The Hidden Costs of Retiring Early

[Geoffrey]

This issue has been addressed before on this forum, but nevertheless, I found this article interesting:

The Hidden Costs of Retiring Early at SmartMoney.com

It illustrates the pitfalls an early retiree could face if he or she fails to fully consider the costs of obtaining medical insurance. Some retirees will face exorbinant costs, assuming that coverage is even available. For those that are not already covered by employer's plan, or otherwise have a viable plan for obtaining affordable health care, this is an interesting read.

 

[Sparky]

For those that are not already covered by employer's plan, or otherwise have a viable plan for obtaining affordable health care, this is an interesting read.

My sad story is my friend who's husband was dying and she hung on for an extra year so that she could get employer sponsored health insurance for retirees. He died two weeks after she retired and two years later, the company cancelled retiree health insurance.

Nothing's written in stone.

 

[dex]

This issue has been addressed before on this forum,

and this article really does not indicate we need to address it again

 

[CyclingInvestor]

If my RE plans had such a tight tolerance that an extra $100K or so for health expenditures would have broken it (or caused excessive worry about it), I would have worked the extra time (6 months?) or so needed to eliminate it.

 

[haha]

I can imagine many optimistic action oriented people like the guy in this piece being blindsided by health insurance cost and accessability problems.

Most of us here are careful in the extreme, so we tend to look before we leap.

Ha

 

[Rich_by_the_Bay]

It's a big deal. Barring reform, the premiums are likely to rise 10-12% per year and continued access is not assured - while you cannot be dropped arbitrarily as an individual based on claims, your group can be dropped (non-renewed -- including so-called individual policies where internally are considered to be a "group" for contracting purposes, as I understand it).

That said, you either have access to insurance or you don't. If you don't you are taking a major risk by retiring early, unfortunately. If you do, plan for hefty annual increases starting when you choose your FIRE date.

Medicare at age 65 brings some relief but I'm planning on premiums closer to commercial premiums if serious reform occurs - someone has to pick up the tab for insuring the currently underinsured, and means testing is a possibility.

None of this is news to most of us, but it still catches people off guard.

 

[haha]

Medicare at age 65 brings some relief but I'm planning on premiums closer to commercial premiums if serious reform occurs - someone has to pick up the tab for insuring the currently underinsured, and means testing is a possibility.

None of this is news to most of us, but it still catches people off guard.

Medicare already has surcharges for high income people. My premium is a little more than twice the standard Pt. B premium, and I believe they are going to start the same thing with part D. Plus the Supplement is aout equal to my enhanced Medicare premium. Overall I am paying roughly the same as I paid when I was 64, though the coveage is a bit better.

I am doing a bit of a slow burn over this, and I will bend over backwards in the future to keep my "Modified AGI" below their thresholds. Maybe the Philippines or SA looks better after all.

We should all have worked for our uncle.

Ha

 

[FIREd]

Medicare already has surcharges for high income people. My premium is a little more than twice the standard Pt. B premium, and I believe they are going to start the same thing with part D. Plus the Supplement is aout equal to my enhanced Medicare premium. Overall I am paying roughly the same as I paid when I was 64, though the coveage is a bit better.

My MIL has been covered by Medicare since the summer and she is paying more now for a somewhat lesser coverage (she is in pretty good health so her premiums were pretty low prior to signing up for Medicare).

Before Medicare, she paid $405 a month on premiums for health + vision + dental. Copays were minimal especially on drugs ($20 per doctor visit, $4 per prescription).

Now she pays about $100 for Medicare Part B, $130 for supplemental insurance (going to $180 next year), $30 for Medicare Part D (going to $40 next year). So a total of "only" $260 in monthly premiums (going to $320 next year).

But, with the Medicare part D donut hole, her drug copays are on the rise. Plus she lost dental and vision coverage. So in her case, signing up for Medicare has increased her medical costs substantially.

 

[FIRE'd@51]

Medicare already has surcharges for high income people. My premium is a little more than twice the standard Pt. B premium,

And it's not just high income people. When a spouse dies, leaving one as a single filer, the AGI threshold is halved.

