Transcription
There's one number that controls your health insurance costs in early retirement. And once you understand it, health care stops being complicated. It becomes simple math, and you no longer have to worry about waiting for Medicare to retire. But almost nobody knows what that number actually is or how to control it. And so that's exactly what I'll be running through with you in today's video.
So here's what we're going to cover. First, I'm going to reveal the one number that the ACA uses to calculate your premiums and why it has almost nothing to do with how much money you actually spend. The second thing is I'll show you a real example of a 60-year-old retired couple spending $120,000 a year in retirement while paying $0 per month for health insurance, completely legal, completely sustainable. And then finally, I'll walk you through what happens when you do not understand the system and why that ignorance is costing early retirees literal fortunes.
So, let's get right into it. You've been told that health insurance before Medicare is complicated. And you know what? On the surface, it is, right? Metal tiers, benchmark plans, subsidy calculations, federal poverty levels, modified adjusted gross income. It sounds like you need a PhD in tax law just to figure out what you're going to pay each month.
But here's the truth. The system only seems complicated because nobody's explaining it clearly. Once you understand the mechanism, the single variable that determines everything, it becomes shockingly simple. And when I say simple, I don't necessarily mean easy to execute perfectly. I mean simple enough that you can make informed decisions, control your costs, and stop living in fear.
Because right now, that fear is doing one of two things to you. The first track is it's keeping you locked into a job that you don't want for another three, five, or seven years just so you can get to Medicare at age 65. Or maybe you retire anyways, but you massively overpay for health insurance every single month because you don't understand how the pricing actually works. Both options are costing you. One cost you time, one cost you money. So, let's fix that.
So, here's the number that changes everything. MAGI, modified adjusted gross income. That is it, right? MAGI is the whole game. Your health insurance premiums under the Affordable Care Act are not based on your net worth, your spending, the size of your portfolio, or how much cash you have in the bank. They are based entirely on your modified adjusted gross income.
Now, don't let the name scare you. It's just a fancy term for income that the IRS counts on your tax return. And here's the insight that unlocks everything. The IRS doesn't count every dollar you spend. So, let me say that a second time because this is the part that most people miss. You can live on $120,000 a year and report $50,000 in MAGI. So the question is how? Because not every dollar you spend counts towards MAGI.
So let's break this down. What actually counts towards MAGI? Withdrawals from traditional IRAs or 401ks, taxable interest and dividends, capital gains, wages or self-employment income, taxable social security benefits, and they add back some elements of non-taxable like municipal bond income.
Now what does not count as MAGI? Well, what doesn't count as MAGI are withdrawals from Roth IRAs, spending down cash savings or money from your brokerage account that you already paid taxes on years ago, or anything else that you've already paid taxes on in the past. So, for example, if you had a portfolio that was split between $500,000 in pre-tax accounts, $300,000 in a Roth account, and maybe $400,000 in cash and after-tax brokerage accounts, you'd have a lot of options to strategically blend your withdrawals and keep your modified adjusted gross income low while maintaining your desired lifestyle. And when your MAGI is low, your health insurance premiums can drop to basically zero.
Now, some of you are probably thinking, "Eric, this sounds like tax evasion." It's not, right? This isn't even a loophole. This is just how the system works. So, let me show you exactly how this works with an example.
Let's take a 60-year-old married couple living in my home state of California. They want to spend $120,000 a year in retirement. If they didn't understand MAGI, they'd probably just withdraw $120,000 from their traditional IRA, report that as their income, and then get slammed with full price unsubsidized health insurance premiums. So, how much would that cost them? Well, for a benchmark silver plan in Los Angeles County in 2026, the unsubsidized premium for a 60-year-old couple is about $1,950 a month. So, that's $23,400 a year. And over 5 years, let's say they were from 60 to 65 until Medicare kicks in, that's nearly $120,000 in premiums.
Watch what happens when they understand MAGI. Instead of withdrawing $120K from their traditional IRA or their pre-tax account, here's what they do instead. They take $30,000 from their pre-tax account, which applies towards MAGI. Then they take $20,000 from their Roth IRA, which doesn't count as MAGI. They take $50,000 from cash or money they already paid taxes on years ago, so principal does not count towards their MAGI. And then again, finally, they take $20,000 from long-term capital gains or dividends, and that does count towards their modified adjusted gross income.
Now, I know that's a lot of numbers, but here's the simple summary. This couple gets $120,000 of spending money, but they only show the IRS $50,000. How, right? And the answer is they've been strategic about which accounts they pull from. That's it, right? That's the whole strategy. They end up with total spending money of $120K, total MAGI of $50K, and now just for the clarity of this example, $50K of MAGI for a married couple puts them at about 236% of the federal poverty level. At that income level, they qualify for a premium tax credit, also called an APTC, of about $1,619 per month.
