Ep # 39: Making The Early Retirement Leap? Healthcare Costs Aren't Cheap!
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Benjamin Haas 00:02
Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you a healthier financial life starts...now! Hello, Adam and happy belated Father's Day to you.
Adam Werner 00:31
Thank you and happy belated Father's Day to you and all of our listeners who are fathers or father-like figures as you put it.
Benjamin Haas 00:39
Yes, very well said. Let's jump right into it. Want to talk today about those that are thinking about retirement and specifically, what in one way we deem early retirement. The focus today is going to be on retirement earlier than age 65 and that's a key one because what we really want to focus on is health care. So I'll just set the stage and I feel like we've been having these conversations more frequently. Maybe some of that is changing expectations with jobs, COVID, changing world. Some of it, frankly, is just the summertime. I feel like we get clients that they go on vacation and they go you know what? I could get used to this.
Adam Werner 01:24
Benjamin Haas 01:25
So like good financial planners. What we want to focus on today really is, what are the dominoes? What are those key factors or the situations that we would see. We want people to feel prepared and news alert: healthcare is not cheap.
Adam Werner 01:43
Wow, that's news to me.
Benjamin Haas 01:45
Breaking News. So, I don't know, let's do it. Let's talk about what are the conversations like between us and our clients and prospective clients on pre-65 retirement.
Adam Werner 01:56
Yeah, I think the conversation around health care becomes one of the most critical or at least it's one of the least kinds of factored into that retirement decision pre-65. I mean, we often see that it's age 62, people kind of have that as the benchmark for being able to access Social Security benefits. I think people inherently know age 65 is Medicare but don't necessarily understand how much or what the process would be to actually get health care coverage to fill that gap until they're eligible for Medicare. And I think, obviously, we'll go through a lot of those factors, the costs, how to get coverage, where to get coverage but I think we often see that as the biggest variable to making an early retirement actually work from a financial standpoint.
Benjamin Haas 02:53
Yeah, and we don't want there to be this crazy shock factor because if you work for and with corporations your whole life, what you pay as part of a group health care plan probably can be very different than what the cost is going to be to go out on the marketplace and really get your own private insurance. I also think there's always that danger on stereotyping. What are you really going to need in retirement? And sometimes that online calculator says, well, you need a certain percentage of your working income. Hey, by the way, if you don't have your mortgage anymore, hey, this is all the income you need and you weren't really thinking about that out-of-pocket expense pre-65.
Adam Werner 03:32
We often see it's the simple napkin math of well I know what I was earning. I know what my expenses are. I can start to add up what income I'm expecting in retirement but it's that variable or the unknown of what's healthcare going to cost if I retire at 63, for example and not really factoring that into that equation. So I think right off the bat, the default for a lot of people retiring pre- 65 is they have some sort of availability of Cobra, which is essentially just extending their group coverage through work. So once you retire, if it's pre-65, you can essentially extend your existing coverage exactly as it is from a coverage standpoint, for up to 18 months. Now, the trick is, you're paying your cost and you're also going to pay the employer's cost. Whatever they were essentially sharing on your behalf and potentially another an extra 2% for some administrative costs, since you're no longer an employee and you have to pay outside of your payroll. So it's essentially you could be paying up to 102% of your, of whatever that plan costs to be able to continue that for 18 months.
Benjamin Haas 04:46
Yeah, and we're not able to kind of pinpoint a specific dollar amount. This is age dependent. You still have to plan deductible and there are many things that go into that but the key is if you were used to paying that $200, $300 a paycheck. The key that you said there, just want to highlight it, you're covering the employer's portion of that too. That may have been a benefit to you but wasn't going out of your pocket. So, a 60-year-old is going to pay $800, $900, who knows maybe $1,000 a month and that may not be something that you were factoring into your plan.
Adam Werner 05:25
And there are special considerations, other caveats. If you are close to Medicare age, we've seen it, it's rare but there is a chance that the employer depending on kind of their rules, they may help cover some of those costs but I don't think as a general rule you can expect to pay much more than you are used to be able just to continue your existing coverage.
Benjamin Haas 05:52
I think one of the other things I mentioned there is, you may be able to control the cost a little bit by thinking about what is that deductible. If you're not really familiar with health care plans, the idea in theory is that the higher deductible you have, maybe the lower the premium that you have to pay. So you're saving yourself a little bit every month on the premium. However, if you do need to get some sort of health care, that out-of-pocket expenses, all the way up to that deductible. So, what we typically see is a great group plan has low cost and by the way, typically lower deductibles, where when you go out on the open marketplace, it's usually like a double whammy. The premium's higher and it's usually a higher deductible than you've been used to. So we don't as financial planners, we not only need to help you cover that cost but it's quite often that in this situation, we're building into a financial plan. Hey, we should be conservative here and say this $6,000 deductible, let's plan on that probably being paid out of pocket this year and that's another expense you may not have been thinking about.
