Early Retirement and Healthcare in the US? Medicaid? Obamacare? Other?

[coinstar]

Several on here are followers of Early Retirement philosophy. I would like to retire in my early 40s and one of the big unknowns is healthcare. What I recently discovered is the Medicaid expansion that most republican governors failed to accept, that the democrats complained about really just removes the asset test for getting Medicaid.

What this means from my reading is that if your income is under the poverty line (around $15k per year), it doesn't matter if you have $500k in your brokerage account. Your assets are no longer tested. You still qualify for medicaid. While medicaid may not be great, it's mostly free from my understanding with low copays.

The other options seems to be Obamacare. If you are low income, the government will pay 80% of your insurance costs. Again, assets are not tested to my understanding.

Thus, a reasonable retirement approach may simply be something like:

1) Buy a house, pay it in full
2) Max out retirement accounts during accumulation phase
3) For any non-retirement money, put it in gold coins and low dividend producing stocks
4) Keep your "income" to under $15k per year which is reasonable since you own your own home. If you contributed to a Roth along the years, you can take some out of the principal without it counting as income

While I would feel like an asshole for getting free or highly subsidized healthcare, I feel like more of an asshole by paying $10k per year (which is what health insurance will cost by 2020) and subsidizing others.

The other option, which I will probably take myself, is to go without insurance all together. Live a health lifestyle, which you can do in early retirement through diet and exercise and you have all the time in the world to do it. If you wind up getting some kind of crazy cancer, then simply "move" to another state. Or marry your best friend (now it can even be the same gender!) By moving states or getting married, the insurance company is required to issue you a policy at any time during the year because it's a life-altering event. Normally they will only issue a policy during the regular window of time to avoid people "cheating" and only signing up the day they need it, due to the new pre-existing coverage requirements.

Maybe you decide to live on the Washington/Oregon border in retirement. Officially in Washington for no state income tax on your retirement investment income, but close enough to get sales tax free stuff in Oregon. Then if you get sick, simply move a few miles into Oregon, get a drivers license, and apply for health insurance there. Works for any state-to-state move, but I mention Oregon/Washington since that's one place I'm considering retiring to.

[Tyler]

You're correct that the ACA is not means tested. Medicaid still may be depending on where you live.

I live in a state that did not expand Medicaid. The sweet spot for the two of us is to keep our reported income right above $22k. That maximizes both subsidies (that reduces premiums) and cost sharing (that reduces deductibles and OoP max). If we fall below that we would be excluded from the exchanges and would need to buy directly from the insurers at the full price.  We juggle this by:

1) keeping our expenses low (no mortgage, smaller house for property taxes, wise spending, etc)
2) being really smart about tax management. I love the PP for this purpose - the four assets (including lots of cash) give you a variety of ways to manage income for tax reporting purposes. We'll pay very little in taxes this year, and will use the portfolio to generate exactly the reportable income we want.
3) having a good chunk of IRA money that we can convert to a Roth as needed. That counts as ordinary income and can bridge any gap. A side benefit is that 5 years later we can also withdraw the Roth principal penalty free.

For the two of us, our effective health expenses for an ACA Silver plan are $77/month with a $150 deductible and a $2k OoP max. At that rate, you'd be insane to bypass health insurance. I'd also choose that over Medicaid any day, as the doctor networks are a lot better.

[iwealth]

What happens if you need extra money in any given year. Major house repair, a loved one desperately needs financial help, etc. I'm sure I wouldn't be able to count the unknown possible reasons one could need an extra $10-15k in any given year. I imagine it could negate your subsidies for the entire year?

[Tyler]

What happens if you need extra money in any given year. Major house repair, a loved one desperately needs financial help, etc. I'm sure I wouldn't be able to count the unknown possible reasons one could need an extra $10-15k in any given year. I imagine it could negate your subsidies for the entire year?

That's the beauty of the PP cash.  You can easily take out $15k for an emergency and because the capital gains are so low the income is marginal.  I paid off my house by selling some SCHO last year and it only increased my reported income by a few hundred dollars.  That wouldn't affect subsidies at all. 

Now if you have a portfolio short on cash, that's a whole 'nother story. 

[iwealth]

That's the beauty of the PP cash.  You can easily take out $15k for an emergency and because the capital gains are so low the income is marginal.  I paid off my house by selling some SCHO last year and it only increased my reported income by a few hundred dollars.

Now if you have a portfolio short on cash, that's a whole 'nother story.

Of course, how could I forget the cash component. What happens when it comes time to rebalance into cash? You'd likely be selling from an asset with capital gains.

