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Health Care Reform: Don't Count on Retiring Early

The high cost of retiree medical insurance and the barriers to coverage due to pre-existing conditions have long been a significant obstacle for most Americans who want to retire before age 65, the eligibility age for Medicare. Does the health reform bill help? For some people, yes, but the high cost of retiree medical insurance will still be a challenge for many Americans.

The true effect of the health reform bill is a complex subject that will take a few posts to fully cover, and I'll write about this over the next week or two in order to give it the coverage it deserves. For this post, though, let's assume you're part of the vast majority of Americans who won't get retiree medical insurance from your employer or your spouse's employer. (A future post will cover issues of concern for the lucky few who might be eligible for employer-sponsored retiree health benefits.)

If you're like most Americans, you're on your own when it comes to buying individual medical coverage if you retire before you turn 65. Often this coverage isn't available at any cost due to pre-existing conditions. And even if you don't have pre-existing conditions, the cost can be prohibitive. Since they can't obtain affordable health insurance, many Americans put off retirement.

The story changes when you become eligible for Medicare at age 65. Medicare covers you regardless of your health conditions, and the monthly premium is affordable for most people (in 2010, it's either $96.40 or $110.50 for most retirees). Also, insurance companies that sell Medigap coverage can't use pre-existing conditions to deny you coverage.

Now let's look at the most important feature of the health care reform legislation that's relevant to early retirees. Starting in 2014, the purchase of health insurance will be mandatory and states will create American Health Benefit Exchanges where individuals can purchase health insurance if they don't have employer-provided insurance. In addition, premium subsidies will be provided to families whose annual income is between 133 percent and 400 percent of the poverty level. This table summarizes these thresholds in 2010.

Family Size: 1 2 3 4

Poverty Level: $10,850 $14,570 $18,310 $22,050

133% of poverty level: $14,430 $19,378 $24,352 $29,326

400% of poverty level: $43,400 $58,280 $73,240 $88,200

If your annual income is under 133 percent of the poverty level, you'll be eligible for an expanded Medicaid program. But if your annual income is over 400 percent of the poverty level, there will be no subsidy and you'll be paying the full freight for health insurance. In this case, the total cost can run several thousands of dollars per year for an individual, as you'll see in the table below.

The subsidy will be offered on a sliding scale, limiting the premium paid by the individual to 2 percent of gross income at 133 percent of the poverty level and going up to 9.5 percent of income at 400 percent of the poverty level. The formula for the subsidies is complicated, but fortunately for us, the Kaiser Family Foundation (KFF) has developed a friendly online Health Reform Subsidy Calculator that does the math for us to illustrate the amounts of federal subsidies. The chart below shows an example.

Suppose you're an individual age 60, and you live in a mid-cost region as specified by the KFF. The following table shows estimates from this calculator of the total annual cost of medical insurance, the subsidy at various levels of income, and the resulting amount paid by the retiree, as follows.

Income Total Premium Subsidy Amount Paid by Individual
$30,000 $7,911 $5,261 $2,650

$40,000 $7,911 $4,111 $3,800

$50,000 $7,911 $0 $7,911

Note: All amounts are annual. Total premiums are representative of 2009 levels.
Please keep in mind that we are interpreting a new, complicated law, and that the above table shows estimates of events that are projected to take place in 2014. A lot can happen in the meantime, so stay tuned on this subject.

Also keep in mind that these are illustrative examples, and that your total annual premium can vary widely, due to plan features such as deductibles, coinsurance and the area of the country in which you live. The above table shows that health reform can indeed be good news for lower-income retirees, but the beneficial effect diminishes for middle-class retirees. It's pretty obvious that even after 2014, you might still be paying a lot for retiree medical insurance.

The bottom line: Whether you retire before or after 2014, an important part of your retirement planning is to do the math in order to determine the best option for your circumstances with respect to health insurance. It can affect the age at which you can retire.

Stay tuned for my next few posts, which will cover the many other features of the health reform bill that affect retirees.

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