Could the age tax sink your retirement?
Countless older Americans have no choice but to buy their own health insurance. But thanks to a new healthcare bill, seniors might feel the pain when they go to purchase insurance on the open market.
What is the age tax?
The age tax is a penalty of sorts that seniors will face if President Trump's American Health Care Act (AHCA) goes through. Though a vote that was supposed to happen yesterday never came to be, the House hopes to make the AHCA official on Friday.
For those not familiar with the AHCA, it's basically the latest version of Obamacare, but with a twist. Under the current system, the amount that insurers can charge older Americans for coverage relative to younger Americans is capped at a ratio of 3:1. Under the AHCA, that ratio will be capped at 5:1, meaning insurers will have the option to charge seniors up to five times as much as younger enrollees for similar coverage.
AARP, a big opponent of the bill, states that seniors 60 and over will see their insurance costs jump $3,200 a year on average if the plan goes through, bringing the typical older American's annual premiums up to $17,900. Ouch. Given that seniors already spend one out of every six dollars on healthcare, those who can't afford higher premiums will have one of two choices -- go without coverage or get insurance and compromise their finances in the process.
Now the age tax isn't the only provision of the AHCA that could spell trouble for seniors. Whereas Obamacare offered subsidies based on income and geographic location (since health coverage is more expensive in some regions of the country than others), the AHCA's subsidies will be flat, age-based rates that will phase out at higher income levels. For older low-income Americans aged 50 to 59, the subsidy will be capped at $3,500, and for those 60 and over, it will be limited to $4,000. Unfortunately, these subsidies won't come close to compensating for the increase countless seniors will face if insurers get the green light to drastically raise their premiums.
Don't let the age tax derail your retirement
Healthcare is already a tremendous expense for retirees, many of whom leave the workforce before becoming eligible for Medicare. In fact, new data from LIMRA suggests that almost half of Americans retire somewhere between the ages of 61 and 65. Coverage under Medicare, however, doesn't begin until age 65 unless extenuating medical circumstances apply. And since many Americans rush to retire at age 62, the earliest age to collect Social Security, that opens the door to a three-year gap in reasonably affordable health coverage.
If you're planning to retire before age 65, be aware that the age tax might cause your healthcare costs to skyrocket in the early years of retirement, which could, in turn, wreck your finances indefinitely. Data from the Employee Benefit Research Institute tells us that 46% of senior households already spend more money, not less, during their first two years of retirement, and for 33%, this trend lasts a solid six years. Underestimate your healthcare expenses and you could be in for an even greater financial shock.
Now this isn't to say that all seniors will automatically be doomed if Trump's bill goes through and the age tax takes effect. But what you should do is pay attention to the news and prepare accordingly. The easiest solution? Save more money, or at least enough to cover the aforementioned $3,200 yearly increase. Or consider postponing retirement until Medicare kicks in.
No matter how you adjust your retirement plan to what could soon be a harsh new reality, don't make the mistake of forgoing coverage to avoid rising insurance costs. While the ACHA won't penalize Americans for being uninsured, if you go without coverage for too long and change your mind, you'll risk a 30% surcharge on your premiums for coming in with lapsed coverage. Furthermore, because seniors are more susceptible to medical issues, the last thing you want to do is go without insurance and risk a whopping bill the first time an emergency strikes.
To put that risk in perspective, the average three-day hospital stay costs roughly $30,000. If you fall ill or get injured and don't have insurance, you could wind up on the hook for a catastrophic amount of money that could ruin your retirement even more.
Of course, at this point, it's hard to say whether the ACHA in its current form will indeed go through. But if you're an older American without employer-provided health insurance, consider this your wake-up call.
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