[Tyler]

Of course, how could I forget the cash component. What happens when it comes time to rebalance into cash? You'd likely be selling from an asset with capital gains.

Tax loss harvesting will minimize reportable income.  It's also a benefit of having four uncorrelated assets to pull from.  I even have some old losses on the books that still carry forward each year. 

I also plan to head that off by intentionally rebalancing each year (even if a band is not reached) as much as I can while remaining in the 0% LTCG tax bracket.  Tax-free rebalancing!  You have to be smart about the reported income for subsidies, but there are multiple levers to pull and you can just play it by ear each year. 

And worst-case, paying more for healthcare once every several years is not that terrible an outcome.  It will still average out quite low if you manage it smartly.  It's just like any other tax minimization strategy -- you do the best with what you've got.

[iwealth]

Thanks Tyler  - and coinstar for bringing this up. Financial engineering of this type is very interesting to me and healthcare costs are a scary impediment to early retirement.

I guess worst case scenario come time for a cash rebalance is having to pay for a year's worth of health insurance. Maybe you'd want to hold off that rebalance until cash is nearly depleted.

This is also something that affects the rent vs. own cost efficiency calculations. Just running some sample numbers for a family of 3, it looks like these subsidies can be worth upwards of $6,000/yr.

Quite a bit to think about as I strive for early retirement. Although I do worry about being disinclined to start a fun small business in my future free time as I become more and more addicted to a subsidized lifestyle

[barrett]

Tyler, (or anyone else who cares to answer)

Do you take it as a given that the ACA is here to stay in some form or another? I am 56, my wife is 48 and we are just getting ready to send our daughter to at least four years of college starting in 2016. In my opinion even college is easier to budget for than healthcare. Because our work is physical we don't take it as a given that we will be able to work a lot longer. Fortunately we have savings.

Isn't it very possible that the ACA will be repealed or seriously revamped in the next few years? I'm just not sure it's a good idea to count on those subsidies going forward for the next ten years (more for my wife).

[Tyler]

Good question.

Personally, I take nothing for granted.  I planned our budget for paying full rate with no subsidies, so anything we get back at tax time is truly icing on the cake.  I do not recommend planning a retirement budget that requires government handouts to be viable.  That includes social security, by the way.

I fully expect healthcare to be a hot topic for probably the next decade.  It will go through lots of changes, and we'll all have to figure things out as we go.  The more sturdy your financial foundation and flexible the life you build on it, the easier you'll be able to adapt. 

[barrett]

Tyler,

Do you think you'd look at SS differently if you were 56 and not 37? I don't count on getting it at age 70 but I do have some fuzzy figure in my head of what I think is likely (say 2/3 of what they say I will get... something in that range).

[clacy]

If you can look yourself in the mirror while using welfare as a retirement strategy go for it. There are plenty of people that use welfare/disability to avoid work.

[Tyler]

Tyler,

Do you think you'd look at SS differently if you were 56 and not 37? I don't count on getting it at age 70 but I do have some fuzzy figure in my head of what I think is likely (say 2/3 of what they say I will get... something in that range).

Oh -- definitely.  I think it will look a lot different by the time I qualify so I don't count on anything.  Anything I receive will be gravy.  If I was closer I'd feel more confident.

In any case, knowing what you should receive is a sign of good planning.  But we all know politicians are fickle, and putting yourself in a position where a cut to the projected payout or a delay to the retirement age will leave you scrambling to pay the bills is probably not the most robust plan.  I doubt anyone here has that problem, though. 

[iwealth]

If you can look yourself in the mirror while using welfare as a retirement strategy go for it. There are plenty of people that use welfare/disability to avoid work.

I for one didn't ask for my premiums to triple nor my max out of pocket costs to quintuple. I also didn't ask for the availability of subsidies. But with one comes the other. Besides, if one can happily live on $22k/yr or whatever that sweet spot income is for your family size/state of residence, more power to you. Unless forced, that's a "sacrifice" few are willing to make.

[barrett]

If you can look yourself in the mirror while using welfare as a retirement strategy go for it. There are plenty of people that use welfare/disability to avoid work.

clacy, I get where you are coming from. The ACA is far from an ideal solution but we can only play on the one field we are presented with. At the rate my medical insurance was increasing (doubling every five years) before the ACA, that one monthly expense would have eaten up my entire income within another 10-15 years. So, while I don't believe the government should be funding the majority of my retirement, I also don't think it's totally unreasonable to expect a few crumbs.

