The Smart Take:
Healthcare is a primary concern, especially for retirees. Transitioning from employer-provided coverage you’ve been on for decades is stressful. Now you have more complexity and choices than ever before. And, yes, costs may seem sky high after retiring and before Medicare.
Listen in to hear Kevin and health insurance expert Zig Novak discuss health insurance options from the time you retire to before you can begin Medicare at age 65. Should you take COBRA? What types of plans and are available for Affordable Care Act (ACA or Obamacare) plans, and how much do they cost? How do ACA tax credits work, and how valuable are they?
Get informed. Get destressed. Know what you need to about this important topic to Retire Smarter.
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4:00 – Pre-65 Healthcare Planning
8:15 – Floating Cobra
14:27 – ACA Plans
26:00 – Tax Credits
31:37 – Verifying Your Income
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Intro: Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to Retire Smarter.
Walter Storholt: It’s time to Retire Smarter. Once again, Walter Storholt here alongside Kevin Kroskey, President and Wealth Advisor at True Wealth Design, serving you throughout Northeast Ohio and Southwest Florida. You can find the team online at truewealthdesign.com. Kevin, time for another episode today. How are you, sir?
Kevin Kroskey: I’m good, Walter. We are fresh off my oldest daughter’s seventh birthday yesterday, so it was on a Monday, and the school happened to have a teacher in-service day, so all of the kids were off school. We were like, “All right, we’ll have her birthday party on that Monday.”
Walter Storholt: They did that just for her, didn’t they?
Kevin Kroskey: Yes, they got the memo. My wife, she just goes over the top. She had it pretty rough growing up, and I would say nobody really cared about her, let alone her birthday, unfortunately, or certainly not enough in all honesty. She is making sure that our daughter does not feel the same. Aubrey had a mermaid birthday party, which started off with having six of her friends come over in the morning, and they were all dressed like mermaids. Then, we went out on the boat, and literally, we saw 16 dolphins, and so it got to the point it was like oohs and aahs. Then, after like 13 or 14, it was like, “Hey, there’s another dolphin.” They were spoiled with dolphins.
Kevin Kroskey: It was fantastic. I was Captain Merman of the vessel, and we came back and actually had all of the same six- and seven-year-olds that we ventured out with. We brought everybody back to the house. The girls were great. They had an absolutely fantastic day and birthday. And an absolutely exhausting day for the parents as well. It was quite an event, but I’m sure one that she’ll remember for a while.
Walter Storholt: I’d love to go back to like the 16-year-old Kevin Kroskey and play him that clip of you saying, “And I was Captain Merman” with such pride and vim and vigor. See your 16-year-old’s reaction to that would be great.
Kevin Kroskey: All right, well, truth be told, and there are a few clients that know this. I know one, she listens to the podcast every time, and she’s seen this, but some years ago… I have two girls, and so I’m going to play with my girls. The girls will play with Barbies. My team members some years ago for my birthday got me a Ken doll. They’re like, “Well, we heard about your girl Barbie voice was not very good,” it was actually quite scary, “So we thought we’d get you a Ken doll.”
Kevin Kroskey: I now have a collection of Ken dolls, it’s become this running joke, but yes, I play with the Ken dolls with my daughters who play with the Barbies. I do have one Barbie doll or Ken doll that is a merman, so he’s a merman. I call him Kevina. It’s a little bit more effeminate spin of Kevin, but I am going way, way off-topic and completely going to-
Walter Storholt: I love it.
Kevin Kroskey: Wreck this, but-
Walter Storholt: I love it.
Kevin Kroskey: Yes, that’s the world I live in.
Walter Storholt: You’re listening to The Retire Smarter Podcast with Walter Storholt and Kevina Kroskey on today’s show. I’m not going to let you live that one down for a little while.
Kevin Kroskey: What you see is what you get, Walter.
Walter Storholt: That’s right. We’re not afraid to show it all here on this show, that’s for sure. Well, we’ve got another great episode today. If you’d listened to the last episode, we had special guest Zig Novak joining us from Advanced Insurance Designs. We talked about Medicare, and on today’s show, Kevin, we want to shift gears a little bit and talk about the earlier part of the healthcare equation, that kind of pre-65 healthcare planning and idea. Why is it so important not only to focus on that Medicare solution, but what happens leading up to that 65-year-old age for folks?