After my FIL died, my MIL sold her house and moved into an apartment in a senior citizens' facility. As a single, her capital gains exclusion on the sale of her house was cut from 500K to 250K. This left her with a residual capital gain that pushed her into the higher part B premium, even though her normal income (without the capital gain) was under the AGI threshold. IMO, this is a ticking time-bomb waiting to ensnare many who are unaware of its existence.

 

[harley]

And it's not just high income people. When a spouse dies, leaving one as a single filer, the AGI threshold is halved.

After my FIL died, my MIL sold her house and moved into an apartment in a senior citizens' facility. As a single, her capital gains exclusion on the sale of her house was cut from 500K to 250K. This left her with a residual capital gain that pushed her into the higher part B premium, even though her normal income (without the capital gain) was under the AGI threshold. IMO, this is a ticking time-bomb waiting to ensnare many who are unaware of its existence.

But wasn't the cost of the home stepped up after your FILs death? At least half of the growth should have been, and if it was a community property state all of the growth should have been stepped up. Unless she waited many many high growth years before selling, this shouldn't have hit her that hard. And if it was many years later with lots of growth, I doubt having the full $500K exemption would have helped.

 

[youbet]

Before Medicare, she paid $405 a month on premiums for health + vision + dental. Copays were minimal especially on drugs ($20 per doctor visit, $4 per prescription).

.

That's a very attractive price considering those low copays. Was that an individual policy or perhaps subsidized by a former employer or spouse's former employer? I'm paying almost that much for a retiree plan subsidized by my former employer.......

 

[Frugality_of_Apathy]

I always wonder what the deal with the little copays. I've got a $10 co-pay on doctor visits but it seems like it's just there to annoy. The doctor will charge upwards of $300 for a visit, is it really that important the the insurance company reduces the cost by that $10?

I'd think not having a co-pay at all would give you more than enough business to make up for the extra cost.

 

[FIREd]

That's a very attractive price considering those low copays. Was that an individual policy or perhaps subsidized by a former employer or spouse's former employer? I'm paying almost that much for a retiree plan subsidized by my former employer.......

Actually she was covered under COBRA as a bridge between a former subsidized employer policy and Medicare. So, while under COBRA, she was footing the whole, unsubsidized bill.

 

[CuppaJoe]

I just received my medical insurance info for next year. Am very surprised the premium only went up $25.00, from $522 to $547. Was budgeting for $600; wait till next year?

 

[ladelfina]

Cycling Investor.. I think few people can accumulate an extra $100k after taxes in a mere 6 mo. of working. Just sayin'.. Could easily be 5-10 years at which point the "E" part of RE is a bit compromised. That's assuming $100k will even suffice; with double digit increases that won't last 10 years, even starting from a low-cost policy (to me $600/month sounds pretty low; I'd been paying >$700 5 years ago).

I had assumed Medicare cost a lot less than it apparently does (thanks, FIREdreamer, for those figures).

I'm wondering if something will burst the health care bubble at some point. Jambo101's CPAP thread highlighted the complete disconnect between real cost and inflated ins.co. figures (100% markup). At half the price, the company selling direct still makes a profit, so what's the true cost of the device.. 25%, 30% of list? Less?

 

[OAG]

I always wonder what the deal with the little copays. I've got a $10 co-pay on doctor visits but it seems like it's just there to annoy. The doctor will charge upwards of $300 for a visit, is it really that important the the insurance company reduces the cost by that $10?

I'd think not having a co-pay at all would give you more than enough business to make up for the extra cost.

IMO Co-pays are there to make people think about going to the Dr. for every little thing (headaches, hangnails, "I wonder what that was"). Having been subject to collective free medical care while in the military it always amazed me that the "emergency room" was always overflowing on weekends but pretty sparsely populated during the week. I think if we get "universal free health care" we will see that all the time.

 

[tryan]

Here's monthly premiums for 4 years of BCBS for a family of 4 with a 3k deductable:

2005 - $583
2006 - $635
2007 - $686
2008 - $914

Not sure I could have "planned" for a nearly double of costs with in 5 years.