[WiseOne]

Repealing the ACA subsidies and its banning of pre-existing conditions clauses is possible, but I think it will be a very unpopular move at this point.  If the ACA were to survive a Republican presidency or Republican-controlled Congress, I'd be more confident.  Social Security, on the other hand, will be impossible to eliminate completely.  I do expect it to be reduced considerably.

I agree that counting on welfare as a retirement strategy is rather an unpalatable choice, especially for members of  this forum!  But it's certainly hard to pass up free money :-).

I probably won't retire early, but I would like to reduce to part time at some point.  Working for two weeks straight with a call weekend in between, and then flying off straight off to an international conference is getting kind of old - it would have been really nice to have a couple of days off in that stretch!  I'm planning for at least enough savings to cover all basic expenses, and figure Social Security as well as the part time income as extra for things like exotic travel, major expenses etc.

[clacy]

If you can look yourself in the mirror while using welfare as a retirement strategy go for it. There are plenty of people that use welfare/disability to avoid work.

I've thought about this issue quite a bit also.  In Tyler's case, as a double-income-no-kids taxpayer for many years, I think it's safe to say he's paid a pretty large pile of taxes over his working years.  And he'll probably pay more in the future, at some point.  So I don't think I'd have a problem looking in the mirror, in his shoes. 

Also, we all collect some "welfare" at various points in our lives.  Public education, both primary and secondary; Social Security; etc.  We're a welfare state, like it or not.

Yes, it's our current system.  I guess I would rather work than live on $22k and draw welfare, but if one can get past that, I guess the rules are what they are so you might as well do what's in your best interest.

[Pointedstick]

Yes, it's our current system.  I guess I would rather work than live on $22k and draw welfare, but if one can get past that, I guess the rules are what they are so you might as well do what's in your best interest.

Nothing's stopping you from working as hard as you want and forgoing all the welfare. We're talking about early retirement here in which work is optional.

[clacy]

Yes, it's our current system.  I guess I would rather work than live on $22k and draw welfare, but if one can get past that, I guess the rules are what they are so you might as well do what's in your best interest.

Nothing's stopping you from working as hard as you want and forgoing all the welfare. We're talking about early retirement here in which work is optional.

The OP asked for opinions.  I raised a question to think about.  I'm not trying to stop him from going on welfare in order to not work.

[Tyler]

Yes, it's our current system.  I guess I would rather work than live on $22k and draw welfare, but if one can get past that, I guess the rules are what they are so you might as well do what's in your best interest.

Two things:

First, having $22k in reportable retirement income is not the same as living on $22k/year.  As an example, if one lives off the PP cash and has a large enough portfolio, they can spend $50k/year and still report virtually no income most years for tax purposes.  Many people get so accustomed to income equaling expenses that they don't understand this.  In fact, the bigger problem for me is not getting down to $22k in income, but getting up to it.  The PP is so tax efficient that it takes effort to generate $22k in reported income for someone like me not yet taking distributions from a retirement account.  I'll likely be converting IRA money to a Roth to get there this year. 

Second, subsidies are tied to your tax bill. From my perspective legally minimizing your taxes owed is not the same as living on welfare.  Do you also decline all deductions, credits, and tax returns as undesirable welfare?  For those who feel very strongly about this, my recommendation is to always claim the most you are legally entitled to and then donate them to the charity of your choice.  I suspect you can think of a more deserving recipient than the government. 

Both issues really just come down to educating yourself about taxes and being smart about them. The ACA is also admittedly extremely politically charged and I get that many people don't like it, but that doesn't change the fact that it's how things work now.  We've all got to do the best with the system we're handed.

[clacy]

Two things:

First, having $22k in reportable retirement income is not the same as living on $22k/year.  As an example, if one lives of the PP cash and has a large enough portfolio, they can spend $50k/year and still report virtually no income most years for tax purposes.  Many people get so accustomed to income equaling expenses that they don't understand this.

Second, subsidies are tied to your tax bill. From my perspective legally minimizing your taxes owed is not the same as living on welfare.  Do you also decline all deductions, credits, and tax returns as undesirable welfare?  For those who feel very strongly about this, my recommendation is to always claim the most you are legally entitled to and then donate them to the charity of your choice. 

Both issues really just come down to educating yourself about taxes and being smart about them. The ACA is also admittedly extremely politically charged and I get that many people don't like it, but that doesn't change the fact that it's how things work now.  We've all got to do the best with the system we're handed.

Good point on the taxable income vs living budget, which can differ. 

As to the subsidies vs welfare labels, I guess I consider taking subsidies for ACA or utilizing Medicaid a welfare program.  I will certainly take part in SS/Medicare which is also a welfare program. 