Kevin Kroskey: Sure. We talked in the last episode that once you get on the Medicare at 65, ballpark you’re looking at about maybe 3,000 or so per year per person, at least initially for your premiums and out-of-pocket costs. Certainly, it can be a little bit higher or a little bit lower, but maybe that’s a good starting point. Candidly, that’s pretty low, and particularly once we talk about some of the costs for pre-65 healthcare for today, I think that’ll juxtapose that nicely.
Kevin Kroskey: Whenever you’re looking at some different choices, say you have a husband and wife, and they’re 60, they’ve done well, and they’re financially independent, and they decide that they don’t want to work any longer and they want to go ahead and make that transition. Well, everybody that we work with, one of their top concerns is universally it’s their health and their healthcare as related to that. You go from working for an employer and having this employer provide a plan for 30, 40, maybe even 50 years, and you have maybe one or two or three plans to choose from during open enrollment, and the employer really handles everything else. Your premiums are deducted pre-tax from your pay. You have a little it out-of-pocket, boom, bam, done. Maybe you put money in an HSA, but that’s about it.
Kevin Kroskey: Then, once you leave that employer, now here’s where a lot more choices and complexity come into the fray. This is why we’re doing this episode. We really want to talk about those choices on a high level, and we’ll get into some planning aspects, too. As we mentioned, or as Walter mentioned, we have Zig joining us today. Zig, when I think about talking with a client that’s making this transition that’s retiring, we’re just going to use this, say, this 60-year-old couple, husband and wife, for discussion purposes today. They’re leaving work. If they have one spouse that’s maybe going to continue to work to a certain degree, maybe the retiring spouse can go on to other plans, so maybe that’s one option. They’re retiring, they could have Cobra, and we’ll talk about Cobra a little bit.
Kevin Kroskey: If they do have retired medical through their company, that could also be an option, but those options tend to be going away over the last several years. Or, they have I’ll just call an ACA policy or an exchange-based policy, Affordable Care Act. That’s how I frame this and those choices. Some of them are time-bound like Cobra, but is there anything I’m missing there or anything that you would add to those four choices?
Zig Novak: I would add one option, and that’s one that we look at frequently, but I completely agree. If you have a spouse that is working that has access to an employer plan, you can check with that HR person and the person that oversees that plan to see if there’s access. The bottom line, we’ll line up a handful of options for people that are asking and put them side by side. Which one’s the best option? A lot of times, Cobra, as you said, is a good option. We can compare one-person groups also in this day and age. Really since 2016, it’s been a focus of ours, so if somebody that is inquiring is a sole proprietor or does have a one-person company even that has a tax ID number, that is an option that I’m going to look at.
Zig Novak: As you said, Obamacare ACA plans, depending on your family size and income, can be an option. Those can be a little tougher nowadays. The networks on those have been something… they’re very strict networks, making it a little tougher over the past couple of years. Retiree medical, we don’t run into it much, but it is out there from time to time, so I agree with you.
Kevin Kroskey: We’ll just tackle these a little bit more one by one. If you have a spouse that’s continuing to work, certainly you have what they say in insurance legalese, I suppose, but you have a qualifying event. You’re retiring. It’s a triggering event that could allow, let’s say the husband is retiring, and the wife is going to continue to work. That husband retiring is a qualifying event that would potentially allow him to go on to his wife’s policy through her employer. Am I using that nomenclature right on the qualifying event?
Zig Novak: Correct.
Kevin Kroskey: Okay. We can certainly look at what the cost is to do that [inaudible 00:08:59]. One of the benefits of doing that is that literally technically it doesn’t have to be, and functionally it’s always this way, but the premiums for the healthcare are going to be deducted pre-tax from the pay for those premiums, which is a great benefit. It’s much better to spend pre-tax dollars than it is to spend after-tax dollars, which is what you would have to use if you went on the Cobra. Cobra, Zig, how long do you have when you leave work to elect to enroll in Cobra?
Zig Novak: Well, Kevin, I think what you’re alluding to is what we call floating Cobra. You have 63 days from the date of the event to elect Cobra. Let’s say you lose coverage at the end of the previous month. You have two months essentially now to decide if you want to go back to when you lost coverage and elect it. That gives you options. At that point, people can go and look for like we say in Obamacare, ACA plan, or other options available. Some people, I’ve had clients that go the 60 days and say, “Okay, I found another option in between. I never had any medical expenses, and we can move on. We don’t have to pay the Cobra premium.”
