OurNextLife.com // The Power of a Low Income in Early Retirement // Keeping Your Income Low to Maximize Health Insurance, Affordable Care Act and Income, Obamacare for Early Retireesgearing up

The Power of a Low Income in Early Retirement

If I close my eyes and picture the images I associate with “retirement,” there’s still a big part of me — despite all the schooling in frugality and the general tenets of the personal finance blogosphere — that immediately goes to the stereotypical “good life.” Being able to travel in style, living in a spacious home, golfing whenever you want, checking in with the financial advisor to see how that big nest egg is doing… (In my imagination, this vision of “retirement” probably looks exactly like a Fidelity ad. Or maybe one for an active senior living community. The power of marketing!) 

And while there’s nothing wrong with those images, the more we’ve come to learn about every aspect of early retirement, the more we’ve realized that our goal should be not the good life, but the low income life, at least until we hit traditional retirement age.

This isn’t a post about saving less (you know we’d always err on the side of over-saving rather than under-saving). It’s a post about the under-recognized benefits of spending less in retirement. Because the less you spend, the less you have to earn from all of those passive sources you’re busily saving now.

And the less you can earn, the more benefits you accrue. Both warm and fuzzy benefits, and cold hard cash benefits.

Think of it as a philosophical thought-starter to assess how much you really want to spend in retirement… and what you can gain when you bring that number down, maybe way way down. Let’s take a closer look.

OurNextLife.com // The Power of a Low Income in Retirement // Keep income low in early retirement to maximize your Obamacare benefits, reduce your taxes and retain maximum flexibility in your plans.

Income Vs. Cash Flow

Income in retirement doesn’t necessarily equal cash flow, or what you have to spend in retirement. As we broke out in this post on optimizing our income for Affordable Care Act (ACA) coverage , many early retirees will have more actual cash flow each year than their income figures will suggest. That’s largely thanks to cost basis, meaning the price you paid for stocks in the first place won’t count against you as income when you later sell those same shares. The same idea applies to rental and business income. Two examples:

Stock example

  • If you bought a share for $100, and it’s worth $150 when you sell it, your “income” is $50 but your cash flow is $150.

Rental income example

  • If you take in $1000 in rent, but have depreciation and expenses that total $400, your “income” will be $600 and your cash flow may be $700 or $800. (Depreciation is the best thing ever.)

This post discusses income, not cash flow. We’re interested more specifically in the definitions of income used by the IRS: taxable income (relevant for how much tax you’ll pay), and MAGI (modified adjusted gross income, relevant for how much health care will cost you). At times we’ll group both together and shorthand them as just “income.” But the overall principle remains the same: there are big benefits to keeping your income low in early retirement, much of which is within your control.

Let’s get one important caveat out of the way first: we don’t always have total control over what our income in retirement is. Stocks could have a banner year and kick out record dividends that we must count as income even if we reinvest them. We could be forced to exercise company stock options upon leaving a job. We could inherit assets that are taxable. Those are all cases where we can’t control our income exactly, but those scenarios are also rare.

Most of the time, and for most sources of retirement income — capital gains, rental income and employment income — we can engineer our income to fit within certain parameters. When we engineer those numbers to keep our income small in retirement, made possible by keeping our spending small, we stand to gain a lot.

(Usual and obligatory caveat: this is not financial or tax advice. Consult your own tax attorney to make decisions relevant to your own situation. We are not liable for any financial decisions you may make based on this non-expert blog. You’re a grown-up. You know the deal.) 

Ways a Low Income Makes You More Powerful in Retirement

ACA Premium Insulation — Starting with the biggie. There has been a lot of bellyaching lately about rising Obamacare premiums, and even claims that the system is “failing” (experts say this is debatable). And it’s true that premiums are rising a lot for higher income individuals and families. But, what hasn’t been reported is that subsidized premiums aren’t changing significantly for low-income people. Why? Because the Affordable Care Act caps premiums at a small percentage of income:

Source: Kaiser Family Foundation

Year to year, the percent change in premiums for people under 400% of the federal poverty line is only a few hundredths of one percent, not the 20-40% or more increases that people over that limit are looking at for 2017. (400% of FPL is currently $97,000 for a family of four, and less for smaller households. Here is a breakdown.) The law also caps out-of-pocket maximum costs for lower income people, so having a low income in retirement both ensures that you’ll pay a low cost for the insurance itself, and that your total for all copays, coinsurance and deductibles will also stay in a reasonable and predictable range:

Source: Kaiser Family Foundation

This page at the Kaiser Family Foundation has the charts above and tons of other helpful info about the ACA, unlike a lot of the other resources out there that purport to help but are either trying to sell you alternate insurance or trying to get you involved in the politics of it all. If, like us, you really just want to make sure your health needs are covered, and you recognize that this is the current law of the land, other great resources include:

And for those who don’t believe our leaders matter, there is perhaps no starker contradiction of that than the differences between states that did and did not expand Medicaid to cover adults up to 100% of the federal poverty level. In a non-expansion state, adults who are extremely poor by any definition may be unable to get any health insurance, and middle income families may not be able to get subsidies, while states that expanded Medicaid are able to offer their residents the health coverage they need and can afford. This is a good breakdown by income tier, if you’re curious.

