One of the challenges of an early retirement includes the need to budget for increased health insurance expenses prior to the onset of Medicare at age 65. During our working years, health insurance is typically provided at no cost by our employer or at a significantly reduced cost with employer assistance, but those who retire prior to age 65 and without any retiree insurance typically rely on the government health insurance exchange to purchase coverage.
Unfortunately, the average cost of this coverage far exceeds what retirees have typically been used to paying and can be expected to rise each year going forward. This means a failure to appropriately account and plan for health insurance costs in retirement can derail a plan and create unpleasant surprises. However, with the right advisor and financial plan, you can offset that cost by taking advantage of a premium tax credit, or subsidy, offered as part of the Affordable Care Act (ACA), also referred to as “Obamacare”.
Unlike other government programs, the ACA’s eligibility requirements for premium tax credits are based on your income, not wealth or assets. That is, a person with a $5 million portfolio is treated no differently than a person with a $100,000 portfolio.
If eligible, the formula to determine the amount of your subsidy is a function of your age, your income, and the health insurance costs in your county. Amounts vary widely based on geographic location, but the general theme is the higher the costs of insurance, the greater the subsidies.
The definition of income used in this formula is your modified adjusted gross income (MAGI). To qualify for a premium tax credit in 2023, your MAGI cannot exceed:
Your MAGI also needs to be between 100% and 400% of the federal poverty level to be eligible for the subsidy. As an example, you’ll qualify as an individual with an income range of:
In response to the COVID-19 pandemic, the American Rescue Plan implemented in 2021 introduced a provision that permits individuals to be eligible for a subsidy if the expense of a benchmark plan, which is defined as the second-most affordable Silver plan accessible in their area, surpasses 8.5% of their income. (Obamacare uses a classification system of Platinum, Gold, Silver, and Bronze tiers to categorize plans based on costs and benefits.) This rule was further extended through 2025 by the Inflation Reduction Act of 2022. This extension ensures that individuals have continued access to financial assistance for health insurance premiums, offering relief to those whose income percentage exceeds the affordability threshold set by the benchmark plan.
So, if your income was $75,000 per year, you typically wouldn’t qualify for a subsidy given your income is greater than 400% of the federal poverty level. But, with the 8.5% rule in effect, if the second-least expensive Silver plan available to you costs at least $6,375 per year or more, you’d be eligible for a premium subsidy because the cost would equal 8.5%, if not more, of your income.
It's worth noting that subsidies, whether acquired through the federal poverty level or the 8.5% rule, can be applied to any plan, be it Platinum, Gold, Silver, or Bronze.
When it comes to planning for health insurance costs, a retiree must develop a structured plan to generate the necessary funds for living expenses while NOT generating income over certain thresholds. In the case of the ACA, if your income is too high—even by $1—you get nothing. That’s a big risk and emphasizes the need for careful planning.
A financial plan can help you manage your reported income (and thus, your MAGI) in retirement by considering the following:
To illustrate the impact that better controlling your income can have on your eligibility for the premium tax credit, let’s look at a sample married couple.
Using the health insurance cost calculator on the government health insurance exchange website, the table below shows whether the couple would receive a subsidy, and in what amount, at various income levels.
| Annual Income | Estimated Monthly Subsidy | Estimated Annual Savings |
| $225,000 | Not Eligible | Not Eligible |
| $175,000 | $315 | $3,780 |
| $125,000 | $669 | $8,028 |
| $75,000 | $1,023 | $12,276 |
Hopefully, this explanation provided valuable insight. For more information, download our Retirement Readiness Checklist or schedule a time to speak with one of our credentialed advisors.