Health insurance planning critical for early retirees

We are in the middle of what is termed the open enrollment period for government health insurance plans. This program, called the Affordable Care Act or ACA (often referred to as Obamacare), is now 12 years old. While my experience is that consumers have for the most part settled into using the government's insurance marketplace, I still find this time of year to be stressful for current plan users as they discover their premium adjustments -- and especially stressful for those using the marketplace for the first time.

A key component of the ACA program involves Federal premium subsidies, which are critical to this program. As we get into discussing the premium subsidy system, let me state two qualifications. First, my primary focus on this type of planning involves strategies for early retirees -- those between ages 59 and 65 -- requiring health coverage but not having access to employer-based retiree options or Medicare. Second, I don't make the rules, I just know how to use them, so don't shoot the messenger. I'm just here to solve problems.

Without government premium subsidies, 12 years into this program, my observation is that premium costs have now become nearly unaffordable for most Americans, making subsidies extra critical for early retirees. Subsidies are "baked in" to the plan premium program, which means the government subsidizes premiums by paying insurance companies directly, and insured families pay the net subsidized premium monthly.

Subsidy amounts are based on household income in relation to what is called the Federal Poverty Level (FPL). For 2026, the Federal poverty level for a household of two is $21,160. The ACA subsidizes health premiums for households with up to four times the FPL -- which means a two-person household with income up to $84,640 is eligible for a premium subsidy.

How important is the subsidy? As an example, the unsubsidized premium for an ACA silver plan for a 60-year-old household of two averages about $2,600 a month for 2026. But if this household has income less than $84,640, the subsidy caps household premium costs at 9.5% of household income -- or about $670 a month. The subsidy is that important.

So where does the planning come in? One of the primary focal points for the enrollment process on healthcare.gov is reporting expected income for 2026. But in the eyes of the ACA, not all sources of income are treated equally.

Let's use a hypothetical retired household of two, age 62. The family has $100,000 in bank CDs, $250,000 in Roth IRAs, and $750,000 in pre-tax IRAs or 401(k)s. Both spouses have elected to claim Social Security and collect $3,200 in monthly benefits. The family needs $7,500 in after-tax monthly cash flow to make retirement work.

Social Security and interest on CDs both count as income, so at least $42,400 must be reported. The question is: what accounts does the family use for the remaining retirement income need? IRA or 401(k) withdrawals also count as income, so if these accounts are used the subsidy is at risk. But Roth IRA withdrawals and spending of savings are not countable in the ACA premium subsidy calculation. So we might suggest a combination of Roth IRA withdrawals -- say $23,000 -- and savings withdrawals of $20,000 for the three years before Medicare eligibility. This will likely cause these accounts to "spend down" a bit, but not using the IRA/401(k) and allowing it to grow should offset the spend-down, and receiving the premium subsidy is a game changer.

With properly structured retirement cash flow, the household could report $42,400 in expected 2026 income, capping silver plan premiums at 7.7% of income -- or about $276 a month. Yes, in this scenario we have millionaires receiving huge premium subsidies, but like I said, I don't make the rules.

This program is a critical planning topic for pre-retirees not yet using it as well. For those in their early to mid-50s desiring to retire before age 65, understanding these rules early could impact decisions such as Roth 401(k) elections, Roth conversions and how to invest savings. This topic is crazy complicated, but with the right team and the right advice, understanding the ACA may make the goal of early retirement more feasible for many families.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.