Medicare starts at 65. Retire at 55 and you are buying your own cover for ten years, at an age when premiums are at their highest and you no longer have an employer paying most of them.
This is the single largest cost that separates early retirement from ordinary retirement, and it is the one most retirement calculators leave out entirely. It is also the one cost where your own choices move the price by five figures a year, because what you pay depends on your taxable income rather than on your wealth.
Four ways to be covered before 65
A marketplace plan. The main route. You buy an individual policy through the ACA marketplace, and a premium tax credit reduces what you pay based on your household income. This is where the planning happens, and the rest of this article is mostly about it.
COBRA. Continuing your employer's plan after leaving, usually for 18 months. You pay the entire premium plus a 2% administration charge, which means the full cost your employer was quietly covering. For a couple in their late fifties that is frequently $1,800 to $2,200 a month. It is the right answer in one situation: you are mid-treatment and changing plans would change your doctors.
A spouse's employer plan. If one of you keeps working, this is almost always the cheapest option available and it removes the income planning problem completely.
Part-time work that carries benefits. This is what Barista FIRE is named after, and the insurance is the point rather than the wages. Some large retailers and coffee chains extend medical cover below 30 hours a week.
The subsidy is based on income, not on assets
The premium tax credit does not look at your portfolio. Somebody with $2,000,000 invested and $45,000 of realised income qualifies for the same credit as somebody with $45,000 of wages and no savings.
A retiree chooses their own taxable income to an extent an employee never can, which is what makes this controllable. What counts is modified adjusted gross income, which for ACA purposes is your adjusted gross income plus tax-exempt interest, plus any untaxed Social Security, plus excluded foreign earned income.
What raises it and what does not:
| Counts towards MAGI | Does not count |
|---|---|
| Withdrawals from a traditional 401(k) or IRA | Qualified withdrawals from a Roth account |
| Roth conversions, in the year you convert | Roth contributions withdrawn as basis |
| Realised capital gains | The return of your own cost basis when you sell |
| Dividends and interest, including tax-exempt interest | Cash held in a savings account and spent |
| Rental profit, self-employment profit, wages | Loan proceeds, including a HELOC |
Two consequences follow. Selling $40,000 of an index fund does not create $40,000 of MAGI, because most of the proceeds are your own money coming back. Only the gain counts. And a Roth conversion ladder, which is otherwise the standard way of bridging the years before 59½, is a direct attack on your subsidy in every year you run it.
The cliff is back for 2026
The enhanced premium tax credits that ran from 2021 through 2025 removed the hard income ceiling and capped what any household paid for a benchmark plan at 8.5% of income. Those expired at the end of 2025.
For 2026 the original structure applies again: above 400% of the federal poverty level, the credit is zero. Not reduced. Zero.
The 2026 thresholds, based on the 2025 poverty guidelines for the 48 contiguous states, are roughly:
| Household size | 400% of FPL |
|---|---|
| 1 | $62,600 |
| 2 | $84,600 |
| 4 | $128,600 |
Alaska and Hawaii have higher figures. Check your own on healthcare.gov before relying on any of this, because the guidelines are reissued annually.
What one dollar over the line costs
A worked example, with the inputs stated so you can substitute your own. A couple, both 60, no dependants, living in a state where the benchmark silver plan for two people their age costs $2,000 a month, which is $24,000 a year.
At a MAGI of $84,000 they are just under 400% of poverty. Under the original ACA rules a household at that level pays no more than roughly 9.9% of income for the benchmark plan, so their own share is about $8,300 and the credit covers the remaining $15,700.
At a MAGI of $84,700 they are just over. The credit is zero and they pay the full $24,000.
Seven hundred dollars of extra income costs about $15,700. That is a marginal tax rate above 2,000% on the dollars that crossed the line, and it is why an early retiree's tax planning and insurance planning are the same exercise.
It gets worse than a one-year problem. Credits are paid in advance against an estimate and reconciled on your tax return. Underestimate your income and you repay the difference. For 2026 the caps that used to limit how much of an overpayment had to be returned no longer apply above 400% of poverty, so a household that lands over the line repays the entire year's advance credit at once.
Six ways to keep MAGI under the line
Spend cash first. A year of living expenses held in savings and spent produces no MAGI at all. Two or three years of cash at retirement is worth holding for this reason alone, quite separately from the sequence of returns argument for holding it.
