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How to Manage Your Money in a Forced Retirement

NEW YORK ( TheStreet) -- Retiring early is a common dream, but only if it's by choice. Unfortunately, many workers in their late 50s or early 60s have been ejected from the workforce by downsizing and other calamities. For them, smart managing of cash and other assets can make the difference between a comfortable retirement and a miserable one.

And now there's a new issue: Under Obamacare, the way you manage your retirement income can determine whether you get a federal subsidy for health care insurance. The right moves might save you thousands, says Christine Benz, director of personal finance at Morningstar (MORN), the investment data firm. This is a critical consideration if you're younger than 65 and therefore not eligible for Medicare.

As you'd expect, the lower your income, the larger the subsidy will be. The biggest is for people with incomes below 150% of the federal poverty level. Subsidies get smaller as you hit higher thresholds of 200%, 250% and 400% of poverty level. As this chart shows, poverty level for a two-person household is $23,265. So you might qualify for a health insurance subsidy if your income is below about $93,000. Most unemployed people would likely qualify for some help.

If you have the luxury of choice, it would pay to live off of money that will have the smallest impact on your income. The first choice would be cash, such as bank holdings you've kept as a rainy-day fund. Typically these are funds on which you've already paid taxes, so withdrawing and spending them will not create taxable income that will reduce your health insurance subsidy.

At the other end of the spectrum are withdrawals from traditional 401(k)s and IRAs. Any money that has not been taxed previously -- which in most cases is the entire withdrawal -- will count as taxable income, undermining your eligibility for an Obamacare subsidy. (If you are under 59.5, you would also likely pay a 10% early withdrawal penalty.)

Of course, if you are unemployed and withdrawals from savings and investments are your only income, you may be in a very low tax bracket, so your tax bill might not be as big an issue as the withdrawal's effect on your health insurance subsidy.

If cash holdings are not large enough to keep you going until you find a new job, consider withdrawals from any Roth IRAs or Roth 401(k)s you have. Since those withdrawals are tax free, they will not enlarge your income. Keep in mind that with these withdrawals you'd be giving up future investment earnings. So tap the accounts that you think have the least growth potential.

Among your other assets, focus next on ones that will be taxed at the long-term capital gains rate, which for most investors is 15%. Selling these investments will create a lower tax bill, and have less effect on any Obamacare subsidy, than selling assets, such as traditional 401(k)s that are taxed as ordinary income, which may well have a higher rate than 15%.

Benz warns that tapping home equity, through a home equity loan or reverse mortgage, is a less appealing option because it incurs interest charges.

She also cautions against starting Social Security benefits before reaching "full" retirement age, generally around 66 or 67. Starting early can reduce the size of the benefit substantially. For instance, starting at 62 can reduce the monthly check by 30%.

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