Zig Novak: I just had a client recently said, “Yeah, I’m in Cobra and approaching my next option, but I had to go back and buy Cobra because I had a medical situation.” The floating Cobra aspect of it, it is 63 days to elect, and we can help people if they have questions on that.
Kevin Kroskey: Let’s just call it two months. Maybe it’d be safe and give a buffer day or two depending on how many days in a month, and we actually just had a client as well that was retiring, and they’re eligible for Medicare soon. They’re like, “Well, we’re just going to go ahead and elect Cobra.” I’m like, “Well, maybe you can actually just wait and see if you need care over those two months. If everything’s fine, you still have these two months to retroactively enroll. If you don’t need the healthcare, then you’re fine. You just go on to Medicare.”
Kevin Kroskey: I’m going from memory here, and please correct me if I’m wrong, Zig, but I believe the employer, I think it’s by law, has to send out that Cobra paperwork. I think it’s within 30 days or so of the separation from employment. Does that sound right to you?
Zig Novak: It should be 15 days for-
Kevin Kroskey: 15.
Zig Novak: For Cobra, and there is a discrepancy. Cobra’s a federal law for employers 20-plus. There’s a state law we call Cobra or state continuation, I should say, or Mini-Cobra, but Ohio has a state law for employers under 20 that I believe that’s where it’s 30 days to get that state continuation notice out.
Kevin Kroskey: Okay. No, thanks for the clarification. Ballpark, let’s just stay with the federal and the Cobra, so about 15 days, you should be getting your packet with all of the Cobra information. You have another, I’ll just stick with the two months, 15 days is about half a month, so you have another month and a half to enroll in Cobra. Not to get too off-topic, but there was something in the CARES Act earlier this year, and again, I’m going from memory here, but I believe it actually allows you to enroll in Cobra even after that two-month more standardized window period. Just a quick note if that may apply to anybody. You may want to look into that a little bit more.
Kevin Kroskey: You have Cobra. In our experience, I’m curious to hear what your points are, but a lot of times when we’ll analyze Cobra versus like an ACA plan, at least over the last several years, because you’re getting the benefit of that, probably if you’re coming to a big employer, you’re that big employer group. You can go ahead and just go ahead and pay the full premium.
Kevin Kroskey: I think under Cobra law, technically, not only do you pay the full premium, the employer’s not subsidizing anymore, but the employer can also add on like maybe a 2% admin fee. Even if you’re paying like the full premium plus the small admin fee, a lot of times, that seems, set aside any tax credit for a moment, but that seems to have been a better choice for most of our clients versus going onto what I would just say like an ACA plan. Has that been your experience as well?
Zig Novak: Right now in this environment, it does seem most often that Cobra is a better option. Again, we’ll line them up side by side and any other options that a particular client may have, but with Cobra, you’re getting the group PPO network typically, or the network of doctors and providers, and there’s a cost to that. Sometimes it is a little more than maybe what we would get on an individual Obamacare plan, but the network is significantly better and makes a big difference. There are examples in the Obamacare individual family options that particular hospitals aren’t accessible, so Cobra becomes very competitive in that situation.
Zig Novak: Then, again, depending on your family size and income, an individual family ACA or Obamacare plan can be very cost-effective if we can find one that fits your needs.
Kevin Kroskey: Even if we have our two 60-year-olds and we determine that “Hey, it is in their benefit to go onto Cobra,” they can only do that for 18 months. If they’re disabled, I believe they can go for 36, but if they are just nondisabled, they go for 18 months. Now, if they’re 60 and maybe they like Cobra and now they’re 61 and a half, and now they’re going to be forced to go and do something different, so we’ll set aside the retired medical, but let’s go into the Obamacare plans or these ACA plans for sure.
Kevin Kroskey: I know speaking from experience, we have a small business, and we had a group plan. Candidly, years ago, at least when the ACA… I don’t want to say when it first came out, but I looked at what we were being offered under the group plan, and I looked at our cost and our deductibles and the benefits under the individual plans, and it was better, at least at that point in time, to be under the individual plans. That’s changed for us over time. It’s always a moving target, but it’s been, I would say, a bad lesson to learn. It’s definitely been a bad experience.
Kevin Kroskey: It hasn’t been a bad lesson, but my family and I, we’re in our mid-40s now, and we were on these plans, and it’s not like the plans were bad, but we were, again, a small employer. Zig, I know your company’s a small employer. We can do certain things, but my family and I… I can speak first person here because I own the business. I remember over a three-year period between premiums and out-of-pocket expenses; we paid just a smidge under $50,000. It was like 48, 49,000, and we had a daughter. We were trying to grow our family, and, unfortunately, we had some miscarriages, and my wife had to have eye surgery. I had to get a CPAP machine, but I mean, whatever.