Mr. ONL mountaineering

Mr. ONL, glad to have health insurance, because falling off a mountain would be expensive

Lower Tax Liability — While we like most of the things that taxes pay for (hooray for schools and roads!) and aren’t generally trying to get out of paying taxes, we know that a lot of early retirees count tax minimization as a core planning strategy. And nothing reduces your taxes like keeping your income low. This post from Go Curry Cracker provides an excellent overview of tax avoidance strategies you may choose to employ, should that strike your fancy.

Portfolio Conservation — My personal favorite. The thought that keeps me up at night — and probably a lot of you, too — is the fear of outliving our portfolio. Or, since we have a lot of money socked away for our later years, the fear of our “phase 1” portfolio not lasting us all the way to age 60. But there’s a solution to that: spending less than what we can afford to spend, which requires earning less each year than we plan to earn, meaning we sell fewer shares than we’d planned to sell. If we have $X budgeted in a given year, spending $.9X or even $.8X will hugely increase our likelihood of success and will allow us to keep more of our assets in stocks where they can keep growing for longer.

Making You Resourceful — Besides the obvious financial benefits of keeping your spending and therefore income low in retirement, the warm, fuzzy benefits are very much worth thinking about as well. Having less cash at your disposal means having to get resourceful. Think: MacGyver. And you know who has awesome self-esteem because he knows he can handle anything? MacGyver. Trusting yourself to figure things out even when the going gets tough is priceless, and when there’s more money handy, it’s all too easy to pay someone else to fix the problem when things get sticky.

Now that we’ve run through the benefits, let’s talk about some steps you can take to keep your income low in retirement.

Changes You Can Make Now to Keep Income Low in Retirement

Structure Your Income for Passive — Where your cash flow comes from in retirement will have a big impact on what your taxable income is, which goes directly to what your tax and health insurance situation will be. And keep in mind that most retirees will not get itemized deductions anymore (which don’t get subtracted from MAGI anyway), but instead will take a standard deduction — so you can’t bring your taxable income number down, for example, by giving a bunch to charity. Here’s a rough guide:

When working to keep your post-retirement income low, know how different income sources are counted!

Dividends, “regular job” and contract work all count nearly 100% as income for the sake of ACA and tax calculations. But selling stocks counts only the gains as income (and the long-term gains are taxed at a lower rate), and with rental income, you get to slice a whole bunch of stuff out of that income, including depreciation and expenses, because rental income is reported on a separate tax schedule. So from an ACA perspective especially, capital gains and rental income are better friends in terms of how much cash flow you get out of a set amount of “income” than are dividends and traditional income.

Prepare to Stop Reinvesting Your Dividends — If dividends are counting against you in your MAGI and taxable income (they are!), then use them as part of your cash flow in retirement rather than reinvesting them. Just make sure you factor in smaller growth moving forward, as most historical growth projections assume you are reinvesting your dividends. This may require rerunning your numbers before you pull the ripcord.

Pay Off Your Home — For most households that own a home, the mortgage payment is by far the biggest budget line item. If you can eliminate this number, you can hugely reduce your monthly cash flow needs, and keep your income correspondingly small. (As ever, there is a lively and never-to-be-solved debate of whether it makes sense to pay off a low rate mortgage early vs. invest that money, but Obamacare subsidies significantly change this calculus. It’s worth running your own numbers using the Obamacare subsidy calculators above. The extra amount you need to invest to make your mortgage payments in retirement could easily be enough to cost you a big subsidy based on your increased income needs.)

With Travel, Think Cash Now, Miles Later — If you’re a travel hacker, we absolutely understand the appeal of cutting down the cost of travel now. But banking those miles to spend in retirement may be a smarter strategy if your future goal is to keep your spending and corresponding income as low as possible. We absolutely recommend continuing to travel while saving up for financial independence, but we mostly still pay cash to travel now, and bank those miles for the future. (I cross over to 1 million air miles this very week, you guys! Call it my second portfolio.)


So close!

Take Care of Your Health — Even with more Americans insured than at any time in recent history (seriously, y’all — record levels, even though most people don’t know that the ACA has spurred this), health care costs are still the leading cost of bankruptcy. Don’t let this happen to you. Eat healthy food, cut out the junk (this will save money too!), dedicate time to exercise, get enough sleep (my biggest health short-coming), and surround yourself with people who make you happy. Taking these steps will ensure that you don’t end up with preventable diseases and will also decrease your odds of contracting the ones we can’t totally control. And in the year or two before you quit working, load up on all the preventive health care you can get, so that you can minimize your health care spending in retirement… though if you get a sweet subsidized plan, you should be able to get all the health care you need without busting your budget.

Take Care of Your Stuff — Stuff isn’t nearly as important as your health, but it can still cost you if you don’t take care of it. Don’t put off home maintenance when the costs will likely multiply instead of just adding up. Keep your car and your complicated gear like bikes tuned up, too. Make sure you store things in ways that increase the lifespan of that object instead of shortening it.

