With the passing of Supreme Court Justice Ruth Bader Ginsburg, the nation is thrust into an unexpected and incredibly time-sensitive debate on the future of the Supreme Court. The court is suddenly on a fast-track to a hard right turn, and hanging in the balance are pivotal social issues including abortion rights and healthcare programs. Relevant to us is the continued existence of the Affordable Care Act.
Other (understandably huge) social issues aside, changes in—or elimination of—the Affordable Care Act could mean colossal changes in the cost of healthcare insurance. What should we know and how can we prepare?
Section 1: How Healthcare is Discounted for An Early Retiree
Healthcare is the unspoken elephant in the room for many in the financial independence and particularly the early retirement community. Many dirtbag climbers don’t insure at all, insistent on keeping costs in check, thereby dangerously flirting with the crushing weight of medical bankruptcy.
Why?
Well, IT’S CONFUSING AND EXPENSIVE AS HELL TO INSURE YOURSELF IN THIS COUNTRY.
While many of us rely on employer-sponsored plans, many do not. Gig workers, freelancers, contractors, and a variety of self-employed business owners must find their own insurance. The same is true for any who choose to leave their jobs and retire early.
In fact, until the passage of the ACA, healthcare costs were so prohibitively expensive that early retirement was mostly limited to those with a truly obese net worth. An argument could be made that the passage of the ACA in 2009 (implemented in 2010) largely helped to usher in the first tsunami of early retirees between 2010-2020.
Why?
Federal subsidies provided by the ACA.
Federal Subsidies Keep Insurance “Cheap”
You see, healthcare rates (premium, out-of-pocket-max, deductible) are at least partially priced based on income. Subsidies are applied depending on your level of income as it relates to the federal poverty level.
A tiered subsidy (or more correctly, tax credit) program is applied, so long as your modified adjusted growth income (MAGI) is within 400% of the Federal Poverty Level (FPL). The FPL is a sliding scale based on number of household humans and inflation. In 2021 for a 2-person household (our case), the FPL is $17,240. So, a hypothetical income of $40,000 is at 232% of FPL, well-within the 400% necessary for a subsidized plan.
Calculate your AGI here, which is often very similar to MAGI.
It’s very important to know that the 400% FPL level is indeed a sheer and terrifying cliff. $1 of income over this level could result in thousands of additional premium costs!
So, I can have three million clams in investment savings (clams = dollars if you’re not hip), however, the government does not consider net worth when assessing subsidies. If our MAGI is only $40,000 each year in living expenses withdrawn from our investments, the government sees our income at 232% of FPL, within range of a tiered subsidy program.
It’s also worth noting that being between 100%-250% of the FPL is the sweet spot for securing Cost Sharing Reductions, which help reduce the price of normal out-pocket-expenses when visiting a doctor or hospital.
Confused yet? Wait, there’s more!
The next tricky part is your geographic location. The base price of each plan is highly dependent on the place of residence. That Silver Plan in Wyoming is going to look a hell of a lot different than the same plan in Colorado.
WTF is MAGI?
In essence, it’s important for all of us to understand, particularly retirees (early or traditional), that the Affordable Care Act provides subsidized plans for all individuals with a modified adjusted growth income (MAGI) within 400% of the Federal Poverty Limit.
An Income and Subsidy Example:
Let’s assume that I have a hypothetical net worth of $1,200,000. Deciding to withdraw around 3.5% of my savings for the year in living expenses, I should be able to pull $40,000 from my investments to fund my life.
To do so, I take a combination of dividends that are paid quarterly and sell shares of stock to cover the rest. I might do this a few times a year to equal roughly $40,000, my hypothetical spending level. I’m only generating income to cover my life’s expenses.
The first critical element to understand is that with the sale of stocks, only gains count as income. If I bought a share for $10 and it’s worth $15 when I sell it, I’ve made $5—not $15—in capital gain income.
Dividends, however, are fully taxed. This is one element of “income” where a retiree doesn’t wield a lot of control. If the stock market kicks ass and delivers a 30% year-over-year gain, stocks will kick off more dividends, and as such, dividend income will be higher. Even if reinvested, dividends are still 100% taxable. No biggie though. Dividends are taxed either way, so it’s best for a retiree to cease automatic reinvestment of dividends and use those puppies! The more dividend income you have, the fewer shares you must sell, my friend!