Was really looking forward to the 5k tax credit McCain proposed. Now we'll have to wait to see what Obama puts thru.

 

[ziggy29]

And it's not just high income people. When a spouse dies, leaving one as a single filer, the AGI threshold is halved.

After my dad passed away in '05, my mom's household income dropped by $8,000 (the difference being what used to be her SS check). But because she was filing single, 85% of her SS became taxable (it was 50% when filing jointly) and she owed almost twice as much in income tax as in '05.

Twice the tax on a lower income.

The tax laws sure know how to comfort a grieving widow.

 

[dex]

Here's monthly premiums for 4 years of BCBS for a family of 4 with a 3k deductable:

2005 - $583
2006 - $635
2007 - $686
2008 - $914

Not sure I could have "planned" for a nearly double of costs with in 5 years.

Was really looking forward to the 5k tax credit McCain proposed. Now we'll have to wait to see what Obama puts thru.

Those look like good prices - I have a 5K deductible and pay 208 only for me.

 

[FIRE'd@51]

But wasn't the cost of the home stepped up after your FILs death? At least half of the growth should have been, and if it was a community property state all of the growth should have been stepped up. Unless she waited many many high growth years before selling, this shouldn't have hit her that hard. And if it was many years later with lots of growth, I doubt having the full $500K exemption would have helped.

The house was owned jointly, so half the basis was stepped up. She had lived in the house for 40 years, so the basis on her half was still very low. She didn't sell it right away so both halves benefitted from the appreciation earlier this decade. However, another 250K of exclusion would have eliminated the capital gains liability.

 

[Rich_by_the_Bay]

Medicare already has surcharges for high income people.

Agree, but presently all-in it's still usually less than half the cost of commercial insurance.

 

[unclemick]

If my RE plans had such a tight tolerance that an extra $100K or so for health expenditures would have broken it (or caused excessive worry about it), I would have worked the extra time (6 months?) or so needed to eliminate it.

In 1993 I was layed off - Cobra would have ran over $700/mo - I chose ER, no medical insurance for the next 12 yrs and a healthy bad attitude.

Today can afford medical but still have a bad attitude.

heh heh heh - I sure as heck wasn't gonna let medical insurance make me 'w#&k'. Not recommended for others - I also tuned up with no A/C in Louisiana.

 

[militaryman]

Cycling Investor.. I think few people can accumulate an extra $100k after taxes in a mere 6 mo. of working. Just sayin'..

If your just talking income savings this is true but at near early retirement you would think 401k's and savings to be substantial -- At 1 million (although I would not retire with only a million unless I had a pension too -- but just for example) an extra 6 months interest would be $25k to $50k (5-10%) plus add in 6 months regular retirement salary savings and your looking at a total of $35k-60K (in my case)

So for me I'd say that I would need to stay a year extra to get an extra 100k assuming 401k balance of 1 million.

 

[tuixiu]

I can imagine many optimistic action oriented people like the guy in this piece being blindsided by health insurance cost and accessability problems.

Most of us here are careful in the extreme, so we tend to look before we leap.

I agree, although I don't think it even needs to be "in the extreme" to have a get sense of what your anticipated expenses vs. income will be before you retire. I can't fathom someone retiring then scouting around for health insurance pricing.

 

[CyclingInvestor]

If your just talking income savings this is true but at near early retirement you would think 401k's and savings to be substantial -- At 1 million (although I would not retire with only a million unless I had a pension too -- but just for example) an extra 6 months interest would be $25k to $50k (5-10%) plus add in 6 months regular retirement salary savings and your looking at a total of $35k-60K (in my case)

So for me I'd say that I would need to stay a year extra to get an extra 100k assuming 401k balance of 1 million.

Yeh, this was close to my thinking. Since I have no pension, I figured a person would have about $1.5m at the ER decision point. I also tend to use 100% stock allocations, with an average return of 10-12%. This plus a savings rate of $30k/year gave me the 6 month number.