Look for Spending to Trim — The less you can spend in retirement, the less you’ll have to earn. We are never going to tell you to cut the stuff that truly brings you joy, but many of us still have areas of mindless spending where we could tighten things up. Or things we’d unquestionably cut if the stakes were higher — like if we knew we could be paying $100 a month for health insurance instead of $500, or have an out-of-pocket max difference of +/- $6000 a year based on being above or below a key threshold. Trim wherever you can.


Time to Weigh in!

What’s your take on all of this? Do you intend to keep your income lower than you technically could “afford” to, to keep your health insurance costs predictable? To keep your taxes within desirable limits? Just for the challenge of seeing how little you can live on? Any other benefits of living on a low income that we missed but should add? Or think we’re dummies for intending to live on less than we could afford to, because YOLO? Let us know all your thoughts!

(And, because whenever we mention the ACA, someone asks us to defend the law as though we wrote it ourselves, the reminder: We didn’t write it, we don’t think it’s perfect, but we still plan to get our health insurance through it because 1.) it’s the law now, 2.) we value our health above nearly everything, and 3.) it will be our most affordable option and we’d be fools not to take advantage of it. If you still want to debate us on it, I promise to pepper you with smiley faces. You’ve been warned.) :-) :-) :-) :-) :-)

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106 replies »

  1. This post is so true. People retiring cut their expenses quite considerably by just being away from their place of work. eg raffles, staff presents, lunches, morning tea, etc etc etc.

    When retired the need for new clothes is reduced dramatically, travel costs are nil, even the morning cappuccino has gone and the newspaper at lunch time; which all save money as a result! Retirement has a great way of reducing your outgoings without even trying.

    Very good post, regards Adrian

    • This is so true! I went back to work for about 10 weeks and was asked to give to some cause EVERY single week (and some weeks, more than once!) I had been working part-time and ended up having to get new clothes too. I was amazed at how many times my office staff ordered out lunch. I brought mine everyday (and thoroughly enjoyed it and save 9 or 10 dollars each day!) If I kept working, I could easily have spent $300-400 a month on work “stuff” and that’s probably a low figure.
      In terms of ACA, we have health care coverage for the next 7 years – by then, who knows what it will look like? :) I have money set aside already to start preparing for what looms ahead then… Our plan is to keep income low to pay fewer taxes. Our rental income is the current way of doing that.

      • Oh my gosh, I can’t imagine! Good for you, Vicki, for staying strong and bringing your own lunch! And wohoo that you have health coverage for 7 years! I’m hoping that, by then, our elected leaders will have sorted out the issues in the ACA one way or another!

    • That’s definitely true! What we wonder is what new expenditures will pop up to replace all of those things. ;-) And in our case, because we work from home, those work-related expenses are drastically reduced already (hooray for saving that money instead!). :-)

  2. This was our strategy until Mrs. EE got a new job that she loves and provides healthcare at a reasonable price for our family saving us a few years until we have to deal with ACA subsidies. I agree 100% on your strategy for keeping income low to utilize the subsidies and it is absolutely what we would do if necessary. However, just don’t see how that the ACA law is sustainable over the long term as many people are paying for the massive premium increases to cover both themselves and those that don’t pay which is why it is so unpopular among so many. I personally would/will be nervous when the day comes that we have to take that leap.

    • If you want to actually talk health care policy, what frustrates me is that everyone is blaming a law that got lots of uninsured people covered for not getting enough people covered. The reason premiums have risen so much (and as predicted by the CBO, actually), is that not enough young healthy people are signing up to spread out the risk. But then everyone trashes the law… and we think this is somehow supposed to make young, healthy people MORE likely to sign up?! Oh well…

      In any case, I am happy for you guys that you have a non-ACA health coverage option available to you for a few years! That will be such great peace of mind because you won’t be planning around something that moves like quick sand! :-)

      • Ha! I actually didn’t want to start a policy/political debate as I am always pretty allergic to that stuff and allergies have been really bad lately ;)

        I guess what I was saying is that I think that what you’re doing is really smart in making the best of the cards you are dealt, but that we were really nervous about planning years out around an ACA that I think is destined for big changes in one direction or the other and makes long-term planning very challenging and calls for building in flexibility to be able to adapt to those changes (whatever they may be).

      • Haha — yeah, sorry about that. ;-) But amen all the way, brother — it’s hard and often disorienting to try to plan around a law that will clearly change, but with no clear sense of HOW it will change. Flexibility is pretty much everything.

  3. For early retires, I think ACA can be a gift from the gods. I wish in the Netherlands, where I live, your assets didn’t count, but they do. Here, assets are (of course?) taken into account when it is determined who needs financial help.

    So Americans, enjoy the fact that you can have $1 million or $2 million or even more in assets and still can get subsidy “for the poor” for your health care! (Assuming you live in one of the states that have this subsidy). Count me jealous.

