Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How Early Retirees Manage Healthcare Costs Before Medicare
Transcript
- Lucas: So today we're looking at the single biggest variable in any early retirement plan that I think people underestimate most, which is healthcare costs before Medicare kicks in at 65. Luna: Yeah, the 'healthcare wedge' — that gap between leaving your job and turning 65. It's terrifying if you don't plan for it. Lucas: Exactly. And we've got a specific case to anchor this. Jen and Mark retired at 52. They have a $1.2 million portfolio, they're aiming for a 4 percent withdrawal rate — that's $48,000 a year. But they live in a state that didn't expand Medicaid, and their income puts them right in the ACA subsidy sweet spot — or so they thought. Luna: Right, because the ACA subsidies are based on modified adjusted gross income, which for early retirees is basically whatever you withdraw from tax-deferred accounts plus any capital gains you realize. Lucas: Exactly. And the key threshold is 400 percent of the federal poverty level. In 2026, that's about $60,000 for a couple. If your MAGI is under that, you qualify for premium tax credits that cap your insurance costs at a percentage of your income. If you go over, you lose the subsidy entirely, and suddenly you're paying full price. Luna: So Jen and Mark's $48,000 withdrawal is under $60,000, they think they're safe. But what about dividends? Or if they do a Roth conversion? Lucas: Great question. That's exactly the trap. If they have any dividends in a taxable account — say $4,000 a year — and they do a small Roth conversion of $10,000 to manage future RMDs, their MAGI jumps to $62,000. They lose the subsidy. Their premiums go from maybe $200 a month to $1,200. That's a $12,000 a year swing. Luna: And that $12,000 is almost a quarter of their withdrawal. Suddenly their 4 percent rule becomes a 3 percent rule in practice. Lucas: Right. So the first lesson is: know your state's Medicaid expansion status and your local ACA marketplace. The second is to model your MAGI carefully. Keep it under 400 percent of FPL, but also above 138 percent if you're in a non-expansion state, because below that you fall into a coverage gap with no subsidy. Luna: And that's where the HSA comes in. If you have a high-deductible health plan, you can contribute to an HSA — up to $8,300 for a family in 2026, I think — and that contribution reduces your MAGI dollar for dollar. Lucas: That's a huge lever. Jen and Mark could put $8,300 into an HSA, which lowers their MAGI from $62,000 to $53,700. Now they're back under the threshold, they keep the subsidy, and they've got a triple tax advantaged account growing for future medical expenses. Luna: And the HSA is the stealth retirement account. You can invest it, let it grow tax-free, and use it for anything Medicare-related later — premiums, deductibles, long-term care. Lucas: Exactly. But here's the thing: Jen and Mark need to have an HDHP to qualify for the HSA. If they're on a silver or gold ACA plan, they can't use an HSA. So they have to pick the right plan from the start. Luna: And the out-of-pocket maximum is another big number. A typical HDHP has an out-of-pocket max of $8,000 to $10,000 per person. For a couple, that's $16,000 to $20,000 in a bad year. Lucas: Right. So you need to budget for that worst case. If you have a $48,000 withdrawal and a $20,000 medical bill, you're spending $68,000. That's a 5.7 percent withdrawal rate. Not sustainable. Luna: But you can plan for it. Set aside a separate cash reserve of one to two years of out-of-pocket maximums. Or keep a health expense fund in a taxable account. Lucas: And that's where the part-time work option comes in. Some early retirees take a job that offers an HDHP with an HSA — maybe 20 hours a week at a company that provides benefits. That covers your insurance, gives you the HSA contribution, and the income can be managed to stay under the subsidy cliff. Luna: Yeah, that's a smart bridge. And it's more common than people think. I've talked to several early retirees who work as consultants or part-time at a university just for the health benefits. Lucas: So let's run the numbers for Jen and Mark one more time. They retire at 52, need to cover 13 years until Medicare. If they budget $15,000 a year for premiums and out-of-pocket, that's $195,000 over the period. That's a big chunk of $1.2 million. Luna: But if they keep their MAGI under 400 percent of FPL, use an HSA to lower it further, and choose an HDHP with a low out-of-pocket max, they might get premiums down to $5,000 a year and have a $10,000 out-of-pocket max. So worst case $15,000, but average maybe $8,000. Lucas: And that $8,000 a year for 13 years is $104,000. That's 8.7 percent of their portfolio — not nothing, but manageable. The key is to include it in the withdrawal rate calculation from day one, not treat it as an afterthought. Luna: And don't forget that after 65, Medicare Part B and Part D premiums still cost about $3,000 a year per person. So healthcare never goes away. Lucas: Right, but it becomes more predictable. And you can use your HSA for those premiums tax-free. So the HSA contributions you made in your 50s become a Medicare slush fund in your 70s. Luna: Speaking of supporting the show — if our money conversations have helped you think about a decision differently, especially something as big as healthcare planning, we'd love your support. We deliberately don't run ads on these episodes, and listener support keeps it that way. Lucas: Yeah, it's a choice we made early on. If you want to support that, the link is buy me a coffee dot com slash fexingo. No pressure, but it helps us keep the focus on the numbers, not the sponsors. Luna: And we'll get back to the numbers. So another strategy for Jen and Mark is to use a health reimbursement arrangement, or HRA, if they're self-employed. But that's more niche. Lucas: Let's stay focused on the ACA path. The most important thing is to run the numbers every year. Your MAGI changes, subsidy thresholds adjust, plan options change. It's not a set-it-and-forget-it plan. Luna: And the penalty for not planning is huge. I've seen people retire at 55, think they'll just buy private insurance, and get quoted $2,000 a month for a family plan. That's $24,000 a year — half their withdrawal. Lucas: Exactly. So the takeaway: estimate your healthcare costs before you pull the trigger. Use the ACA marketplace. Keep your MAGI under 400 percent of FPL. Use an HSA if you can. And budget for the out-of-pocket max. Do that, and healthcare becomes a manageable line item, not a crisis. Luna: And if you're listening and you're five years from retirement, start now. Open an hsa eligible HDHP while you're still working. Build that HSA balance. By the time you retire, you might have $50,000 in there, tax-free, ready to go. Lucas: Great point. Jen and Mark wish they had started earlier. But they're fine because they planned. And that's the whole idea — plan for it, and you can enjoy that cabin porch. Luna: With iced drinks. Lucas: Exactly. For The Financial Freedom Podcast, I'm Lucas. Luna: And I'm Luna. See you next time.