Any traditional W2 or 1099 is 100% considered income and will be taxed. In our hypothetical example, I will not be working a traditional job, so no further consideration of traditional income is necessary.
Bottom Line:
By hypothetically selling $40,000 of shares to provide living expenses, the MAGI will be reported as something significantly less, dependent upon the amount of capital gains and various tax-except deductions (added back in), including IRA contributions or student loan interest. The important point to remember is that only the gains of any given stock are taxed, not the original purchase price (cost basis). However, for conservative planning purposes, using your gross income to assess ACA subsidies is probably not a bad idea. We’ll do that more below.
A $40,000 MAGI Example in Colorado
I no longer live in Colorado, but let’s pretend I do.
Let’s also pretend my MAGI is $40,000 (a conservative case, as described above).
Using this ACA subsidy calculator, our 2-person household is eligible for a whopping discount of 62% off the sticker price of a Silver Plan. With our subsidy, we are expected to pay $260 per month, or $3,124 per year in premiums alone. Without the subsidies, we’d be paying $8,134 per year just in premiums! Out-of-pocket max and deductibles aren’t even considered! What’s more is that Colorado is one of the more affordable healthcare states! So many exclamation points!
What many early retiree hopefuls do is (at best) account for the cost of subsidized premiums in their FIRE budgets. In this case, we could assume a healthcare cost of, say, $3,500 per year and call it good. However, this thinking is very dangerous. First off, this calculation ignores any potential deductibles and high out-of-pocket max spending for catastrophic events. Second, there’s politics.
We are relying on the healthcare subsidies provided by the government from a 2010 law hated by a certain segment of fire-breathing lawmakers. Those lawmakers now hold control of the Senate and have the technical privilege of electing a new Supreme Court justice just weeks before a presidential election. Sorry, we really can’t keep politics out of this discussion.
And now with the untimely death of Ruth Bader Ginsburg, it all hangs in the balance.
Bottom Line:
- ACA premiums are discounted based on a tiered subsidy program. Discounts are applied so long as income is less than 400% of the Federal Poverty Level.
- The 400% FPL is a cliff. $1 of income over this level could result in thousands of dollars more in healthcare spending.
- When early retirees sell investments to fund their life, only a portion of this is considered income (capital gains and dividends + any traditional income). So, even though a retiree may have a 7-figure net worth, only income is considered for applying healthcare discounts.
- The base price of healthcare plans varies considerably depending on geographic location, even within the same state.
Section 2: The Precarious Future of the Affordable Care Act Healthcare Plan
Assuming President Trump’s Supreme Court pick, Amy Coney Barrett, is nominated as the next judge, how likely is the ACA to be overturned?
Without a doubt, the Republicans have made it clear for years that they want to overturn the law. However, Americans overwhelmingly support the Affordable Care Act, most notably the protection of those with pre-existing conditions (COVID anyone??).
So, with the presumptive appointing of a staunchly conservative judge, will the Republican party have a real chance of doing away with “Obamacare”?
Not likely.
On November 10, the Supreme Court will hear arguments over the constitutionality of the Affordable Care Act. This article does a great job of highlighting the mangled mess being litigated, and I’ll briefly summarize here.
In short, legal experts do not expect the Supreme Court to overturn the law in whole, if at all. The issues most closely contested are the individual mandate and the coverage of pre-existing conditions. Most likely, the court will rule that citizens do not have to pay a fine if they choose not to carry insurance, and pre-existing conditions will continue to be covered, essentially the status-quo. Federal funding for the subsidies is expected to remain in place…for now.
What Happens if Federal Healthcare Subsidies are Removed?
Well, as we’ve seen above, healthcare for Americans will become very expensive. And I’d argue prohibitively expensive.
Even to ensure two young, healthy 30-somethings in Colorado, we’d be looking at over $8,000 per year in premiums alone. In other states, premiums could approach or even exceed $20,000 simply to be covered. For those needing more and regular healthcare, the bills would be staggering.