Kevin Kroskey: We were by and large healthy. It was like late 30s to early 40s, and we’re looking at this. I’m like, “I can’t believe what we ended up having to spend in aggregate.” Then, each year our premiums would just get larger and larger and larger. Again, you should expect to lose money on average for insurance. That’s the basic principle there. The insurance company has to be in business, what have you, but I don’t know, it was like a punch in the mouth every year, and not just because we were consuming healthcare, but just because our premiums, even if we didn’t consume healthcare, our premiums were going up by a lot.
Kevin Kroskey: We’ve had some firsthand experience over the last few years with these small group plans, which I don’t really want to talk about today, but we’ve been on the ACA plans. Then, in 2019, what we have because we go back from Ohio to Florida, all of Ohio plans turned into these HMO plans, and we just only had local coverage in Ohio. So I asked, “Well, what if something happens to my family when we’re in Florida? What if we need to see a doctor?” They said, “Well, if it’s an emergency, then you’ll be covered, but if it’s just a regular visit or something, it’s out of network, and you’re SOL I think is the insurance term that they use, or maybe that’s just what I thought of.
Kevin Kroskey: It’s been a moving target each and every year. It’s like we’ve just had to really relook at this, and it’s been frustrating. I guess I’m venting rather than asking a question here, Zig, but this is probably part of your job description. You probably have to counsel and calm down people like me and work through all of the different options when it comes to the ACA.
Zig Novak: Absolutely. That’s what we do. Our goal is to find the best option available out of what’s out there for us to find, so-
Kevin Kroskey: Zig, if we’re looking at this 60-year-old husband and wife, and obviously their Cobra’s going to run out as we talked about after 18 months generally, and then they’re going to have to go, generally speaking, onto an ACA plan, when you start looking at the costs for them, maybe we can just talk round numbers for what the lowest-cost plan would be. What does that ballpark look like for that husband and wife on a monthly basis?
Zig Novak: I’d ballpark that around $1200, about $600 each per person for the month without subsidy.
Kevin Kroskey: When you’re looking at a plan that’s about $600 per month per person, I’m guessing that’s probably going to have a fairly large out-of-pocket that they’re going to have to go through before the insurance company would really pay anything of substance. Is that a fair estimate?
Zig Novak: That is the definition that we use of a catastrophic plan. It’s an $8,000 deductible per person and no copays per se. Everything is going to apply towards that $8,000 prior to the insurance company picking up much benefit, with the exception of some of the ACA regulations that require like first dollar preventative benefits and those kinds of things. Those could be covered, but your typical office visits, prescriptions. Those are all going to apply towards the deductible, and once that deductible’s met, it would be the only time you start to see the benefit.
Kevin Kroskey: Let me just do a quick adding up here, but if we’re talking about $600 a month per person, my brain tells me that’s a little bit more than $14,000 just in premium costs. Okay, maybe I get to see my doctor for an annual physical, and I don’t have to pay anything, but if we get in an accident, God forbid, and we both need a lot of healthcare, then we’re each going to have to pay $8,000 out-of-pocket or 16 grand before the insurance company’s then going to basically go ahead and pay our claims over and above that. The 14 for our premiums, 16… Again, if I’m looking at the worst-case out-of-pocket, so now I’m up to like 30 grand if I have a really, really bad year on one of these catastrophic policies. Is that right?
Zig Novak: That’s correct.
Kevin Kroskey: All right. Walter, we may need to pause for a minute. I’m going to go get a drink.
Walter Storholt: Go for it.
Kevin Kroskey: No, no. That was a joke.
Walter Storholt: Oh. Whoo, right over.
Kevin Kroskey: Yes, a different kind of drink. This is what frightens people. This is what about healthcare that people are concerned about because they’ve heard some of these horror stories. Maybe they know somebody. Again, I’ve lived through it to a certain degree, late 30s, early 40s, family of two then of three, and were in aggregate paying out $50,000 almost over a three-year period and just getting smacked upside the head. It’s tough. It’s like, “What are we even paying this for?” We would have been better just self-insuring because the insurance company really didn’t pay anything for us.