Sell the highest-basis lots. When you sell shares, only the gain counts. Specific lot identification lets you sell the shares you bought most recently at the highest price, which produces the smallest gain per dollar raised. Selling the oldest lots does the opposite.
Harvest losses in the years you have them. Realised losses offset realised gains and reduce MAGI directly.
Do Roth conversions before you retire or after you turn 65. The conversion ladder and the ACA subsidy want opposite things from your income. Converting in the gap between leaving work and starting Medicare costs you subsidy at a rate that usually exceeds the tax saved. Converting in the years after 65, when Medicare has replaced the marketplace, does not.
Keep the taxable account in tax-efficient funds. Dividends and interest arrive in your MAGI whether you spend them or not. A broad index fund throws off far less taxable income per dollar than an actively traded fund or a high-yield bond fund. The site's index fund article covers why the low-turnover version matters here as well as on fees.
Watch the second cliff, the one underneath. Below 138% of poverty in a state that expanded Medicaid, you are routed to Medicaid rather than a subsidised marketplace plan. In the states that did not expand it, income below 100% of poverty can leave you eligible for neither. Some early retirees deliberately realise extra income to stay above the floor, which is the same planning problem inverted.
What to budget
Premiums are only part of it. A marketplace plan has a deductible, coinsurance, and an out-of-pocket maximum, and the maximum is the number that matters for planning, because it is the worst case in any single year.
Budget for the premium plus the out-of-pocket maximum, not the premium plus an average. An average is what happens across a population. Your own bad year is not an average, and the whole reason to hold insurance is the bad year.
A useful planning figure for a couple retiring in their late fifties in a subsidised year is the premium share plus a maximum in the region of $18,000 for the household. In an unsubsidised year the same coverage can total more than $40,000. Ten years of that is a line item comparable to a mortgage, and it belongs in the bridge calculation rather than in a footnote.
Where this fits
Health cover is the reason early retirement targets are higher than the arithmetic of spending suggests, and it is the reason Coast FIRE and Barista FIRE exist as intermediate stops. A part-time role that carries benefits is worth its premium value plus the subsidy it lets you stop protecting, which is frequently $20,000 a year of effective compensation on a job that pays $25,000.
Run your own numbers on the rest of the plan with the 401(k) projection calculator, and see which accounts to fill in which order, because the balance between traditional and Roth money is what determines how much control over MAGI you will actually have.
Frequently asked questions
How much does health insurance cost before 65?
For a couple in their late fifties buying a marketplace plan without a subsidy, $1,500 to $2,200 a month is the common range, before deductibles. With a subsidy at an income just under 400% of poverty the same plan often costs $600 to $800 a month. The gap between those two outcomes is decided by your taxable income.
What is the ACA subsidy cliff?
Above 400% of the federal poverty level the premium tax credit drops to zero rather than tapering. The enhanced credits that removed this cliff expired at the end of 2025, so it applies again for 2026 coverage.
Do 401(k) withdrawals count as income for ACA subsidies?
Yes. Withdrawals from a traditional 401(k) or IRA are ordinary income and go into MAGI in full. Qualified withdrawals from a Roth account do not, which is the main reason to arrive at early retirement with money in both.
Does selling stocks count against my ACA subsidy?
Only the gain does, not the whole sale. Selling $40,000 of a fund you bought for $30,000 adds $10,000 to MAGI, not $40,000. Selling the lots with the highest cost basis produces the smallest gain for the same amount of cash raised.
Is COBRA cheaper than a marketplace plan?
Usually not, unless your income is too high for any subsidy. COBRA charges the full group premium plus 2%, with no credit against it. It is worth the money when continuity of treatment matters more than the price, and it runs out after 18 months in any case.
Can I get an ACA subsidy if I have a large portfolio?
Yes. Eligibility is tested on modified adjusted gross income, not on net worth. A retiree with substantial assets and low realised income qualifies. This is not a loophole, it is how the statute is written, and it is the single largest reason early retirees manage their income rather than simply spending from wherever is convenient.
What happens if I underestimate my income?
Credits are advanced against your estimate and reconciled when you file. If your actual income comes in higher, you repay the excess. For 2026, a household that ends up above 400% of poverty repays the whole year's advance credit rather than a capped portion, so the safe approach is to estimate high and take the credit as a refund at filing.