Early retirees face a significant healthcare cost gap between retirement and Medicare eligibility at 65. To estimate this cost, let's consider a couple retiring at 55 with a moderate income. They may be eligible for an Affordable Care Act (ACA) silver-tier plan, which could cost around $1,500 per month. Over 10 years, this would total $180,000 in healthcare premiums alone.
Calculating Healthcare Costs
To calculate the total healthcare cost, we need to consider the monthly premium, out-of-pocket expenses, and potential subsidies. Let's assume our couple has a Modified Adjusted Gross Income (MAGI) of $60,000, which could qualify them for ACA subsidies. Using the Freedom Calculator, we can model different scenarios to estimate their healthcare costs.
- Monthly premium: $1,500
- Out-of-pocket expenses (10% of premium): $150 per month
- ACA subsidy (based on MAGI): $1,000 per month
With the subsidy, their monthly healthcare cost would be $650 ($1,500 - $1,000 + $150). Over 10 years, this would total $78,000.
Managing MAGI for ACA Subsidies
To minimize healthcare costs, early retirees can manage their MAGI to qualify for ACA subsidies. By keeping their MAGI below $66,000 for a couple, they may be eligible for significant subsidies. Here's an example of how MAGI affects ACA subsidies:
- MAGI: $60,000, subsidy: $1,000 per month
- MAGI: $70,000, subsidy: $500 per month
- MAGI: $80,000, subsidy: $0 per month
Leveraging Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) can be a powerful tool for early retirees to save for healthcare expenses. Contributions to an HSA are tax-deductible, and the funds grow tax-free. Let's assume our couple contributes $7,000 per year to an HSA, which grows at a 4% annual rate. Over 10 years, their HSA balance would be:
- Year 1: $7,000
- Year 5: $38,419.19
- Year 10: $83,919.19
This HSA balance can provide a significant cushion for healthcare costs in early retirement. By combining ACA subsidies, HSA savings, and tax-efficient withdrawal strategies, early retirees can develop a comprehensive plan to bridge the healthcare gap.
New to FIRE? See our primer at https://freedomcalc.app/what-is-fire.
For a couple with a $1 million portfolio, aiming to retire at 55, their healthcare costs could be around $78,000 over 10 years, or approximately 7.8% of their portfolio, highlighting the importance of careful planning and management of healthcare costs in early retirement.
Tools worth looking at
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- Empower — Free net worth tracking, portfolio analysis, and retirement planner. The dashboard serious FIRE chasers actually use.
- Acorns — Round-ups that invest your spare change automatically. The lowest-friction way to start investing if you have been putting it off.
- Wealthfront — Tax-loss harvesting, a 5% cash account, and direct indexing once you cross $100k. Solid robo for the set-and-forget crowd.