Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How Early Retirees Cover Health Care Before Medicare
Transcript
- Lucas: So, Luna, I want to talk about the thing that keeps more people from retiring early than almost anything else. And it's not their portfolio. Luna: Let me guess. Health insurance. Lucas: Exactly. Health insurance before Medicare. There's this persistent fear that if you're 55 and you quit your job, you'll have to pay two, three, even four thousand dollars a month for coverage. And for some people, that is true. But for a lot of early retirees, the math works out way better than they think. Luna: I remember the days when people would just stay in a job they hated because they were terrified of losing their employer-sponsored plan. But that's not the whole story anymore. Lucas: Right. The Affordable Care Act marketplace has been around long enough now that we have real data. And the key thing to understand is that your subsidy is tied to your income, not your wealth. So if you're living off investments and keeping your taxable income low, you can get very generous subsidies. Luna: That's a huge deal. So let's get specific. What does that actually look like? Lucas: Let's take a concrete example. A 55-year-old couple, both retiring this year. They have a decent nest egg, but they're smart about withdrawals. They plan to keep their modified adjusted gross income at sixty thousand dollars a year. That's after deductions, after the standard deduction. In 2026, for a family of two, the subsidy benchmark is the second-lowest-cost silver plan, and it's designed so that at that income level, they'd pay around four and a half percent of their income for the benchmark plan. Luna: So that's about two hundred and twenty-five dollars a month? That's surprisingly reasonable. Lucas: It is. And that's for a silver plan, which is pretty comprehensive. They could get a bronze plan for even less, or a gold plan for more, but the silver benchmark is a nice middle ground. The point is, they're not paying two thousand dollars a month. They're paying a couple hundred. Luna: And that's because they're managing their income. It's not about how much you have saved, it's about what you show the IRS. Lucas: Exactly. And the reason this works so well right now is that the subsidy cliff was eliminated through 2025, and as of this writing in August 2026, it's still gone for 2026. So there's no hard cutoff where your subsidy suddenly drops to zero. Before, if your income went a dollar over the line, you lost thousands in subsidies. Now, it's a gradual phase-out. That's a massive change for early retirees. Luna: So you don't have to be paranoid about accidentally earning one extra dollar from a dividend or something. Lucas: No. You have a lot more buffer. But you still want to be intentional about your income. That's why so many early retirees live off a mix of taxable brokerage accounts and a health savings account, which we'll get to in a minute. But first, let's talk about the costs themselves. Lucas: The real risk isn't the premium. It's the out-of-pocket maximum. In 2026, the out-of-pocket limit for a silver plan is around eighteen thousand dollars per person, but for a couple, it's double. So if something catastrophic happens, you could be on the hook for a lot. Luna: That's the part that scares me, honestly. The premium is one thing, but a hospital stay can wipe out a year of expenses. Lucas: Right. So you have to plan for that. One strategy is to use a bronze plan with a health savings account, because bronze plans have lower premiums but higher deductibles, and the HSA lets you pay those medical expenses with pre-tax money. Plus, HSAs are triple tax-advantaged: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. And after age 65, you can use it for any reason without penalty, just like a traditional IRA. Luna: So it's like a stealth retirement account. I actually use my HSA as part of my bond allocation, just because I know I'll have medical expenses eventually. Lucas: That's a smart move. And it ties into the income management thing, because your HSA contributions lower your modified adjusted gross income, which can increase your subsidy. So you're getting a tax deduction and a bigger subsidy at the same time. Luna: That's a double win. So let's talk about the subsidy cliff being gone. What happens if it comes back? I know there's been talk about making the enhanced subsidies permanent. Lucas: That's the big political question. The enhanced subsidies are currently in effect through 2026, but they were originally set to expire after 2025, and they got extended. If they expire, the cliff returns, and that changes the calculus dramatically. So anyone planning to retire early needs to stay informed, but also build in flexibility. Don't assume the current rules will last forever. Luna: So what's the takeaway? Should people be less afraid of health care costs in early retirement? Lucas: I think yes, with caveats. If you have a million dollars but you keep your income low, you can get affordable coverage. But you need to run the numbers. Use the ACA calculator on healthcare.gov, or, even better, talk to a fee-only financial planner who understands early retirement. And remember, the cost of the plan is just one piece. You also need to budget for the out-of-pocket maximum. Luna: And that's where the HSA comes in handy, because it's a dedicated bucket for those expenses. Lucas: Exactly. And one more thing: don't forget about COBRA. If you leave your job, you have the right to continue your employer plan for 18 months, but it's usually expensive because you pay the full premium. The ACA marketplace is often cheaper, especially with subsidies. So it's worth comparing. Luna: That's a good point. A lot of people just go with COBRA because it's familiar, but it can be a trap. Lucas: Yeah. And look, I know we're in the weeds here, but this is one of those topics where the details really matter. And it's been a bit of a journey for us, talking about all these strategies on the show. It's made me think about the resources that help people figure this out. Luna: Totally. And speaking of that, I know we've talked about this before, but if you're finding these conversations useful, you can support the show at buy me a coffee dot com slash fexingo. It's a small gesture, but it helps us keep this content coming without ads. Lucas: Yeah, we don't have a paywall or anything, so listener support is what keeps the lights on. And we really appreciate it, but no pressure. Now, back to health care. There's another angle I want to cover, and that's how to actually pick a plan. Luna: Right. Because not all silver plans are created equal. One might have a lower premium but a super narrow network, and another might have a higher premium but cover your favorite doctor. Lucas: Exactly. So the benchmark silver plan is just a reference point for the subsidy. You can buy a more expensive plan and pay the difference, or a cheaper plan and save the difference. But you need to check the provider networks, the drug formulary, and the out-of-pocket costs. It's not just about the premium. Luna: And if you're on any regular medications, that's a huge factor. Some plans have crazy co-pays for drugs that other plans cover at a lower tier. Lucas: Yes. So our advice is to spend a weekend doing a deep dive on the marketplace. Use the search tools to compare plans based on your expected usage. And don't be afraid to get help from a licensed agent or navigator. They're free and they can save you a lot of money. Luna: I've heard that some agents aren't really working for you, they're working for the insurance company. How do you find a good one? Lucas: That's a fair concern. Look for someone who's independent and works with multiple carriers. Ask them straight up if they get commissions from the plans they recommend. Transparency is key. And you can always check reviews or ask for referrals from financial advisors you trust. Luna: Good advice. So let's wrap up. Health care costs in early retirement aren't the monster they're made out to be, but they do require planning. Lucas: Exactly. The key is to understand how subsidies work, keep your income manageable, and use tools like HSAs to your advantage. And always have a plan for the unexpected. It's not a reason to stay in a job you hate. It's just another number to run. Luna: And you can always use a calculator or talk to a pro. There's no excuse for going in blind. Lucas: Right. So if you're thinking about pulling the trigger on early retirement, don't let health care scare you off. Do the math, and you might find it's more affordable than you thought.