Health Insurance Options For Part-time Employees – Health Insurance Options for Early Retirement by Rob Stoll, CFP®, CFA Financial Advisor & Chief Financial Officer / March 29, 2023
The number of employees who choose early retirement before the age of 65 has been on an upward trend in recent years. Higher stock market valuations and worker burnout are some of the contributors to this trend. While the idea of early retirement appeals to many, it can be more expensive than you think. Not only do you need money set aside to cover day-to-day expenses, but a critical expense that people forget is for health insurance and health care. What are your early retirement health insurance options and how much could it cost you?
Health Insurance Options For Part-time Employees
Early retirement is an exciting prospect to look forward to, but must be planned for several years before when you might want to retire early. Most of our monthly expenses beyond housing, food and transport are discretionary. That means we can spend more or spend less and still get by. Here are the typical expenses for which you must have savings set aside for early retirement:
Employer Health Benefits Survey
These expenses add up. The challenge is to have set aside funds that you can draw from as needed. Remember, you can’t start withdrawing money from your IRAs and 401(k)s until you’re at least 59-½ years old. So someone retiring in their early to mid-50s faces the challenge of meeting living expenses from savings or an investment brokerage account.
Therefore, it is very important to understand the cost of health insurance. It’s probably one of your biggest expenses in early retirement, something you don’t pay for while you’re working and is covered by employer insurance.
Most early retirees are fully responsible for the costs of health care and insurance. Understanding how much this cost is critical to any early retirement plan.
The best and easiest way to get a quick understanding of the potential health care costs in early retirement is to look at public market plans, also known as Obamacare. These are readily available and the most logical option for many.
Hra Plan Types: A Breakdown (infographic)
For the sake of this exercise, we’ll look at the total cost of an average health plan using these assumptions:
First you have the monthly premiums. For this plan, you’ll pay $1,805/month for an annual total of $21,660. That cost right there will immediately be one of your biggest monthly expenses, behind your mortgage payment or rent. Most people who have health insurance through an employer don’t understand the full cost of that coverage; it’s not cheap!
Secondly, there are insurance deductibles. This plan has a deductible of $2,500 per person, for a total of $5,000. This means that most of the first health care expenses you incur each year are your responsibility to pay, before the coverage really kicks in.
Third, each plan has an out-of-pocket maximum that you are responsible for. They sell this to people as a “good thing” in that there is a cap on how much you have to pay for healthcare each year. But these out-of-pocket maximums can be large, as in the case here where it’s $9,100 per person, or $18,200 for the couple.
Employers Offering Part Time Jobs With Health Insurance
Worst-case scenarios, the total health care costs for a couple who fully utilize coverage under this plan are enormous.
Add up that cost for each year of early retirement until you’re eligible for Medicare, and it’s a big problem to consider before you retire!
We’ve just seen how expensive these plans can be. But they are the easiest and most likely way for early retirees to get health insurance.
However, there is one way to significantly reduce the cost of these plans: the Premium Tax Credit. This tax credit is a subsidy that the government will give you to cover the cost of insurance premiums. The size of the grant is based on your annual income, which for an early retiree can be quite low.
Scrla Insurance Center
For example, a couple earning $50,000 per year would receive a premium tax credit of $1,300/month, bringing the total monthly cost from $1,800/month to “just” $500/month. That adds up to $15,600 per year in health insurance premium savings.
The problem with counting on tax credits to reduce health insurance premiums is that the credit decreases as your income increases. One of the more powerful financial planning strategies for early retirees is to take advantage of Roth Conversions during these low-income years. The potential tax savings from this strategy can be huge.
But if you do a Roth conversion strategy, you create income when you convert traditional IRA money into a Roth. Remember that the higher your income, the lower the Premium Tax Credit you get.
Marketplace plans, while one of the most logical options, must be selected and planned with other aspects of your retirement plan.
Savvy Is Reimagining Employer Health Insurance
Businesses with more than 20 employees are required by federal law to provide continuing health care coverage for 18 months after an employee quits or retires. This law is called COBRA.
When most workers hear about COBRA coverage, they automatically assume it’s expensive. It usually is. You must cover the entire monthly cost of the insurance the company offers. This can easily add up to $2,000 per month.
However, because your company is on a group insurance plan, they are usually able to negotiate much better plans for the price paid. Deductibles and out-of-pocket maximums are also usually lower.
There is one BIG benefit to choosing a COBRA plan if you have been saving in a Health Savings Account (“HSA”). You can pay COBRA insurance premiums from your HSA. The ability to pay health insurance premiums from HSA is NOT available for Marketplace plans. So if you’re planning for early retirement, stashing some cash in an HSA can be a great way to pay COBRA premiums.
What Is An Hra?
It may seem strange to say “get a part-time job” when the goal of early retirement is to stop working! But time and again we see clients who retire early from a stressful job, but who are not ready to lie on the beach yet. They still want to be active and keep their minds sharp.
Because of the labor shortage we have in the United States, several large companies are offering higher wages and benefits to part-time workers. For example, you can get a job at Costco that only works 24 hours a week and get excellent health coverage for yourself and your family.
The key here is to research which companies offer benefits to part-time workers. And this may depend on which companies are around the city you live in.
If you are a licensed professional in your industry, make sure you check out the health insurance options these professional organizations can offer. Because these organizations can get group coverage, insurance can be cheaper and cover more than a typical Marketplace plan.
Health Care More Affordable For Small Businesses
Some employers will offer the option for a retiring employee to continue coverage under a retiree health plan. The most common are health plans for retirees that were negotiated as part of a union contract. Teachers and other government employees are likely to have this option available to them.
The problem with retiree health plans is that they are sometimes scaled-down versions of the health insurance offered to full-time employees. In the cases we have seen with FDS, it was not a viable option for early retirees. But these plans are out there and can be an option.
If you’re thinking about early retirement, make sure you check out health savings accounts (“HSAs”) while you’re still working. Many people who have HSAs contribute money to them each year, but then use the same funds to pay ongoing medical expenses.
HSA can be a powerful savings tool, both for retirement and early retirement. You can invest money contributed to an HSA for the future, much like your 401(k) or IRA. Then, when you have qualifying medical expenses, you can withdraw money from your HSA tax-free to cover those costs. Effectively, HSAs are a pool of money that you set aside solely to deal with health care costs.
Employee Benefits: Types, Importance, And Examples
First, you can pay premiums for COBRA coverage from your HSA. This is a unique benefit that only applies to COBRA; you can’t use HSA savings to pay Marketplace or other health insurance premiums. Despite the (likely) high cost of COBRA coverage, if you’ve done your work to save for it in an HSA, you’ve covered the cost.
Second, you can pay for qualifying medical expenses from your HSA, tax-free. Doctor visits and photocopying, along with many other normal expenses qualify. An HSA account becomes a significant source to cover these expenses that would be paid under a Marketplace plan, for example. Given the high deductibles and co-payments for many Marketplace plans, having a fully loaded HSA can limit the amount you need to withdraw from everyday savings to cover these costs.
When we have clients who express an interest in early retirement, we do a lot of work to make sure they are prepared for it. The last thing anyone wants to do is retire from the rat race, only to have to get a job again because the cost of early retirement was