    • It is definitely strange that our benefits tend to be based solely on income rather than on assets. Whenever an early retired blogger ends up in the mainstream media and mentions subsidized health care, people get upset about how unfair it is that someone who is able to retire early also gets to rely on taxpayer subsidized health insurance.

      At the same time, statistics show that we are pretty terrible at amassing assets. Maybe the basis on income rather than assets was a feature, rather than a bug, aimed at incentivizing us to invest more and build up our assets.

      Either way, it does create an interesting incentive structure that really makes it advantageous to aim for FIRE.

      • If we had written the law, a LOT about it would be different. :-) Agree with you — there is something unfair about us qualifying for a subsidy when a middle income family with essentially no assets will get much less. You know it was completely a political decision to avoid the ACA being more supposed “welfare.”

    • You certainly know that getting ACA coverage is not without political peril! (We can’t even talk about it here without getting some attacks… though none so far today.) ;-) I *do* think it’s more fair to count assets, but Americans think that it’s “welfare” if you count assets, and “just another program” if you don’t. So anything for the poor has an asset test, and things like Social Security (retirement for “everyone”) don’t. But it’s nice to hear of someone in Europe being jealous of us, for once! ;-)

  4. Though we’d always planned to keep our income low in retirement, I’d not thought through some of these benefits. I’m definitely with you on going mortgage-free into ER, and your point about how that impacts your income particularly for ACA is a great. You’re almost there so I’m sure you will be under that system; I wonder what it’ll be when we retire!

    • Yeah, no idea what’s in store for all of us on the health care front! I’m sure we’ll just always need to stay flexible, because things will change. This is of course just based on what’s in place now! I know we’re all ready for this election to be over, but one of the answers we should all have next week is whether the ACA will stick around at least a little longer or be on the near-term chopping block.

  5. Never thought of the airline miles or saving points for early retirement to keep cash flow low. That is a grand idea – I have been using them as soon as we get them.

    I am going to have to check back and see if anyone gets peppered with smiley faces – we know it’s coming!

    • Haha — I’m ready with the smileys! :-) And if you decide to hang onto your miles like we do, know that a devaluation *could* happen — but we think it’s worth the risk to be able to travel a bunch in the future even on a very low income!

  6. As always great post and completely agree with everything stated. for us we hope this is easier by moving to a cheaper place to start….

    The only other thing I would add, starting this month we are diverting a % of the ‘spent’ bucket into things like ‘future car replacement’ or ‘home repairs’, etc. This also is forcing us to get used to spending less right now and trying to reduce this every year until we are as low as we comfortably can – amazing what habits can do!

    Of course, one can just save extra in the regular post tax bucket and mentally set aside a certain % for things like this, but I find that it mentally helps me bucket this stuff and put it in less volatile investments counting it like a 529 (not in my assets as money is called for spending on something else).

    Ideally in retirement we will get rid of cars and homes and that should help, but if not, it will be good to have that on hand and revisit our plans as we go.

    • I think it’s super smart to save for big ticket items in a post-tax account, so that when your car breaks down, you’re not looking at having to pay taxes on a big chunk of money just to take it out of investments AND possibly screw up your health care to the tune of a big repayment penalty to the IRS on your subsidy!

  7. I was really scared that I would have literally nothing to contribute to this post (I mean…do I ever?! ;D ). But so much of what you have listed as steps to prepare for early retirement also serve as excellent advice right now. Since my dad retired last week (!!), I’ve been thinking a lot about how much health matters.

    • Health is the most important thing of all! I’m so excited for your dad, and hope he is getting into a new groove with healthy habits — it’s so important not just for length of life, but for quality of life, as you well know!

  8. Yup, cutting income can have tremendous advantages, provided we also have a nice little net worth number sitting behind it. We will definitely take advantage of the ACA subsidies as well, although I heard that premiums have risen quite a bit as of late. Like you said, we’re kinda stuck with it now, and any subsidy that we can get, based on a low income, is definitely an avenue that we’ll be taking.

    • Click through the links I shared here on the ACA — you aren’t looking at a premium hike if you’re in a subsidized category (they are capped by law at a percent of your income!), only if you’re above it.

  9. Not sure I would actually buy into the ACA marketplace since BF plans to continue working for a long time to come and apparently health insurance in social services is really good. B ut boy am I glad that safety net is there.

    I also don’t think I would artificially deflate my income for it or other subsidies, mostly because that would require thinking a lot about money post-retirement which is the exact opposite of what I intend to do. And honestly off the top of my head, I can’t think of any other subsidies that aren’t means tested to otherwise tempt me.

    • If you have another source of affordable health insurance, awesome! That takes away a lot of potential headaches in your life, both on the money front and health front! The “thinking about money” is really not *too* onerous — it’s more like a check-in on dividends at the end of the year to see if there’s room to sell any more stock at the end of the year, or possibly do a back door Roth conversion at that point to get up to the ceiling… not something we expect to think about day to day. ;-)

  10. oh as for miles – I really worry about devaluation, so I tend to spend them now but plan spend and applications for the following year so we can stay within travel budget (some years more than others – usually 40% mile spent, rest cash).

