewing options. Depending on your state, you may be purchasing directly through Healthcare.gov or be re-directed to your state’s marketplace. These sites have made great strides to create a straightforward application process and incorporate questions that reveal eligibility for subsidized rates. Despite the intent, it can still be very challenging to navigate the site and various state marketplaces. Encountering errors and feeling lost on how to proceed is not uncommon. In addition, utilizing the exchange for planning purposes rather than an immediate need can be frustrating. The site now requires account creation and ID verification before being able to review coverage options and pricing. Gone are the days of simply entering an age, gender, and zip code. I’m now enlisting the help of an enrollment specialist to provide a ballpark for pricing for planning purposes and help with the application and plan selection when there is a more immediate need.
COBRA: If eligible, a client may pay to stay on their employer’s plan for up to 18 months post-termination. This means bearing the full cost of coverage and up to a 2% administrative fee. Depending on the situation, this may be a convenient option if a pre-retiree is close to qualifying for Medicare. There are a few considerations for COBRA. Given that you’re bearing the full cost to remain on the employer plan, it’s wise to first determine if you have any chance of qualifying for subsidy on the exchange. Second, it can work in a pre-retiree’s favor given that work policies are priced based on various employee and participant averages. If you’re coming from a company with younger employees it’s likely young spouses and children are being included in actuary calculations that determine pricing. In this instance, the cost of insurance is skewed in the pre-retiree’s favor vs quotes based on their age and health alone. The second consideration is the attractiveness of the plan itself. I recently reviewed coverage options on the exchange against my husband’s COBRA plan and found that for comparable money the COBRA plan coverage was significantly better. In fact, the insurer isn’t even available in our state to purchase directly. So while there are more options on the exchange to fit your budget, the value may be better within a COBRA plan.
PART-TIME WORK: In the past, it was possible to keep your toe in the working world simply to keep benefits running. However, the Affordable Care Act has spared small business from having to provide employees with health insurance and even large corporations are not required to offer plans to employees working less than 30 hours a week. Corporations have used this ruling to their advantage by hiring 2 employees working short shifts to complete the job of 1 traditional employee. With that said, there are some reputable companies that pride themselves on providing part-time workers with access benefits, including their employee health plan. Keep in mind, just because they have access doesn’t mean it’s subsidized.
ABROAD: I’m not comfortable suggesting this option, admittedly because I’ve seen enough horror stories on the popular show “Botched” to know that there is little to no recourse for malpractice. I’m also concerned whether accurate and complete medical records from abroad make their way to the US, which could be a significant problem if corrective surgery is required. Depending on how far you’re going, expenses indirectly related to receiving care also need to be considered, such as travel, accommodation, and professionals to manage home, pet and/or child care in your absence.