I agree that everyone is entitled to reduce their taxes as low as legally possible. I spend a lot of money to do so for my business and personal taxes.  I don't begrudge anyone for doing so.

It goes back to self interest and everyone makes decisions in their own self interest. Capitalists will generally get others to pay their way by figuring out ways for other people to pay them for goods/services, and often will figure out ways to pay others a reduced rate for doing the actual work for them.

Those that choose transfer payments like disability (as a strategy for not working, not actually being disabled), SS etc, or welfare programs like Medicaid/Medicare/ACA subsidies, are choosing to let others work for them through the tax system.

Either way, it's a race to figure out who can pay you money and work for you.

[Xan]

I look at the subsidized price as the real price, and look at the sticker price as an the inflated tax on "the rich".

I'm still grandfathered into my pre-Obamacare plan, but when that goes away, I expect my health insurance costs to triple, and to get worse coverage in exchange.  >:-(

[WildAboutHarry]

I think I'm with clacy on this.

If you want to manage your affairs to reduce taxes, have at it. 

Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.

If you retire early and voluntarily manage your affairs to receive benefits intended for a group that you really do not belong to, well, as Groucho Marx said

I don't know what they have to say,
It makes no difference anyway,
Whatever it is, I'm against it.
No matter what it is or who commenced it,
I'm against it.

Your proposition may be good,
But let's have one thing understood,
Whatever it is, I'm against it.
And even when you've changed it or condensed it,
I'm against it.

[clacy]

I tend to think you can spin it how you want, but in life we make choices, and in this case you would be CHOOSING to take advantage of a welfare program designed for those that need a helping hand temporarily.  That doesn't apply to someone who purposefully takes advantage of the system, IMO, but either way it is what it is, which is welfare.

[Pointedstick]

Obamacare is not "a welfare program designed for those that need a helping hand temporarily." That would be COBRA or Medicaid. Obamacare was intended and billed as a broad-based overhaul of the entire health care system, and the subsidies for people whose taxable income is several times the poverty level are a built-in component intended to offset the increase in premiums that was an expected result of the law's passage. Tyler is actually doing exactly what the programs authors intended: buying cheap, government-subsidized health insurance to avoid having to continue working at a 9-5 job to have adequate health coverage. That was one of the goals: to allow people to leave their jobs and not worry about their health suffering so they could pursue self-employment or entrepreneurial ambitions. Probably ERE was not what they had in mind, but it can't have been overlooked that some of the people taking advantage of the program would be people who wanted to stop working but felt like they couldn't because they had cushy employer-subsidized health insurance.

I'm not a fan of the law, but it is what it is. Why fight the tide?

[clacy]

Obamacare is not "a welfare program designed for those that need a helping hand temporarily." That would be COBRA or Medicaid. Obamacare was intended and billed as a broad-based overhaul of the entire health care system, and the subsidies for people whose taxable income is several times the poverty level are a built-in component intended to offset the increase in premiums that was an expected result of the law's passage. Tyler is actually doing exactly what the programs authors intended: buying cheap, government-subsidized health insurance to avoid having to continue working at a 9-5 job to have adequate health coverage. That was one of the goals: to allow people to leave their jobs and not worry about their health suffering so they could pursue self-employment or entrepreneurial ambitions. Probably ERE was not what they had in mind, but it can't have been overlooked that some of the people taking advantage of the program would be people who wanted to stop working but felt like they couldn't because they had cushy employer-subsidized health insurance.

I'm not a fan of the law, but it is what it is. Why fight the tide?

Firstly, the OP actually discusses the option of Medicaid, which certainly would be considered welfare by nearly everyone.  Secondly, the Obamacare subsidies are a means-tested form of public aid so I would lump that into the "welfare" category, but it's debatable, IMO.  It's unlike the SS/Medicare program that one pays into and earns benefits over time, IMO (although still a form of public welfare, IMO but as I said, that's a welfare program I'm perfectly fine with taking when I qualify). 

Would I take Obamacare subsidies if I was able bodied/minded and working but not earning enough to fall outside the qualification zone?.... Absolutely.  That's not the question posed though. 

I have not followed a lot of the ERE movement, nor have I read a lot on the subject, so I'm fascinated that an otherwise responsible person would chose to take welfare in order to retire early. 

I guess it's an entirely new loophole to take advantage of.  Usually I think of uneducated, underemployed single mothers, or people that as those chose to take part in welfare programs in order to avoid work, but clearly that is a wrong assumption. 

Interesting phenomenon indeed.