    • It’s a fair point, because miles devaluations DO happen. But they don’t happen often and usually aren’t hugely drastic, so in our case, we think it’s worth it to risk a devaluation because either way, it will still stretch our non-cash spending power in retirement.

  11. We will have a modest but not insignificant pension as income floor. That, plus dividends for the taxable portfolio and capital gains from selling any assets will push us up the ACA scale where we will get some subsidy but not huge. Of course, our expenses are higher with a family of four, two boys in elementary school and all the expenses entailed with a growing family. Still, #first world problems.

    Looks like the subsidy through ACA puts our costs significantly lower than what I could get from my company. Of course rising costs will apply to both and we are still considering the pros and cons of both. Tricky decision. The cautious nature in me is very nervous about what may ultimately happen with Obamacare. Thus jumping on my company plan is tempting. I won’t be able to jump onto this plan if I decline it at retirement and choose the exchange route. The analysis just never ends….🤔

    • Yeah, you guys are in an enviable position in terms of having the guaranteed pension income, but you’re quite right that that makes it much harder or possibly impossible to engineer your income into the narrow box we’re aiming for. And I don’t envy you having to make that choice about company health care — I almost think I could choose the company route, even if initially more costly, at least until it’s clear what will happen with the ACA over the long term!

  12. Justin @ Root of Good did a post at one point about how they pay next to nothing for healthcare as early retirees because the system looks at them basically at a poverty level (even though they’re not).

    I’m hoping that healthcare stays on that same path to take care of us on the track for FI, but Obamacare is one variable that’s definitely up in the air. Best we can do is keep an eye on it and hope for the best!

    In the meantime, I’m with you on lowering my taxes by keeping any income at as low of level as possible once I hit FI.

    — Jim

  13. Can you explain the the mechanics of how to execute your stock example? I am in the accumulation stage and only purchasing stocks. When one sells stock, do you have an option to cherry pick which stock to sell based on purchase price? Does the institution the stocks are purchased through provide you a report outlining the stock purchase price, selling rate and potential taxable income?

    Thanks for providing some more explanation of ACA and how it can be used in early retirement. Very helpful. By using the provided calculators the monthly health insurance costs were more reasonable than I was expecting.

    • You’ll have to look at your brokerage account, but most funds will show you “basis” or “cost basis” somewhere in there, though you may have to click a few levels down to find it. If in doubt, call them. If you own individual stocks, you can cherry pick which sell, but generally with funds, you just sell a slice, and so it’s an average of your cost basis and gains over time, since you will have paid a different price every time.

      • Even with funds, many people will opt to go the specific share cost basis route, which is exactly what it sounds like. If you invest over time, you will have some shares with a loss, some with small gains, some with big gains, and you would be able to sell which ever shares make sense for your own circumstances, depending on if you’re trying to minimize taxable income or increase it (one reason someone might want to increase one’s taxable income would be to reach the floor of the ACA subsidies and avoid medicaid.)

  14. Interesting topic, and the source of much debate and second guessing for us. When Mr. AR took early retirement, he opted for the lowest possible monthly pension in exchange for pension benefits for me should he die first (I have no pension and/or IRA of my own). The difference was several hundred dollars per month in income, and the decision is irreversible. At the time it made the most sense, but after we received a surprisingly generous inheritance we had the opportunity to rethink that decision. Although I believe we’d still make the same choice, it certainly would have been nice to have that crystal ball! As far as the ACA goes, premiums for just myself went from $945.12 to $1188 starting January 2017, and I’m seriously contemplating reducing my coverage to keep the premiums under $1000 per month. I haven’t decided yet, but $1188 is outrageously expensive (we might as well be making a mortgage payment). With regard to future income, we continue to postpone any IRA withdrawals until the law forces us to take the mandatory amounts in four years, and I still plan to hold off on collecting social security until the maximum allowable age. Obviously anything and everything could (and will) change, but as long as we can cover expenses on the minimum possible income, we leave the most possible assets for the uncertain future, and that’s the best plan we have for the present!

    • Wouldn’t it ALWAYS be nice to have a crystal ball? ;-) I still don’t know how you all stomach paying those premiums, but I know that you don’t have a ton of choice. :-/ I think your decisions to hold off on SS and IRA distributions as long as possible make a ton of sense, too. If the system is similar to now when we reach our 60s, we’ll happily pay higher tax on our distributions at that point because we’ll know that our Medicare isn’t in jeopardy! But as you said, it could and probably will all change!

      • I’m probably dating myself and sounding overly Pollyannaish (hope that’s a word), but as costly as the ACA is without subsidies, I wouldn’t have been able to retire at all without it, so I try very hard to count my blessings and be grateful we not only have medical insurance, but for today we can still afford the premiums. If o have to choose between $1200 monthly medical insurance premiums or working for someone else, I’ll take the payments.

      • I definitely think “Pollyannaish” is a real word! :-) And I absolutely love your perspective on this — such an important one. If you put the choice in those terms — between a high price for something critically important and working forever for someone else — it’s not a hard choice at all!