Kevin Kroskey: Now, granted, we didn’t have to have like a catastrophic type event, but that’s potentially what we’re looking at, and so if we’re going from, Zig, from say like a catastrophic policy of 600 per month, I know that’s maybe one of the low-end bronze plans if you will. Then, they have these bronze, silver, gold, if you’re looking for a more benefit-rich plan. I got to imagine you’d probably be well more than double in some cases of that $600 per month. Is that about right?
Zig Novak: I ran a quick estimate while you were talking, and you’re talking for a gold level plan around $3,000 for those two people per month.
Kevin Kroskey: All right, so 3,000 per month or about $1500 per person. Candidly, this is what freaks people out if they’re going to retire early. They don’t have retiree medical coverage, or their employer’s doing away with it, or they don’t have a spouse who’s continuing to work who they can go onto their plan. The good thing, if there is such a thing, but the good thing that I will tell clients that are looking at something like this, and we have plenty of clients that retired in their maybe late 50s, early 60s and literally are spending in aggregate of north of $20,000 per year between them for premiums and just total healthcare costs.
Kevin Kroskey: It stings, and you often hear the people are going to keep working until they’re eligible for… It’s really not just for Medicare. You can think about it as working until you’re 63 and a half because if you work until 63 and a half, then you can go onto Cobra, which you’re still going to pay a lot more for, but it’s probably going to be, like we already discussed, a lot better than some of these ACA plans, at least as they currently exist. Then, you can take Cobra for 18 months and then go into Medicare.
Kevin Kroskey: 63 and a half is somewhat a magical number for a lot of people, but if I’m looking at this from the financial planning perspective, I will say, “Look, even if you’re 60 and you’re retiring and even if it’s going to be, say, 30 grand between the two of you, at least that’s a known figure.” We have these premiums, what Zig was talking about is at least in those catastrophic plans, after you meet that $8,000 and there’s no co-insurance after that, the insurance company’s got to pick it all up, or whatever plan that you can pick, there’s always going to be some combination of out-of-pocket and premium costs that you’re going to get to the total cost.
Kevin Kroskey: It’s a known number of years. In this case, if they’re 60 and they’re going to be eligible for Medicare at 65, it’s five years of paying through the nose for healthcare. Yes, it stings, and no, it’s not good, but if you can still afford to do it and we can get at least model that worst-case scenario, which is candidly a likely scenario for many, then you can still retire. Maybe you still want to work for whatever reason, but just working because of healthcare; I wouldn’t start there. You may look at it and say, “Look, hey, I like my job. I get six to eight weeks off per year. I’m making a lot of money. It’s not as hard. I’ve been doing it for a while. I have a lot of flexibility. I get these good benefits, and so when you look at my total comp and the hassle factor of earning it, it’s worth it for me to keep working.”
Kevin Kroskey: I’d say that’s great. It’s not just about retiring and going to do something different. It’s about getting the most out of life, whatever that may be for you, but just working because of the healthcare thing, I would say, is probably a little bit wrong-headed in a starting point. Again, I think the better way to approach it is, “Here are our expenses. Here’s our lifestyle. Here’s the healthcare component that we need to make sure that we’re planning for.”
Kevin Kroskey: Yes, it’s going to be costly if we’re retiring pre-65, and we have to go onto an ACA health plan potentially. We’ll talk about tax credits in a moment, but at least one that’s truncated. It’s only for a period of years, and two, it’s in there. We’ll work it into the plan and make sure that it’s something that you can afford to do in addition to all of the other things that you want to be able to do over time.
Kevin Kroskey: I think that’s an important thing to take away. You hear a lot of people when we ask when they want to retire, and oftentimes, it’ll be like 65 or 66 just because they’ve heard this magical age for Medicare or for their Social Security full-retirement age or something of the sort. It doesn’t have to be that way. It’s really just making sure that we’re planning for these costs and working everything in, but when you’re financially independent, you’re financially independent. Then, you should really just… I would suggest thinking about it as far as, “Do I want to keep working because I want to?” You don’t have to after your financially independent. I get it that these healthcare costs are a lot, but don’t lose sight of that financial independence standpoint.
Kevin Kroskey: The costs can be pretty high, but then as we’ve alluded to a few times, there are these premium tax credits, and we’ve talked about this in prior tax planning episodes that we did at the tail end of 2019, but they can be substantial. This is something that we go through with our clients that this may apply to, but when you have two people in this example that may avail themselves of these tax credits, it can be pretty significant. When I look at this, and it can get complicated as most government programs do, but simply put, the tax credits are really based on a percentage of the poverty level, and you have to be below 400% of the poverty level. That number moves a little bit every year based on inflation as well as how many people are in the household.