So, let's see what that does to their premiums with this chart here. If for a bronze plan, the gross premium unsubsidized would be $1,559 a month. They apply the subsidy of $1,619, and that bronze plan ends up costing them zero. For a silver plan, the gross premium would be $1,950 a month. They apply the subsidy, they end up paying something like $330 a month. And then for a gold plan, the premium unsubsidized would be $1,920 a month. They apply that $1,619 premium, and they end up paying $373 a month.
So, this couple spending $120,000 a year can choose, you know, free bronze coverage or silver coverage for about $4,000 a year or gold coverage for about $4,500 a year. Now, compare that to the $23,400 a year they would have paid if they did not understand this principle of modified adjusted gross income at all. That's a savings of between $19,000 and $23,000 a year, depending on which plan they end up choosing. Over 5 years, we're talking between $95,000 and almost $120,000 in savings. They have the same lifestyle, same spending money, but completely different outcomes when it comes to health insurance premiums.
Now, this couple is using up their Roth and their cash money faster, which means they may have bigger required minimum distributions later in life, but they decided that the trade-off was worth it because they value freedom now over tax optimization in their 80s. Now, there's still a lot more to this. Not everyone is going to make this choice, right? And that's fine. But the point here is through a better understanding of how the system works, they could make a better choice, and they made it with their eyes open.
Now, it all comes down to understanding that one number, which is MAGI. I know that some of you at this point are going to be thinking, Eric, that's all great, but what if I want to spend more than $120K a year, right? What if my lifestyle costs me $200K or $300K a year in retirement? Great question. In a moment, I'm going to show you exactly how that looks. But first, I need to show you the other side of this equation because understanding what happens when you don't control MAGI is maybe as important, or maybe more important, as understanding what happens when you do.
Here's the thing about ACA subsidies. They are based on your income level relative to the federal poverty level. And so for 2026, the federal poverty level for a married couple is $21,150. Subsidies phase out completely once your modified adjusted gross income hits 400% of that number. Now, 400% of that number is about $84,600. So think of this like a light switch. If you have a MAGI that's below $84,600 as a married couple, subsidies are on. If you have a MAGI that's $84,601 or more, subsidies flip off like a light switch. There's no dimmer. It's just all or nothing. And that is why we call this a cliff. And once you go over that cliff, it doesn't matter if your MAGI is $85,000 or $500,000. Your premium will be exactly the same.
So, let me show you what I mean. Let's take that same 60-year-old couple, but now let's say they withdraw everything from their traditional IRA, their pre-tax money, because they don't understand this concept of MAGI planning. So, in scenario number one, another chart here for you. Let's say you have a spending amount of $100K and a MAGI that matches it exactly. The bronze premium cost for a bronze plan would be $1,559 a month. For a silver plan, it's $1,950 a month. No change. If you had $200K in MAGI and $200K a year in spending money, they're both equal. Again, your bronze premium is $1,559 and your silver premium is $1,950. And you can see here that at $300K, the same amount holds true. These numbers were pulled directly from the county of California's health insurance website. So, these are the exact numbers. And again, I'm sure you'll notice the pattern here. There's no change between these different amounts, and that's because there is no change to the cost to premiums based on your income when you pass above that cliff.
So if you're a high net worth retiree spending $200K or $300K a year, healthcare premiums are still just a single-digit percentage of your total spending even without subsidies. Right at $200K in spending, at $23,000 premium is about 11% of your budget. At $300K in spending, it's about 7% of your budget. Is that ideal? Definitely not. Does it feel good? Definitely not. But is it catastrophic and a reason not to retire? My opinion, probably not.
So, here's the key insight. If you have the assets and the account types to control your MAGI, then you can dramatically reduce those costs. If you don't, or if your spending is so high that keeping MAGI low isn't actually possible, healthcare is probably still affordable. It's just more expensive than you're used to or than we would like it to be. And either way, healthcare just shouldn't be the reason that you don't retire if you have the funds to actually retire.
So, let's get really practical. How do you actually implement this? It really comes down to three things. But first, let me warn you. I see retirees make critical mistakes with each of these three steps that completely destroys this strategy. So, I'm going to show you how to do it right and how to avoid the traps that cost people tens of thousands of dollars.
