Answers to Some Early Retirement Questions
I know this will cause much misery (I say with sarcasm), but I am going to start winding down this blog. After all, if retirement planning is truly simple, then there is no need to keep writing a blog about it until the end of time. However, for those of you who are interested or just have a lot of free time to kill, next month I am starting up another blog about our sailing adventures this fall and winter as we travel down the east coast inland waterway and over to the Bahamas. This blog will also discuss what it is like to be retired and, since I am a numbers guy, I will occasionally discuss retirement living costs and how we stay on budget.
To my surprise my last post which described our journey to early retirement generated more questions than any other post I have written. So I decided for my last couple posts I will answer some questions I received about early retirement.
If you retire before age 65 what about health insurance?
Health insurance is always a challenge for people in the 55 to 65 age range who do not have employer-provided group coverage. Despite any changes that may be coming with the new health care law, your health insurance options are something you should examine very carefully before leaving your job.
Neither my wife nor I have employer-provided retirement health care benefits. This is not a problem for my wife as she is healthy and had no trouble getting a personal policy from a private health insurance company. However, I am uninsurable in the private insurance market (generally, if you are taking 3 or more maintenance prescription drugs, you become uninsurable in the private market).
Some states, like New York, Vermont, and Massachusetts, have what is called “guaranteed insurability” mandates which mean insurance companies cannot deny anyone who applies for a health insurance policy based on their health. The problem with this arrangement is that it ultimately raises the premiums for everyone’s policy, usually to more than $1,000 per month per person. If you cannot afford this, there are other options, such as going on Medicaid, but these options are usually not very attractive
I guess this is another area where we were very lucky. We live in Maryland. In my opinion one of the few things the state of Maryland does right is health insurance. In Maryland, if you cannot get an affordable private policy, the state sponsors several “High-risk” policies in which the state provides a generous subsidy. Many states offer high risk policies for uninsurable people, but the policies in these other states either have inferior coverage or the premium costs are very high; sometimes as high as the states that have “guaranteed insurability” for everyone.
Maryland’s approach to the problem is different. Their philosophy is, if someone cannot get affordable coverage from a private company and has to spend down their assets to buy health insurance, that person may eventually become an even bigger burden for the state (Medicaid, welfare, food stamps, etc.).
So Maryland has set up a program where, if you cannot obtain an affordable health insurance policy from a private company on your own, the state will supplement the cost of your policy (or cost of care, I am not sure where the subsidy is applied). So I was able to purchase the same insurance policy as my wife from CareFirst, Maryland’s high risk insurance carrier.
Other than being pegged in the insurance company’s files that my policy is a Maryland “High-risk” policy, my policy and benefits are the same as my wife’s policy and benefits. I pay my premium to the private company and I call them for any claims. Once you are in the program Maryland stays out of it. They just write the subsidy check to the insurance company. The other good thing about this program is that because Maryland helps out the people who cannot get health insurance on their own; those who don’t need any help are not penalized with higher premiums. I think Maryland’s approach to health insurance is the perfect public-private partnership.
I do pay a higher premium, but it is still affordable. At the current time my wife who is 52 years old and has no pre-existing conditions pays $247 per month for a PPO plan with a $2,700 annual deductible (the deductible covers both medical and prescription drug costs). If I had no pre-existing conditions my premium for the same policy (for someone 57 years old) would be $311 per month. Since I am on the Maryland high risk program, I am paying $380 per month, about 22% higher.
Including all deductible costs our total annual health care cost for the two policies will be no more than $13,000 (for this year anyway). This is not cheap, but it is still affordable and we have lots of medical choices and flexible cost management options.
One last thing, the Maryland high risk program even offers a policy that qualifies for a Health Savings Account (HSA) which is the one I chose. This year (2012) we get to contribute $7,200 ($3,100 for my wife and $4,100 for myself since I am over 55) to our HSAs and deduct this amount from our federal and state taxes.
If you retire early, won’t your social security benefits be reduced?
Yes, your benefit amount will be reduced, but the reduction (for us at least) was so small it is not something that should keep you from retiring early.
Social security benefits are calculated based on your highest 35 years of earnings. If you do not have 35 years of earnings, say 30 years for example, the other 5 years are averaged in as $0 annual income. This would seem to indicate that retiring early would mean a big hit to your social security benefit. But the reduction is not as big as you might think because of the way social security benefits are calculated. The social security benefit calculation is heavily weighted toward lower income earners. That is, your earnings and benefits do not scale up at a constant rate. If you have higher earnings, your benefit levels off.
In our case, my wife’s 35 years of earnings will have 5 years of zero earnings averaged in to her benefit. Her full social security benefit at age 67 will drop only about 7% as compared to if she kept working for 5 more years. My social security benefit with 3 years of zero annual income averaged into the calculation will drop by about the same percentage amount.
The more important retirement move in regards to social security is to delay starting your benefits stream for as long as possible. This is because you get about an 8% per year increase in benefits plus inflation for every year you delay receiving benefits from age 62 until your full retirement age. And you get another 8% per year increase in benefits plus inflation for every year you delay collecting social security from your full retirement age until age 70. Over the next decade averaging 8% plus inflation per year return may be the best return you will get anywhere, and it is guaranteed.
There were a few other questions about early retirement I received. I will answer them in the next post.
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