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ObamaCare and early retirement

If your dream is to retire early, then you may get some help from an unexpected source: ObamaCare. Many people delay retiring until age 65 often due to healthcare costs in retirement. This tendency was recently studied by Boston College’s Center for Retirement Research in its working paper “Sticky Ages: Why is Age 65 Still a Retirement Peak?” It makes sense that individuals would delay retirement until they were eligible for Medicare (for most it’s age 65) because private health insurance is unaffordable for many, especially if you have a pre-existing condition or have reduced income due to retirement.

The Affordable Care Act (aka ObamaCare) helps to mitigate some of the cost of healthcare in retirement for certain individuals under age 65. To start with, ObamaCare makes it illegal for insurance companies to discriminate based on pre-existing conditions (effective January 1, 2014.)(1) This could make it possible for an older American with an illness to obtain insurance where before they may not have been able to in the private market. Secondly, ObamaCare states that an insurance company can only charge older Americans a maximum of three times the premiums it charges a young person, helping to rein in healthcare premiums for the older insured.

Further aiding young retirees are the subsidies built into ObamaCare. Subsidies are available to those individuals and families whose income is at or below 400% of the poverty line(1). In 2013 that amounts to $45,960 for an individual and $62,040 for a family of two. The level of subsidy increases or decreases based on your income in relation to the poverty line. Income for the purposes of the Affordable Care Act is based on Modified Adjusted Gross Income or MAGI.

The subsidies offered under ObamaCare increase in relation to one’s age. So for example, a 60 year old with $35,000 in annual income should receive a larger subsidy than a 25 year old with the same income. The plan was designed to help offset the higher premiums usually paid by older individuals compared to younger ones. Again, this is another benefit to someone considering retiring early and who has lower taxable income.

It is interesting to note that because the subsidies under ObamaCare are based on income rather than net worth, it could be possible for an early retiree who has a moderate or even a high net worth, but low taxable income, to qualify for the subsidies. Early retirees have a few things going for them when it comes to qualifying for subsidies. First, they are probably not receiving Social Security benefits yet because they have not reached their full retirement age. This could help reduce their taxable income. Secondly, many retirees have a good portion of their retirement savings in tax deferred vehicles like 401(k)s and IRAs. These vehicles are generally not taxed until distributions are taken out. So, it would be theoretically possible for a young retiree to have ample savings built up in tax-deferred saving accounts and still qualify for subsidies.

The Affordable Care Act is a large and complicated piece of legislation. I would encourage anyone interested in learning how the law affects their unique situation, to consult with their own tax and legal advisors.

D. Abraham Ringer, CFP® is a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which this article is directed. For more information please consult www.morganstanleyfa.com/ringer.

(1) http://www.hhs.gov/healthcare/facts/timeline/timeline-text.html

The information contained in this article is not a solicitation to purchase or sell investments. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. Morgan Stanley Financial Advisors do not provide tax or legal advice. The views expressed herein are those of the author, D. Abraham Ringer, and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC www.sipc.org, or its affiliates.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S.

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