The first step here is to know your account types. You need to have a mix of accounts. We need pre-tax accounts. That includes traditional IRAs, 401ks, 403bs, whatever. We also need after-tax accounts, Roth IRAs, taxable brokerage accounts, cash accounts. The first mistake happens here, and this is assuming that you can use this strategy when 100% of your money is in a pre-tax account like an IRA or a 401k. If all your money is pre-tax, you don't have any options. Every dollar you withdraw will count towards MAGI. But if you have even a small amount, 20% or 30% of your assets in Roth or after-tax accounts, you can start blending taxable withdrawals to control your taxable income. And if you don't have that flexibility now, then it's probably time to start building it. You can do that through Roth contributions, Roth conversions during low-income years, or by saving more into after-tax brokerage accounts before you retire.
The second step here is to plan your retirement gap. The best time to optimize MAGI is during what we call the retirement gap, the period between when you stop working and when new income sources kick in. During that window, you have maximum control over your taxable income because you're not getting wages and you're not getting yet guaranteed income things like social security or a pension. That's when you can live on Roth withdrawals, cash, you can keep your MAGI artificially low and you can maximize your subsidies. The second mistake happens here, and this is claiming social security too early and therefore killing your MAGI flexibility. Now, once social security kicks in, it counts as MAGI. So, if you retire at 58 and you immediately claim social security at 62, you may have added an additional $20,000 or $30,000 a year to your modified adjusted gross income, which could push you over the subsidy cliff. That doesn't mean you should delay social security till 70. Not what I'm saying. It just means think strategically about when you claim during your early retirement years. And if you can live on Roth and cash from 58 to, let's say, 65, you can maximize your subsidy window. And then you can claim social security when it's required or when it makes sense, whatever that age is.
The third step here is run the numbers for your unique situation. Every retiree situation is different. Your location matters because premiums vary by zip code. Your age matters because premiums increase as you get older. Your household size matters. Single versus married filing jointly versus married with kids. The household size will affect the premium cost. And your asset mix matters, right? The more flexibility you have with your asset mix, the more you can optimize. This is where mistake number three happens, which is assuming that these premiums are calculated the same way in every state. Some states have expanded Medicaid, which changes the subsidy calculation at the low end of the bracket. Some states have higher benchmark premiums, which means bigger subsidies. Some zip codes have fewer plan options, which can affect your choices. You really just can't copy someone else's strategy. You need to run your own numbers based on your zip code, your age, and your household size. But the one thing that is always the same is this framework around controlling modified adjusted gross income in order to control your premiums. And if you avoid those three mistakes and you have the account flexibility to execute, you can save literally six figures over a 5 to 10-year period before Medicare kicks in.
So why isn't every advisor teaching this? And that's just because it isn't scalable, right? This requires custom planning for every client. It's not a one-size-fits-all product that anybody can just work with. And frankly, most advisors make more money managing assets than they do teaching you how to spend them efficiently. And so, this strategy just kind of gets overlooked unless you know where to look. The ACA subsidy structure is also kind of intentionally opaque. Federal poverty levels, applicable percentages, second lowest cost silver plans, just, you know, it's all designed to make your eyes glaze over and vomit. And when the system is confusing, most people default to the path of least resistance, which is, you know, delaying retirement until Medicare or just paying the full price and not asking any questions. Both options benefit the system at your expense.
And so the real question here is, are you going to let complexity make your retirement decisions for you, or are you going to take 30 minutes to understand how this works and then take control over your retirement?
So, here's what this all really means. If you're 58 and maybe you're sitting on $1.5 million and you've been telling yourself, I just got to get through seven more years to get to Medicare and then I can release myself, you might not need to wait. You might be able to leave next year. And this isn't just theory, right? This is how dozens of my clients have retired early without healthcare bankrupting them. They thought healthcare was an insurmountable obstacle. It wasn't. They thought they'd have to pay $2,000 a month in premiums. Not true. They thought that retiring before 65 was financially reckless. Again, not true. Once they understood MAGI, once they saw how to blend their withdrawals, healthcare stopped being the reason to delay and started being just another line item in their budget to plan for, and that gave them back freedom to choose.
So the one question remaining here is, are you going to keep waiting out of fear, or are you going to run your own numbers? And so now that you understand how modified adjusted gross income works, the next question is, does your specific situation allow you to retire early? And so click the first link in the description below this video. I put together a free resource that walks you through the exact four-step process we use to help retirees build the retirement plan of their dreams. It takes about 15 minutes to go through, and it'll help you identify whether you're ready to pull the trigger or if you need to make more adjustments to your plan first. You don't need to delay retirement out of fear or overpay out of ignorance. You just need to understand that one number, modified adjusted gross income, and then take control of it.
So, thank you as always for your time and attention. See you in the next video.