For this reason, I’m going to go out on a limb and maintain that overturning the ACA without a highly subsidized alternative (that also covers pre-existing conditions) is simply political suicide. If there’s one thing we can agree on in this country, it’s that we all want good, affordable healthcare. Any politician standing for something other than that is a losing politician.
However, as an early retiree, gig worker, or other self-employed individual in search of healthcare coverage, it’s our duty to work with the system we have and not get ourselves in an underfunded and vulnerable position.
Bottom Line:
- Even with a presumed conservative majority on the U.S. Supreme Court, federal funding for ACA subsidies will likely remain in place (for now).
- Removing subsidies without a plan to make healthcare (much) more affordable is likely political suicide.
- Stranger things have happened, so it’s important to understand the potential range of healthcare costs and begin to consider a contingency budget.
Section 3: How We Budget for Healthcare
I’ve seen two extremes in the early retirement community, and plenty in between. For those who generate income from their investments at or below the FPL, some folks are automatically enrolled in Medicaid, at least in states with expanded Medicaid coverage. These folks pay $0 in premiums. Their out-of-pocket costs are sometimes higher, as many Medicaid plans are, might you say, slightly less than fantastic. In the end, healthcare spending on Medicaid is therefore negligible. I hope they have room in the budget for more, but I can’t say.
Alternatively, there are those who budget for the cost of the subsidized premiums plus the full out-of-pocket-max (each year!). In our Colorado case, that budget would easily exceed $10,000 per year, even with the subsidized plans. While quite safe and conservative, I’ve always found this approach to be a bit much, considering the likelihood of hitting the out-of-pocket max year after year after year is quite low. Plus, if my health is in that kind of shape, I’m going to go out on a limb and assume my lifespan is going to be dramatically reduced anyway.
The Original Budget
As of two or so years ago, I applied a budget of $6,000 to our yearly healthcare spending. At the time, that budget was essentially double the estimates of ~$3,000 in ACA premiums, leaving plenty of slop for deductibles and out-of-pocket spending. I knew we’d probably not come close to hitting that $6,000 each year, thereby lowering our spending for a rainy day.
The New Budget
In the last year, especially as we’ve begun to consider relocating to other states with variable healthcare costs, I’ve bumped our yearly healthcare budget to $10,000. Is that excessive? Shit, I hope so.
I’ve always believed that a reasonable amount of fluffing to the spending expectations is a great way to avoid coming back to your old boss in two years with your tail between your legs. Especially if you rubbed it in his face that you were retiring. Unless you want to, of course.
Funding Long-Term Healthcare with the Health Savings Account
When I was at my corporate job, I enrolled in a high-deductible healthcare plan (HDHP). I primarily chose the HDHP because it was cheaper, I was healthy, and I agree that much of America’s insurance spending is a tax on those who are bad at math. However, the most important aspect of a HDHP is the automatic enrollment into a Health Savings Account (HSA).
You see, an HSA is a fantastic triple-tax-advantaged retirement account! I maxed out my contributions each year (which included a sweet employer match), and invested 100% of contributions in Vanguard Index funds within the HSA.
I pay for all healthcare costs out-of-pocket, allowing the HSA contributions to grow like Jack’s beanstalk in the market, tax-free, for decades. As the time comes to consider more late-life and very costly healthcare options, we plan to have a very healthy nest egg of compounding HSA contributions waiting for us like a lovely Irish pot-o’-gold at the end of the rainbow.
Alternatively, after age 65 I can use these contributions for anything, not just medical spending. I can buy groceries, or even a nice pigskin football. So, there’s that, too.
Save More Than You Need
Occasionally folks in the FIRE community get overzealous in a rush to early retirement (we once took it too far). These individuals lower their spending to unsustainable levels, and then quit their jobs when their net worth is nearly exactly 25x this unsustainable spending level (the 4% Rule).
You can do that, and you won’t die or anything, but I’d venture to guess that there will be a strong desire in 5-10 years to start generating income again – or sooner if the market really tanks. The bare-bones spending of youth might eventually start to feel restrictive. The apartment bouncing or slow travel life may grow old as peers and contemporaries settle into homes. Or the ACA could be overturned and healthcare spending goes from negligible to major.
