Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How to Pay for Health Insurance in Early Retirement
Transcript
- Lucas: You have a million dollars in investments. You quit your job at 45. You think you are set. And then you look at health insurance premiums and realize they could cost you more than your grocery bill, your utility bill, and your car payment combined. Luna: And that is the moment a lot of early retirement plans hit a wall. Especially if you are leaving a job that subsidized your coverage. Lucas: Right. So today I want to talk about how to actually pay for health insurance in early retirement—specifically through the Affordable Care Act marketplace. Because it is not just about picking a plan. It is about structuring your income and your withdrawals to maximize subsidies. Luna: And the key number everyone needs to know is the subsidy cliff. Or, as of 2026, the lack of one? Actually, that changed. Lucas: It did. So the original Affordable Care Act had a subsidy cliff. If your income was above 400 percent of the federal poverty level, you got zero premium tax credits. That was brutal for early retirees. A couple with $70,000 in income would pay full price. But the Inflation Reduction Act eliminated that cliff through 2025, and it was extended through 2026. So right now, in July of 2026, there is no cliff. You get subsidies based on a sliding scale, even if your income is high. The subsidy caps your premium at 8.5 percent of your modified adjusted gross income. Luna: So if you have $100,000 in MAGI, your maximum premium for a benchmark Silver plan is $8,500 per year. That is a huge change from a few years ago. Lucas: Exactly. And that benchmark—the second-lowest-cost Silver plan—is what the subsidy is calculated against. You can use that subsidy to buy any metal tier plan. But here is the strategic part: your MAGI is not your total net worth. It is your adjusted gross income plus some things like tax-exempt interest. So you have a lot of control over it. Luna: Which means you can basically dial in your income to optimize your subsidy. This is where the Roth conversion ladder becomes a really powerful tool. Lucas: Absolutely. Let me give you a concrete example. Say you are a couple, both 50 years old. You spend about $60,000 a year. You have $1.2 million in a traditional IRA, $200,000 in a Roth IRA, and $100,000 in taxable brokerage. If you just withdrew from taxable and did a small Roth conversion, you could keep your MAGI at, say, $65,000. The federal poverty level for a two-person household in 2026 is about $20,000. So 400 percent of that is $80,000. You are safely under the old cliff, and even with the new rules, your subsidy is generous. Luna: How generous? What would that couple actually pay per month? Lucas: I ran the numbers using the Kaiser Family Foundation subsidy calculator. For a 50-year-old couple with a $65,000 MAGI in a typical midwestern county, the annual premium for the benchmark Silver plan is about $16,500. Their subsidy covers roughly $15,900 of that. So they pay about $600 a year, or $50 a month. Luna: $50 a month for two people. That is less than a lot of people pay for Netflix and Spotify combined. Lucas: Exactly. But here is the trap: if they do a large Roth conversion—say $50,000 instead of a smaller amount—their MAGI jumps to $115,000. Their subsidy drops to about $5,500, and they pay $11,000 per year, or $917 a month. That is a huge difference. Luna: So the size of your Roth conversion directly affects your health insurance costs. This is why the order of your withdrawals matters so much. Lucas: Right. You want to fund your spending first from taxable accounts, where only the capital gains count as income. Then from Roth contributions, which are tax-free and do not count as income. And then do a targeted Roth conversion each year, just enough to fill up the lower tax brackets but not so much that you destroy your subsidy. Luna: And what about people who have a health savings account? Does that play into this? Lucas: HSA is fantastic for early retirement. If you have a high-deductible health plan, you can contribute to an HSA pre-tax, and that lowers your MAGI. So you get a double benefit: you save on taxes now, and you reduce your subsidy calculation. Plus, you can pay for qualified medical expenses tax-free, and after age 65, you can use it for anything penalty-free. Luna: So the playbook is: keep your MAGI low, use an HSA if you can, and do small Roth conversions to fill up the lower brackets without blowing up your premium tax credits. Lucas: Exactly. And there is one more nuance. The subsidy is based on your projected income for the year. You estimate it when you enroll. If your actual income ends up higher than you estimated, you have to repay some or all of the subsidy when you file taxes. But if it ends up lower, you get a refund. So it pays to be conservative in your estimate. Luna: Which is another reason to keep your Roth conversions modest. You can always do a larger conversion later in the year if you have room, but you cannot undo an overestimate. Lucas: Exactly. And this is a topic where the details really matter. If our money conversations have helped you think about a decision differently, and you want to support the show staying ad-free, listener support is what makes that possible. You can find us at buy me a coffee dot com slash fexingo. Luna: And it genuinely helps us keep doing deep dives like this one without any sponsor interruptions. Lucas: Alright, back to the strategy. One thing I want to emphasize is that you should not just look at premiums. Look at total out-of-pocket costs. A Bronze plan has lower premiums but higher deductibles. If you have chronic conditions or expect significant medical expenses, a Silver or Gold plan might be better even with a smaller subsidy. Luna: And there are cost-sharing reductions available if your income is below 250 percent of the federal poverty level. That is about $51,000 for a couple in 2026. Those reduce your deductible, copays, and out-of-pocket maximum. Lucas: Right. So if you can keep your MAGI under $51,000, you get a Silver plan with cost-sharing reductions that are essentially as good as a Gold or Platinum plan. That is a huge value. A couple spending $50,000 a year could have near-zero deductibles and very low copays. Luna: That is the sweet spot for a lot of early retirees. Spend from taxable and Roth contributions, keep conversions small, and you get both low premiums and low out-of-pocket costs. Lucas: Yes. And let me give one more number. The average annual premium for a 50-year-old couple in 2026 is around $18,000 unsubsidized. With the right strategy, you can get that down to $1,000 or less. That is the difference between a viable early retirement and one where healthcare eats your portfolio. Luna: So the takeaway is: health insurance is not a fixed cost. It is a variable that you can manage with your withdrawal strategy. Lucas: Exactly. And the sooner you plan for it, the better. If you are five years from early retirement, you can start shifting assets into taxable and Roth accounts now to give yourself more flexibility. Luna: Great advice. And on that note, I think we have given everyone a lot to think about. Lucas: Absolutely. Next time, we will talk about how to handle Medicare if you do work past 65 and how it coordinates with an employer plan. But for now, keep those MAGI numbers in check.