  15. It’s not just the affordable care act health coverage that is a benefit. It’s the way the tax brackets are designed that we would be crazy not to take advantage of.

    For tax purposes, Dividends (and long term capital gains) only count as income if you’ve reached the bottom of the 25% tax bracket. Because underneath the 25% tax bracket, those forms of income currently have a 0% tax rate.

    For a single person with a standard deduction and personal exemption, you’re looking at roughly $45,000 of annual income. For a married cuople, double that.

    You can pretty easily have a 7 figure taxable portfolio and not reach any taxation on it if you invest tax efficiently.

    For me personally, I like having some bonds, so I will pay SOME taxes next year, but not enough to worry about it.

    If one feels uneasy about the idea of not paying taxes, one can certainly choose to voluntarily pay down the public debt: https://www.pay.gov/public/form/start/23779454/

    One can also choose to support public services. The local public library comes to mind. If I use libraries on the road, I’ll certainly throw in some cash. I don’t like the narrative that early retirees are cheap bastards that don’t support public services and life off the system. Not to mention the fact that most early retirees probably paid a rather substantial amount of taxes during their working career. :D

    • Absolutely true! We aren’t focused on tax avoidance as you know, so haven’t spent much time looking at these numbers — but they are great to have here in one place. Thank you!

      And lots of services are funded by use fees, so we’ll still be paying for the roads (it’s actually the Tesla drivers and other electric car purchasers who are skipping out on paying for the roads, since gas taxes fund those), and we’ll for sure try to “pay our own way” when we can! (Plus, yeah, for real, we pay more in taxes currently than most households earn in total. So we’ve for sure prepaid a lot of it!)

      • Don’t look at it as focusing on tax avoidance then, look at is calculating one of your near-term required variable expenses. I think you’ll find that staying below the ACA subsidy cliff also generally keeps your dividends and long term cap gains tax free. Fritz at The Retirement Manifesto has a fantastic cash flow model spreadsheet which I found immensely useful and you might enjoy playing with it as it has cells for expected inflation rate and investment return, just change the starting age and expand the rows out. It’s fun to see the lean number that I could live on indefinitely if I wanted to call myself “early retired” It’s obviously lower than I’d comfortable with on a forever retired basis. :D https://docs.google.com/spreadsheets/d/1wv1YYJ1Jt5n329UQ07sqnL_apX-JLxvtghqZJAxpEGM/edit?usp=sharing

      • Yeah, I responded too fast before! Should have said: We already know that the ACA subsidy limits are smaller than the taxable income limits to stay essentially tax-free, so by optimizing for ACA, we also optimize for taxes. :-) But this is great info to share with folks, so thank you!

  16. I’m in my early 30s and many years from FIRE. I wonder what the subsidy landscape will be then. I do hope the ACA gets better, but I appreciate it now since I am a contingent worker and pay for my plan on the exchange. I don’t get a subsidy, but it is cheaper than it would have been otherwise.

    • My goodness, who knows! Anything could happen even in the next few years. The next president will have a lot of say either way. And we’re also thankful, like you, that the ACA is there, or I don’t know if we could even be considering FIRE!

  17. I checked healthcare.gov and health insurance should cost us $250-$350 per month with subsidies. (If Mrs. RB40 retires.) That’s not bad at all. Keeping income low is a good strategy, but it doesn’t have to be that low.
    I plugged some numbers into the tax software and we could rollover about $40,000 from our 401k into the Roth. This will increase our MAGI, but won’t increase our tax. I think this is mainly due to the high tax rate I’m paying on the self employment income and our rentals deductions.

    • That’s awesome, and seems totally reasonable! And you’re right — it doesn’t have to be THAT low, though you guys have a kid, so that gives you a bit more wiggle room. And it’s on our list in 2017 to run all the numbers to figure out the optimal income target taking into consideration taxes, ACA subsidies and standard of living. More to come!

  18. As always, just about more information than I can absorb in one sitting ;)

    We have great (employer-sponsored) insurance right now, though we do pay a share, and it’s one of the biggest things that concerns me about possible ER for us – I simply cannot do without decent healthcare because I actually use mine regularly. Nothing terribly expensive, honestly, but I have to have good doctors who understand my condition so that I can manage my health and keep it inexpensive.

    Like you, I hope that our government manages to get itself on a sensible path in the next several years on this area.

    I’ve always avoided stockpiling miles specifically because of devaluation but also because we don’t travel nearly as much as you do. With a million miles under your belt, most devaluations will be insignificant, unlike my 23,897 miles with one airline ;)

    • Same here all the way on health care — I am less worried about OOP maxes and more concerned with just having solid coverage for normal things, and not having to fight over whatever tests a doctor orders. (I tend to need a lot of tests, for whatever reason.) So yeah, I get it! And that’s a good point about miles. If you’re accruing them slowly, then it probably does make sense to spend them as you go!

  19. I consider myself luck for being Canadian. Health insurance is so much cheaper compared to US. If we make less than certain amount, health care is free.

