Retiring Before 65: The Healthcare Gap prior to Medicare
Retiring before age 65 can be exciting. You finally have more control over your time. You may be traveling, spending time with grandkids or pursuing hobbies you’ve put off for decades. But one question consistently stops many people in their tracks:
“How am I going to pay for health insurance until Medicare kicks in?” Let’s take a look at ACA subsidies.
Understanding ACA Subsidies
Before we get into what’s expiring, let’s review how subsidies work.
When you purchase health insurance through the ACA marketplace (Healthcare.gov or your state’s exchange), the cost of your premiums is tied to your Modified Adjusted Gross Income (MAGI). This is essentially your taxable income plus certain adjustments.
Subsidies come in two main forms:
- Premium Tax Credits (PTCs): Lower monthly premiums.
- Cost-Sharing Reductions (CSRs): Lower deductibles, co-pays, and max out-of-pocket costs for Silver plans if you qualify.
For early retirees, PTCs are the most impactful, saving thousands annually.
What Changed Under ARPA and the IRA?
Before 2021, ACA subsidies were capped at 400% of the federal poverty level (FPL). Go $1 over and you would lose everything.
Thanks to the American Rescue Plan (2021) and Inflation Reduction Act (2022):
– The 400% Federal Poverty Level (FPL) cliff was removed.
– Premium percentages dropped for all income brackets.
This helped a 62-year-old couple making $70,000 pay under $300/month instead of $1,500+ without subsidies.
When Do the Subsidies Expire?
Unless Congress intervenes, the enhanced subsidies end on December 31, 2025.
– The 400% Federal Poverty Level (FPL) cap returns.
– Premiums increase significantly for mid-to-high income retirees.
– Even lower income households face steeper costs.
Why This Matters Most to Retirees
Retirees under 65 don’t qualify for Medicare and often lack employer-sponsored insurance.
Healthcare costs increase with age, and premiums are non-negotiable. A $10,000–$20,000 increase in annual premiums can derail a retirement plan.
What the Numbers Could Look Like With or Without Subsidies
Example: John and Mary, 62, earning $75,000.
– With subsidies (2025): ~$350/month or $4,200/year.
– Without subsidies (2026): ~$1,600/month or $19,200/year.
That’s a $15,000/year difference. Planning ahead is essential. Now is the time to schedule a meeting with a financial advisor.
How to Prepare for Expiring Subsidies Expiration
- Manage MAGI: Use Roth IRAs, delay Social Security, avoid high capital gains years.
- Sequence Withdrawals: Use tax-diversified buckets to manage income reporting.
- Plan for Higher Costs Now: Budget $15,000–$20,000/year for premiums and Out of Pocket (OOP) costs.
- Explore Part-Time Work: Some employers offer benefits that bridge the gap.
- Maximize Health Savings Accounts (HSAs): Use as a triple-tax-advantaged healthcare fund.
- Stay Informed: Laws change, stay flexible in your planning.
A Word of Caution
Some retirees are tempted to suppress MAGI to retain subsidies, even if that harms long-term tax planning. Be careful. Consider your overall financial picture, not just short-term subsidy savings.
Real Client Conversations
– A couple kept MAGI under subsidy limits by blending Roth and cash withdrawals, saving $12,000/year.
– Another faced a subsidy loss after a rental sale. We reworked their income bridge until Medicare.
Every plan is unique. Early planning helps.
Resources You Can Use for Subsidies
– Work with a Certified Financial Planner™
Final Thoughts
Healthcare planning doesn’t have to be a roadblock to retiring before 65.
– Know the subsidy expiration timeline.
– Understand how income affects premiums.
– Build flexibility into your plan.
– Partner with a financial advisor to run scenarios.
Retirement should be about freedom, not fear. At Paradigm Wealth Partners, we can help you plan accordingly.
Additional Resources for Medicare (PDF attachments)
Healthcare planning doesn’t have to be a roadblock to retiring before 65.
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Will-I-Avoid-IRMAA-Surcharges-On-Medicare-Part-B-and-Part-D-2025
Will-I-Avoid-Medicare-Enrollment-Penalties-2025
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A Quick Note on IRMAA and Medicare
While this blog focuses on healthcare before age 65, it’s important to consider what happens once you become eligible for Medicare.
Medicare premiums are income-based. If your Modified Adjusted Gross Income (MAGI) is above certain thresholds, you’ll pay an Income-Related Monthly Adjustment Amount (IRMAA) in addition to your standard Medicare premiums. This surcharge applies to both Medicare Part B (medical insurance) and Part D (prescription drug coverage).
Here’s the catch: many retirees reduce their income during early retirement to qualify for ACA subsidies, sometimes by delaying Roth conversions or avoiding capital gains. But this can lead to higher taxable income later, especially when Required Minimum Distributions (RMDs) begin at age 73, potentially triggering IRMAA charges.
The key is to strike a balance: manage income for ACA purposes now, while also preparing for future Medicare costs. A coordinated tax and income strategy can help you avoid unexpected premium hikes later.