To give ourselves plenty of spending flexibility, we’ve over-saved. If we were to start withdrawing on our savings today, I suspect we’d be somewhere in the 3% withdrawal range to fund our life expenses. Some of this is due to a very serendipitous company buyout and severance package right before I quit anyway, a windfall that amounts to less than 10% of our net worth. But still, it surely helps.
Not to say I don’t believe in the 4% Rule—I do—but I don’t believe in my ability to predict the cost of my life in 50 years.
While it’s important not to fall victim to One More Year Syndrome, going above and beyond the coveted 4% Rule really helps us sleep at night.
Don’t Actually Retire (Too) Early
I’m not done doing important things that probably generate income. At age 36, I have human capital still to spend. Will I go back to a corporate job that pays a big salary? Probably not, but I’m old enough to know to never make absolute statements. However, I will make this one: I’ll make income again in my life.
Also, I (or my wife) might work a job that offers healthcare coverage. The world is your oyster when you don’t commit yourself too strongly to any identity or title.
(Related Post: The Entrepreneur: The Head of the Chicken)
Bottom Line:
- We’ve nearly doubled our healthcare budget to account for potential changes in subsidies or geographic variations.
- We’ve maxed out an HSA account (when eligible) to allow for tax-free compounding growth in the market. This is a key aspect of our long-term and late-life healthcare planning.
- At risk of falling victim to the “One More Year Syndrome”, we’ve over-saved to provide for a lower withdrawal rate on our investments. We believe a combination of budget flexibility, cushioned savings, and plans for income help us sleep well, at least on most mattresses.
Section 4: Let’s Talk About Privilege Again: Who Are Healthcare Subsidies Really For?
Let’s be real folks: healthcare subsidies are not intended for early retirees with a 7-figure net worth. ACA subsidies are designed to assist those truly in need.
So, are we just gaming the system by relying on subsidized healthcare?
Well, yes. Of course. But should we be ashamed?
In addition to being completely within the law and really hard to avoid with a limited income, the “subsidized healthcare” of the United States is still a colossal pile of money. United States healthcare spending is among the highest of any country in the developed world, with less access to many healthcare resources.
I will admit though, I would have a lot of trouble taking Medicaid in our financial position. That just doesn’t feel right, no matter how much I’d like to occasionally stick it to the man. Luckily, we won’t qualify for Medicaid even if we wanted it.
So yes, I will gladly pay for subsidized healthcare while financially preparing for the eventual reality that costs could skyrocket. At this time, we feel able to weather that storm, should it arrive.
(Related Post: Hi, How Are You? I’m Privileged)
Summary:
- American healthcare is dumpster fire. Without an employer-sponsored plan, you are left to fend for yourself on highly variable state markets plans under the Affordable Care Act. Some other options do exist, although they all come with some hair (see other resources below)
- Americans support the ACA. While many lawmakers are not a fan of the ACA, the American public is supportive of the law, particularly coverage for those with pre-existing conditions.
- Healthcare costs are subsidized. For early retirees or anyone with income less than 400% of the Federal Poverty Level, ACA plans are discounted according to a tiered subsidy plan. The full value of assets and net worth is not assessed, only income (MAGI)!
- Will federal subsidies remain in place? With the potential for a conservative majority in the U.S. Supreme Court, legal experts do not (at this time) expect elimination of the federally funded subsidy program. Will the decade-old law weather many more decades of partisan bickering?
- Budget for uncertainty. For those budgeting for their own healthcare plan, it’s important to understand the range of expected costs for subsidized and unsubsidized plans. Know the deductibles and the out-of-pocket max. It’s best not to assume that highly subsidized plans will exist throughout a lengthy retirement, or that your body won’t require some costly out-of-pocket maintenance in the coming years. Have plans for supplemental income, or plan for higher-than-expected spending.
Other helpful resources, including non-ACA healthcare options:
A good comprehensive guide, including non-ACA options: https://www.caniretireyet.com/early-retirement-healthcare-options
Remember, the best laid plans mean nothing if you can’t take action today. Have questions? Need some feedback? Hit us up on the Contact page.
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