Kevin Kroskey: In the example that we’re talking about, there are two people in the household. The husband and wife, the kids are out of college, they’re on their own. It’s just the two of them, and as long as their income is a little bit below $70,000 of adjusted gross income, they may qualify for a tax credit, and their expected contribution is what we think about at first. At worst, if you are in that bucket of being able to qualify for a tax credit, being below that 400% of the poverty line, it’s about 10% of your adjusted gross income that they really want to limit your healthcare expense too. That’s a rule of thumb. That percentage is lower if you’re maybe only at 200% of the federal poverty line, but that’s a quick rule of thumb.
Kevin Kroskey: Then, they benchmark it to what they call the second lowest cost Silver plan that’s available for you. You look at this expected contribution, you subtract out the second lowest cost Silver plan, and then basically you get your tax credit. If we take maybe an extreme example of let’s say we have this one person and they have a very low adjusted gross income, maybe we intentionally do this. You have a few different pockets of money. You have your money down at the bank that is getting a little bit of interest, and you get a 1099 form maybe every January. You have some Roth money, and you have some pre-tax IRA money, and now that you’re retired, and you’re over 59 and a half, you can pull this money out in a very deliberate fashion.
Kevin Kroskey: We have some clients that have a couple of million dollars, and they’re still availing themselves of these tax credits because not a lot of income is hitting their tax returns. When I say in this example that you have 17,000 of adjusted gross income, that sounds low, and that’s true, but when you pull the money out of, say, the checking account down at your bank, maybe you have a hundred thousand dollars there. Maybe you need to live on $80,000 that year. You pull $80,000 out, none of that $80,000 is going to show up on your tax return because you already paid taxes on it. That’s the simple thing to remember here.
Kevin Kroskey: If I have a single-person, 17,000 of AGI, their expected contribution for 2020 or ’21, I can’t remember what year I pulled, but is about 40 bucks a month. Let’s say that their benchmark plan, the second lowest cost Silver plan, so this is a little bit more benefit-rich than that catastrophic plan Zig and I spoke about, is also, let’s say it’s 740 per month. You take your expected contribution minus that benchmark plan, and you find that you get a tax credit of about $700 per month or $8400 per year. Significant, so now the premiums are really low.
Kevin Kroskey: Granted, you could still have a fairly high out-of-pocket risk there depending on the type of plan that you picked, but the tax credit is really independent of which plan you pick. You have that benchmark plan that’s in there, but you can pick a bronze plan if you want, and you can pick a gold plan. That’s still really up to you.
Kevin Kroskey: If you’re looking at the total cost and you can get maybe a $7,000 or an $8,000 tax credit to go ahead and subsidize your premium expense, now all of a sudden you’re looking to say, “Okay, hey, yeah, I’m still paying. I still have some risk there. I have 4 or 5 or $6,000 out-of-pocket in a worst-case, but my monthly premium cost, candidly, it’s less than a hundred bucks.” It’s $40 in that example that I gave. Now, it’s more palatable, and now, “Okay, I feel a little bit better about retiring, and certainly nobody’s going to say no to a tax credit.”
Kevin Kroskey: In our experience, Zig, and I don’t know how much you may get into this, but being that we do a lot of tax planning for our clients and we tie all of this stuff together with the retirement distribution plan and certainly looping you in and making sure that the healthcare decisions are made properly. When you have those decisions about where we’re going to pull money and avail ourselves of the tax credit, this ACA tax credit, if that is truly the option and that makes sense for them, then it’s so beneficial that it just really makes sense to keep your income as low as possible and avail yourself of that tax credit. Any comments that you wanted to add? I’m not really asking a question here, but anything you’d like to add to that, Zig?
Zig Novak: I can give you, Kevin, based on what we’re talking about, that 60-year-old couple that we talked about, if they make an estimated $60,000 for the year, that subsidy’s almost a thousand dollars per month, so it can be very significant. That can go a long way to help them pay for that medical plan that we were talking about previously, but I leave the financial aspect of it. That’s your portion, and you come to me, and I can help with this side of things, the plan that we recommend for the medical portion of it.
Kevin Kroskey: Yeah, which is a good point because when you’re doing this, too, and the government is going to ask you, “Hey, what’s your income going to be?” Can you talk a little bit about how that may work to just maybe offset the premium versus getting a refund when you’re submitting those applications? Or, what sort of information that the government may be asking to verify what you’re stating your income’s going to be?
