Number one controls your early retirement health costs — understand it and say goodbye to Medicare fears

Many American workers retire just in time for Social Security benefits but a little too early for Medicare coverage.

The average retirement age is 62, according to a Mass Mutual study (1), which also happens to be the earliest age you can start receiving Social Security checks.

However, unless you have a specific disability, eligibility for Medicare does not begin until age 65. In other words, many retirees face a few years of potentially steep health care insurance premiums.

If you retire early or have been forced to quit due to layoffs, you face a potentially longer gap. For someone in their early 60s, monthly health insurance costs can be between $1,072 and $1,120, according to the Kaiser Family Foundation. (2)

This additional monthly cost can cause significant anxiety for retirees. However, that anxiety can be alleviated if you control your modified adjusted gross income (MAGI).

Here’s why your MAGI number can make or break your health care costs in early retirement.

For early retirees concerned about health care insurance premiums, MAGI is a major lever. This is because it is the basis for the premium tax credit (PTC).

Under the Affordable Care Act, also known as Obamacare, the PTC is a tax credit that helps people cover the cost of health insurance plans purchased through the health insurance marketplace. A tax credit is money you can deduct from the income taxes you owe.

Traditionally, your household’s MAGI needs to be below 400% of the federal poverty line to qualify for the PTC. However, there is a temporary and more complex way to calculate PTC eligibility income between 2021 and 2025.

The Internal Revenue Service (IRS) has an online tool to help you determine eligibility within 15 minutes. As a general rule, the lower your MAGI, the higher your chances of qualifying for this tax credit and offsetting a significant portion of your health care premiums.

Fortunately, there are strategic ways to reduce your MAGI while living on a relatively comfortable retirement income.

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To understand how checking MAGI can help older adults offset the cost of their health insurance, let’s look at an example of a married couple, in their 60s, filing their taxes jointly.

In 2025, this couple was expected to have an income of $80,000. However, $25,000 of that money was strategically drawn from sources unrelated to MAGI. According to Healthcare.gov (3), these sources can include cash savings, gifts, Supplemental Security Income (SSI) or even loan proceeds.

This allows the couple to reduce their MAGI to $55,000, which is roughly 260% of the poverty level for a family of two, according to the Kaiser Family Foundation’s online calculator.

This means that the couple can qualify for PTCs through the health insurance market that offsets a large part of the cost of a Silver plan and potentially all the costs of a bronze plan.

In other words, by planning ahead and strategically controlling income and expenses, this couple has the chance to reduce most or all of their health insurance costs until they qualify for Medicare.

America’s health care system can be brutal and complex. And this is compounded if you leave your employer before you qualify for Medicare.

If you retire early, even by just a few years, the monthly cost of health insurance can be significant. However, there is a relatively simple way to mitigate and manage these costs. The secret is to focus on the MAGI of your home.

With some strategic planning and pragmatic budgeting, you can keep your MAGI below key thresholds to qualify for PTC that offsets your health insurance costs.

Although the qualification requirements for this tax credit are complicated and subject to sudden change by legislators, an experienced financial planner should be able to help you navigate the process.

We rely only on verified sources and credible reporting from third parties. For details, see our ethics and editorial guidelines.

MassMutual (1); KFF (2); HealthCare.gov (3).

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.