    Great idea on banking the miles now. That’s something we need to work on. :)

    • Oh, you’re lucky on so many levels! ;-) (We Americans are feeling pretty down from this election — please let it be over already!) And yeah, bank those travel miles for later! :-)

  20. Next year will be the first calendar year in which I don’t have any W-2’s from my full-time job, so that will be our first venture into managing a low taxable income. Like you said, cash flow will be very different from taxable income. I’m not sitting on a ton of capital gains, so we could actually both end up qualifying for Medicaid, even with regular stock sales. Open enrollment starts tomorrow; time to do some forecasting!

    • I’m so curious to know how it all shakes out for you guys next year! I know we’re eager to avoid Medicaid, so may have some years where we do backdoor Roth just to stay above that threshold! But I know you’ve said it’s a good option for you guys, so here’s hoping you can get the best health care at the lowest price! :-)

  21. I’m just going to move in with the hot Dutch guy when I retire and mooch off their healthcare. Problem solved! HA! I could use that crystal ball to see if that would happen and then plan towards that future. Sadly, I have no idea what’s going to happen so I will just have to plan as though I will have to buy health insurance off the market. Considering the alternative just a few short years ago was paying for $$$ plans with lots of restrictions, I’m grateful the ACA exists. (Although it could def use some modifications!)
    PS the graphs were super pretty like normal!

    • Perfect solution! Let’s all find some Europeans to mooch off of, since you know they have the better deal on health care in the long-run. And yeah, totally with you — it’s easy to hate on the ACA, but it’s definitely better than before, even if it can use some further improvement. And thanks on the graphs! It’s all PowerPoint smart art. ;-)

  22. Could you please defend the entire ACA, please? :) Honestly, I’ve read all the posts on it and know the numbers… but it’s still scary stuff. And still expensive (compared to Mr. T’s work plan), the exchange in Alaska only has one option (any idea what the definition of monopoly might be!?), and it’s this one thing that is keeping me from telling mr. t to just be done with work! I’m assuming I’m not alone. :)

    • Here goes: We like health insurance. More people should have it! Oh, more people DO have it now? Then hooray, ACA!

      How was that? ;-)

      And yeah, I’ve been over the numbers dozens of times and it’s still scary for me, too. I don’t know if that will change once we’re on ACA coverage, but we’ll report back! It *does* make me feel loads better to know that we’ll be insulated from price increases… IF carriers keep offering coverage in our state. Fingers crossed!

      • oi! Tell me about it… the ACA should have come with a stricter mandate like switzerland which is free market based but has a stricter mandate so the penalty of not being in the market is actually helpful to getting the healthy people in there too! But I agree yay ACA, now people have insurance! :)

      • I read Reinventing American Health Care by Ezenkiel Emanuel and found his overview and purpose of the act very enlightening. The history of American health care was fascinating. He is biased as he was one of the acts architects. By understanding the intent of the act has helped me be an informed critic. I encourage you to take a look if you want more information. Bill Gates’ review is better than mine.


      • Thanks for the great recommendation! There’s also a really good Planet Money or This American Life from several years ago that delves into the origins of our employer-provided health care system, and how bizarre and illogical that is — that helped me see the whole debate a lot differently!

  23. This is still quite a ways out for me but I’ve thought about it. I’ve worked for the man for 7 years now while my SO has worked in her current career for a couple years. There is a good possibility I call it quits before her since she currently enjoys her flexible career and wants to stay with it for a while (at least for now).

    If I pull the plug in 5 years and she’s still working it could bring up a couple issues, some of which are good. We’d have health insurance through her employer which is awesome, but I wouldn’t be able to initiate a Roth conversion ladder due to our income level. I’d feel like kind of a deadbeat living off her income (even though she doesn’t care since I’m frugal and we’re a team), but I would have significant assets which she would benefit from once she decides to pull the plug. In the end as long as you are on the same page with your spouse, each unique situation has a good possibility of working out one way or another.

    • You should chat with Joe at RB40, since he did exactly what you’re talking about and retired first. I’m sure he has lots of good tips for not feeling like a deadbeat while your SO keeps working. Though in our case, we’ve agreed that we will quit at the same time so that neither one of us gets resentful about it!

    • You and I have so many similarities! One of our “complications” is that I can’t sell off my separate taxable assets without incurring capital gains based on the joint marginal tax rate, so what we will likely do is each year evaluate our needs for the upcoming year and figure out how we will each contribute. If one of us doesn’t have enough cash/income/dividends to contribute their portion (let’s say by $10,000), then that person would transfer $10,000 in separate Vanguard shares to the joint Vanguard account and the person with the income would contribute $10,000 from their income to the joint checking account.

      For 2017, our plan is to do separate everything except contributing a fixed amount monthly to the joint account and keeping a joint cash buffer. We will see how much personal spending we do whether it might make more sense to move all of the spending to joint and then have allowances (or no allowances) in the future.

      • I’ll be curious to know how this stuff evolves for you guys. It sounds impossibly complicated to me to crunch our individual contributions separately — a big bonus to me in having fully combined finances is simplified math! Haha. ;-)

      • Me too – I’m really curious to see how things play out. I’m not sure we want to do this forever but we don’t want to rush into anything yet either… So at the moment it mostly looks like really slowly combining things as it makes sense.