Zig Novak: To try and quickly go through the process, Kevin, when you asked me to quotes for somebody, and I sit down, and we say, “Okay, this is the plan that we’re going to look at.” For example, the plan that we said is about 1200 bucks. It’s closer to 1150, and then we add-in or I should say we subtract out that $992 subsidy for a couple that makes $60,000. We’re going to estimate that you can bring in a tax return, you can bring in information, but the application process is we do the quick quote. We pick a plan. We actually go through the electronic application, and in the healthcare.gov application for the subsidy, we’re going to specify income. It’s actually reconciled with your tax returns, so we want to be accurate.
Zig Novak: Then, we get an official subsidy notice that we’re going to get around a thousand dollars or so if we use this couple as an example and, again, now I say this is where your financial professional, your insurance guy, and your accountant all have to work together because that subsidy eligibility that we’re going to estimate based on the information you give us has to be. Your accountant is responsible. If the IRS questions it, your accountant’s going to be the one that has to go to bat for you, so-
Kevin Kroskey: Well, and let me interject on that. The taxpayer, they’re the one who’s signing everything, so the accountant may need to go to bat for you in a way, but the taxpayer always bears the responsibility, so I think that’s an important point to know. What you’re saying I agree with, Zig, and that’s one of the reasons why we triangulate all of this stuff, that we try to make it easier for the people that we work with.
Kevin Kroskey: Nobody wants to be pinged around between like three different people and just saying, “Well, this person said this and that person said that.” Then, the client’s the one who’s got to make sense of it all. Candidly, that’s why we try to do everything. That’s why, Zig, we have you come to our office. That’s why we’re looped in on everything so we can just make our clients’ lives simple and effective.
Kevin Kroskey: I guess what I was partly alluding to is sometimes you’ll have a big change of income, and we’ll have clients making maybe a couple of hundred thousand dollars, and I’m thinking about 2 million bucks, but they’re getting about a 15, $16,000 tax credit and you can make a premium advance in a way, or you can get the credit.
Kevin Kroskey: It’ll all reconcile come tax return time, but we’ve had some clients where they wanted additional information from the government about, “Hey, your income was pretty high. You’re saying it’s going to be low, and you want this premium advance if you will.” There’s some risk there to that, too. I’ve heard the government is cracking down a little bit more on providing that premium advance in some cases. Maybe you’ve seen that maybe you haven’t, but that’s been some third-party information I’ve gotten recently.
Zig Novak: I’ve not seen anything on it as far as where we apply the tax credit is typically monthly, but it can be applied on the back end in the tax return. I’ve not seen where they’re going to try to move for that.
Kevin Kroskey: Okay. Yeah, we’ve had a couple where it’s come up, and they’ve asked for additional information. In one case, candidly, I think they changed it. I’m going to go from memory here, but even if it’s applied in advance, it’s important that everybody knows it’s always going to reconcile on your tax returns. These thresholds about how much money that you make, if you go over that 400% of federal poverty line by a single dollar, then your tax credit may go from a couple of thousand to zero, so you’ve got to be very precise.
Kevin Kroskey: The benefits can be fairly significant, and in our calculations over the years in doing this, rather than being at the upper end maybe for that two-household couple, that husband and wife that we’ve been talking about rather than being in the $60,000 range, if we can actually keep them even lower, then the benefits for the tax credits are so significant that it actually makes sense to do that.
Kevin Kroskey: By doing that, that may seem like an obvious thing, but if you’re going to keep your income that low in your household of two, then you’re going to be really forgoing using up some of your lower tax brackets for that year. You can have a little bit more than a hundred thousand dollars hidden in your tax return, and after the standard deduction, you’re not paying any more than currently a 12% tax rate.
Kevin Kroskey: That’s great, and that’s lower than what a lot of our clients have ever seen and probably will ever see. They may say, “Hey, why don’t we take some money out of the IRA?” When we run the numbers and show it to them, we say, “Well, we could do that, but that’s going to limit the tax credit that you’re going to get for the ACA policies that you’re on. That’s actually worth a lot more than just paying taxes at a little bit lower rate versus a potentially higher rate down the road.”