Adam Werner 07:00
Yeah, so you mentioned it earlier. I'll throw it out there again, right. Cobra is one option to continue existing coverage going out on the ACA marketplace. Getting individual coverage through the Marketplace is kind of another option.
Benjamin Haas 07:17
Adam Werner 07:17
Yes. Yes. Sorry.
Benjamin Haas 07:19
Obamacare. Many, many different names.
Adam Werner 07:23
Any other names?
Benjamin Haas 07:25
Nope, I'll stop there.
Adam Werner 07:26
Okay. Yeah, it's important to be able to compare plans because it's in your example and I agree, we typically see with employer provided coverage, that those deductibles are typically lower, the premiums are typically lower. Compared to the ACA plan, the marketplace plans. You really have to take in all factors to be able to compare, you're essentially comparing apples and oranges at that point because they are different structures. To be able to wrap your head around what is actually going to cost me in the end if I actually need to use it and not just focus on what's this premium versus what's this other premium.
Benjamin Haas 08:06
Yeah, so here's the other hard part for us. Situationally, if somebody needs to go out on the Affordable Care Act, private insurance, whatever it's going to be and get some sort of plan. Part of what made the Affordable Care Act what it was and is, are what's called tax subsidies and that's based on the income that you show in the given year. So we can't even tell you for sure. What is it going to cost you as an individual without thinking about Okay, let's project out what is your income literally going to be that year. Whether you're working part time? Not at all? Are you on Social Security? Do you have a pension? Do you have a spouse that's working? It's a little bit hard but there are thresholds there. If you're a married couple and you both need health insurance privately and you're earning more than $70,000. You're not getting all the tax credits that you could be getting. So even from our standpoint, what's our number one job for people in retirement: help recreate their paycheck but not all paychecks are created equal and if that drives the expense, we need to be really careful about that.
Adam Werner 09:12
Yes. I'm glad you said that. That is that is a key for us and like I said, not all paychecks are created equal when it comes to retirement right, depending on where that income is coming from is going to be taxed differently. So if it's coming from your non-retirement savings, savings at the bank, and not necessarily coming from a retirement account, that's going to look like taxable income to you that can have a huge impact on not only just filling that gap of what you need from an expense standpoint but then also qualifying you for some tax credits to make your cost of insurance actually less.
Benjamin Haas 09:45
Yeah, so I know we had a client situation a couple years ago and I shouldn't say client. It was not a client. It was somebody we were talking about working with. I don't want to make it sound like we gave bad advice. No, but truly just knew this was the situation. It's actually why we got the call. Somebody in the process of getting private insurance plugged the numbers into the Affordable Care Act website and said, I'm expecting to make $60,000 this year, whatever the situation was, they needed to make a big withdrawal from their IRA to cover expenses. And then it came tax time, the next year, and the IRS says, whoa, whoa, whoa, all those credits we gave you, by the way, time to pay the piper back. So even if you get the credits retroactively, if you did not qualify for them based on where you pulled income, again, we're just talking about sticker shock. These are the things that surprise people in a very negative way, where if you can have the conversation on the front end, understand how these systems work. That's why you have a planner like us. Yeah, so in prepping for this conversation, I broke it down into two different camps. We've seen the unplanned retirement, that is less voluntary. Where it is nearing, we've seen people late 50’s, early 60’s, and they get laid off because the company is downsizing or they're just essentially replacing an older worker with someone who is younger and less expensive to keep on payroll. Those unvoluntary retirements, there's only so much planning that you can really do. On the plan side, if somebody knows that they're looking to retire pre-65. I believe we've talked about this in other podcast, a HSA, a health savings account can be a great tool to help bridge that gap until Medicare. To help cover some of those health care expenses and by the way, it's in a tax preferred nature. We love HSA is because they are triple tax advantaged? Tax free? Whatever.
Adam Werner 11:47
Words are hard. So you are able to put the money in tax deferred, you're not paying the taxes on it when it goes in, it can grow tax free within it and as long as you pull it out for qualified medical expenses, it comes out tax free. It's one of the best things from an investment or a taxable type account to be able to put it in without paying taxes and pull it out without paying taxes.
Benjamin Haas 12:10
Yeah, but here's the planner caveat. We have to say it. Saving into that plan is not without its own restrictions. Of course, you have to qualify for it, depending on the type of plan that you may have at work. There are limits, much like we talked about your limits to what you can put into an IRA. Same thing with an HSA. So the earlier that you can start doing these types of things, the better. So that's an important thing to say.