      • I 100% endorse that approach, not that you need my endorsement. ;-) I love that you’re taking things one thing at a time, feeling them out, and then deciding where to go from there.

  24. One of our biggest fears used to be that one of us would get cancer, diabetes, or heart disease and this would be considered a preexisting condition and make us ineligible for individual health insurance. There was also a lifetime limit of benefits, often $1M, which can be used quickly with surgery and chemo. With the ACA, these exclusions are gone, so we no longer have to stay with a mega-corp for employer-sponsored plans. Woo-hoo!

    No, the ACA isn’t perfect, but it does have a lot of good components that promote lifestyle freedom.

    • Amen, sister! We are HUGE fans of those aspects of the ACA — I think it’s easy not to focus on that stuff if you’ve never seen someone go through a major medical issue, but you’re so right that you can hit that lifetime max relatively quickly… or at least you could in the past. So thankful the rules are different now! Because as a pre-existing condition person, that makes a huge difference in my life! I used to not tell my doctors my full deal for fear that they’d report it as pre-existing to insurance companies… what a bad way to manage care!

  25. I find the topic of figuring out which parts of government programs or policies we should or shouldn’t use really interesting. Along with which seem socially acceptable or not. It’s something I had never really considered before this year off. All of a sudden we “qualify” for all sorts of things if we want to opt in. But it seems weird. A few weeks ago I had people ask me if we wanted heating assistance. “Um, no.” They were super confused. Because we easily qualify and it would reduce our heating cost. So they asked, again! “It’s really ok, we are fine with our heating bill.” But then there are other things that we are automatically opted into. Like the child tax credit. Or our local school district qualified for free lunch for every child. No paperwork, no option to still pay. They just did away with the whole pay for lunch system. It was a bit odd, but I struggled my shoulders and said, “Ok, whatever.” If they opted in every child in town, I’m not going to fight it. I like the idea of all the kids in our community getting lunch even if their meth addicted parents don’t fill out the stupid paperwork. We have insurance via Mr. Mt’s military retirement. Which is awesome. But people view that as an earned benefit, so even though it’s tax payer supported, and our cost is super low, no one (including us!) seems bothered by it.

    • That’s all so interesting! With health care, it’s at least straightforward that the ACA was clearly written in a way to avoid it being perceived as the dreaded “welfare.” (Never mind that old school visions of welfare don’t exist anymore — that doesn’t stop politicians from talking about it as though it does!) But I can see how all of these new questions would throw you for a loop, and it’s especially fascinating how the mechanism through which they are applied would make the choice seem fundamentally different. Like clearly free and reduced lunch is meant to be for poor kids, but if your district opts in everyone, then it feels very different! And the child tax credit is not meant to be just for poor kids, so it seems like the default thing to take it if you can (like the mortgage interest deduction, which is clearly actually meant more for rich people). The idea of how we see ourselves (rich vs poor) and how that impacts what programs we feel like are “for us” is endlessly fascinating. In our case, we still feel pretty weird about taking an ACA subsidy (though we’re completely glad we’ll qualify for it, if it survives past the election!), because we feel like that SHOULD be reserved for poor people, which we do not identify as, even though the law makes clear that there is no asset test on purpose.

  26. I’ve been running some scenarios (ignoring my husband’s income for a moment) of how much I would pay in taxes while taking a sabbatical next year and it is basically nothing. My income will be almost entirely eliminated by the standard deduction and one personal exemption. That still feels wrong to me…

    Your stocks example is part of why we’re doing the DAF. We’re actually going to fund it entirely with my husband’s Vanguard shares and leave mine alone because his have a lower cost basis. We then get the full tax deduction of the entire amount donated AND don’t have to pay capital gains taxes on the “sale”/transfer. White Coat Investor said that gains in taxable accounts should be donated and losses harvested.

    Is it qualified or ordinary dividends that contribute towards MAGI for your passive income calculations?

    • If you’re not working, your only income would be dividends and such, right? It seems fair that that would be covered by the standard deduction. You’ll still pay property taxes and sales tax, so it’s not like you’re becoming a total mooch on society. :-) For MAGI calculations (which are probably irrelevant now…), we’ve always counted total dividends, but I don’t actually know for sure.

  27. Nice post for anyone no matter old or young.This is the truth of life.As a parent I advice my son to save from the very first day he starts to work.Most of the people get in trouble when they reach the retirement age.My opinion is save a small fraction from what you earn each month in a bank. You will be able to overcome the retirement problem.Remember not to expect large heaps of money out of this option but this will leave you enough money to survive in your last few years.

  28. Concerns me that people in their 30s/40s are so focused on ACA giving them free healthcare and glomming off the work of others. Why do I have a feeling that Trump is going to use this blog as a real-world example of why ACA isn’t working.

    Clearly they need to make active participation on the workforce a prerequisite to get ACA – unless an active waiver is applied for.

    • A worker state in which everyone is required to work to get basic services is called communism.