Kevin Kroskey: I think that’s an important planning aspect just to keep in mind. Those are certainly some things that we work through and help people figure that out, but you can have competing objectives, and you need to figure out which ones are going to make the most sense. Everybody’s situation is different. We’re all unique snowflakes, just like our parents used to tell us. I guess just to start something up here. We have those different choices. Maybe your spouse is still working; you can go onto your spouse’s plan. If Cobra… If you’re working for a big employer, it could be a little bit different.
Kevin Kroskey: If you’re with a smaller employer, you have these ACA policies that are available. Potentially with the tax credit, they could be very significant, and we still do have clients that have retiree medical. First Energy, we have a lot of clients that were there. They did away with retiree medical probably 2014, 2015, after the ACA was passed. Goodyear still has it, but it’s gotten a lot more costly over the years.
Kevin Kroskey: We have clients at Firestone and a lot of these big in Akron, Northeast Ohio employers. Firestone just announced they’re doing away with their retiree medical, I think, at the end of 2022, so we did an analysis for a couple of our clients that are there and saying, “Hey, what does this really mean for me?” They’re on the bubble. “I’d like to keep working, but if I work past this date, then what am I giving up?”
Kevin Kroskey: I can think of one client specifically. His wife is a few years younger. They’re still looking to retire like around age 60 or so, and literally, if they live to be like normal life expectancy if they work past the end of 2022, the benefit of their retiree medical insurance that the company is taking away because they’re going to be forcing people onto these ACA plans or onto Medicare and no more retiree medical coverage, was nearly $200,000 over both the husband and wife’s lifetime. That’s substantial, so if you’re at Firestone or you know somebody that’s at Firestone, and you’re on the bubble and getting close to retirement, that’s certainly something that you want to look at.
Kevin Kroskey: One of the big reasons for that is because the costs before Medicare are so significant like we’ve talked about today. There’s a lot that goes into this. We didn’t get into the other thing that Zig mentioned about, “Hey, if you actually are working, maybe you could start your own group plan,” whether that’s a one-person group or maybe a two-person group with you and your spouse. That’s certainly something that you may avail yourself of and could make sense, but you obviously have to have a business or some self-employment income to do that. These are all of the things that you need to think about when you’re thinking about healthcare, and certainly, it is more difficult before 65.
Kevin Kroskey: Once you’re on the Medicare, yes, you want to make good, smart decisions on your Medicare, but the difference between going on a Supplemental plan or an Advantage plan and if you have a “bad year” for healthcare, it is infinitesimally smaller than just the cost that you’re looking at when you’re pre-65 and looking at some of these premium and out-of-pocket costs for the ACA. This is going to continue to be a moving target.
Kevin Kroskey: We’re getting into the election cycle. I’m sure healthcare is going to be talked about a lot. The healthcare issue is obviously not been solved in aggregate for Americans, and this is going to ongoing be a moving target, and that’s why we’re going to need people like Zig to help us think through it. Zig, I appreciate you joining us today, and Walter, I know you’ve been a fly on the wall here, but I don’t know any wise closing comments from you? Or has this been as clear as mud? Or are you still out getting a drink?
Walter Storholt: I took you up on your drink idea, so yeah, that was good stuff. That joke went right over my head, but I loved it. No, I think that this has been really helpful, guys, to look at, and interesting also in the first episode to look at Medicare first and then to peel back and look at the pre-65 solutions that people need to think about as well. I feel like a lot of the time, we forget about that potential gap that’s there and the issues that arise with trying to plan for those final couple of years leading into retirement and some of the complications that come along with it. Good to bring those things to light.
Walter Storholt: I’m sure that we have listeners with questions. Maybe you’ve got something that we talked about on one of these past two episodes that you want more clarification on or want to talk a little bit about how all of this would look with your own situation and are you doing the right thing in planning for Medicare and planning for some of these other nuances that we’ve talked about on today’s show. If that’s the case, don’t hesitate to reach out. You can do that, 855-TWD-PLAN. That’s 855-893-7526, and online at truewealthdesign.com. Click on the Are We Right For You? button and you can schedule a 15-minute call with an experienced financial advisor on the True Wealth Team and talk some more about the kinds of things that we discuss here on the show, but germane to your particular situation and setup.
Walter Storholt: Thanks for joining us on today’s show. For Kevin Kroskey and, of course, Zig Novak as well, I’m Walter Storholt. I hope you enjoyed the special guest today. We’ll have to do more of these in the future. I really enjoyed hearing you guys go back and forth on these topics today, so we’ll have to pencil some more visits in with guests down the line. Thanks for being with us, and we’ll talk to you next time right back here on Retire Smarter.
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