Adam Werner 12:38
Benjamin Haas 12:42
I guess the other the other thought that I had here was and you mentioned it, we often think about saving for retirement into those retirement plans and we just talked about if you have to pull money out of there, it's going to be taxable. I think if anyone and let's quantify this, the latest study I read was like 40-45% of people plan to retire before age 65. Whether they actually do or not, I guess there's probably different studies for that but the vast majority that's a coin flip that you're thinking about retiring before pre-65 the HSA was a great thing, build a cash reserve, like build that extra cushion, that's not having to tap into retirement dollars, not only for that tax flexibility but because it is quick access to cover things like deductibles if you have to, if you can't get all that money that you really in an ideal world could have gotten into an HSA.
Adam Werner 13:36
Yeah, I know I've made this joke on other podcasts. One of our favorite words is flexibility and that's an exact example of where we would love to see that having money saved in different types of accounts to be able to control and do that planning on the fly when it's needed. To be able to pull from a savings account knowing that you know, the taxes are minimal. Being able to pull from a Roth IRA potentially knowing that the taxes may be tax free. Having a retirement account, again, knowing it's going to be taxable but being able to combine all of those things, putting all those pieces together to be able to just to control your taxable income in any given year because again, that drives a lot of the process when it comes to health care pre-65.
Benjamin Haas 14:26
Yes, so one more point that triggered into my head as you were saying that. Just a point of clarification, a health savings account is not a flexible savings account. Sometimes there's confusion in the workplace on one or the other. A health savings account is not a use it or lose it situation. It can roll over year to year. So we often feel comfortable telling people to save there because at some point in your life, you're probably going to need medical care that's going to eat into a deductible. You're going to use this at some point.
Adam Werner 14:57
Yeah, and I'm glad you brought that up because it triggered another thought on my end. Another caveat for the HSA, the health savings account is that you can't use it to pay insurance premiums. You can use it to help meet your deductibles, pay your expenses ongoing. So if you didn't retire pre-65, you started Cobra or you bought a plan on the marketplace, or you just bought private insurance, you can't necessarily use those funds for premiums but you can use those to help meet your deductibles. The idea there being if you're relatively healthy and you don't expect to blow through your deductibles, you can choose a lower premium plan with a higher deductible knowing that you have the savings there to be able to be pulled tax free to help meet those costs if they even occur.
Benjamin Haas 15:41
Solid point, solid point. So the other thing that I wanted to wrap this up with is, I think we're seeing more and more frequently people being willing to kind of transition into retirement. Where you know, again, if it's non-voluntary, that's one thing but even there, we often run into people that go well, I don't know that I want to fully retire, just sit around all day, maybe I will work part time, maybe I will volunteer, maybe I'll dabble in what we deemed small business activities. The key there always is you're probably not going to get insurance in those working environments. But we are big believers, I guess I shouldn't say we, I think you are too, you can tell me if you don't. I believe that part of planning is like mental accounting and if we can isolate, alright, you're 61 and we don't really want to take Social Security yet, we know you have to get your own health care, here's the gap that we need to fill. So we can mentally go, here's the money I'm going to go earn to fill these gaps and sometimes that puts us in a good enough headspace to move forward with the plan and not let the high expense that you see healthcare being deter you from doing something that might give you greater life flexibility and quality of life.
Adam Werner 17:00
Yeah, I know we discussed this on a different podcast where it's just understanding that and the example you laid out. If I know I need to go earn $15,000-$20,000 a year to essentially just cover healthcare but that means I can either choose my own hours, work in a different position that I know is less stressful, whatever that may be. That may be all the confidence that I need to be able to make that decision and feel good about transitioning into retirement rather than just pulling the plug and hoping for the best with health care and costs and whatever withdrawals I would need to fill that gap just knowing or at least being able to pinpoint and you said that. It's mental accounting. I absolutely work that way, being able to just match up an expense with some income and those net each other out. Now I can focus on everything else, that's an okay way to go about it too.
Benjamin Haas 18:00
Yeah, so maybe that's the way to conclude this. The key here is to have the conversations. If you're thinking about that early retirement again, early by Medicare standards in this conversation and let's just not be surprised by anything. Let's take inventory of where income's going to come from, what assets you have, what the expenses can actually look like and then let's just try to pair it up. That may mean for some people, we're going to rely on savings accounts. For some people it's going to be fill that income gap with some sort of earned income but know what that is. You know, that's what we want to do. We want to empower people with the information they need to feel comfortable with the decision.
Adam Werner 18:39
Yep. Yes, I agree wholeheartedly.
Benjamin Haas 18:44
Wonderful. Cool. Anything you want to add to this conversation?
Adam Werner 18:50
No, I think we touched on them all.
Benjamin Haas 18:53
I love it. I love it when we gave it all in 14 minutes and 37 seconds. I have no idea if that's accurate. Well, thank you for the time again.
Adam Werner 19:09
All right. Thank you.
Benjamin Haas 19:16
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we've voiced in the show are for general information and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant or financial advisor, or tax advisor prior to making decisions and investing. Thanks for listening!
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