Last week was a big week in the U.S., and whether you’re happy or sad about the outcome, the man the electoral college will be electing as president will have an impact on everyone who is already early retired, or who is eyeing early retirement, at least if you plan to stay in the States.
One of the biggest reasons we had always planned to retire in 2017, not in 2016, was because we wanted to know whether the Affordable Care Act (ACA) would be likely to stick around beyond Obama’s term in office before we left our jobs and had less flexibility to adapt to big changes. The ability to buy affordable health insurance under the ACA has been a huge boon to early retirees, and if that goes away, then a lot of calculations will have to change for a great many of us.
And now we have the answer about the election. And president-elect Trump has promised (and then unpromised) to repeal the ACA, along with a host of other non-specific promises like cutting taxes, ending trade deals, making the Fed less independent and changing monetary policy. What does it all mean for us, and for others in similar situations?
While you know we have strong feelings about a lot of his views (topping the list: not believing in global warming, his statements on women, people of color, LGBT people, non-Christians, and his inciting of violence at the rallies he apparently intends to keep doing as president, etc.), this isn’t that kind of post. This is about how a Trump presidency will affect our finances, and whether we need to re-evaluate any of our plans accordingly.
Though a lot of things won’t be clear for months, let’s take a look at what we currently know about Trump and early retirement, from health care to taxes and beyond.
Potential ACA Repeal
Starting with the biggie first: Obamacare. The ACA has significantly increased people’s ability to retire early, because it gives people who aren’t connected to employer-based insurance the ability to buy health insurance at essentially a group rate, because the risk is shared across a bigger population, and it gives us all protections via bans on denying coverage for pre-existing conditions, and on capping lifetime benefits.
One of Trump’s main campaign promises — echoed by GOP leadership — was to “repeal and replace” Obamacare. (He’s not even in office yet, and he’s already walking that promise back, but it’s clear that big changes will happen nonetheless.)
For the 20 million or so Americans who currently have ACA coverage who wouldn’t otherwise be eligible for or be able to afford health insurance, repealing the ACA will be devastating, unless it is replaced with something with roughly equal federal subsidies, which Republicans are staunchly opposed to. So for those without the means to pay more, this will clearly hurt, regardless of what the replacement plan is. But let’s assume that early retirees with sizeable assets aren’t in that category. Here’s what we know right now on the ACA:
Could the ACA be fully repealed? Can Trump actually repeal it on day 1, as he said in his election night speech we wants to? Experts say no, including former Senate Majority Leader Bill Frist, a physician and staunch Republican. Full repeal would require 60 votes in the Senate, which Republicans don’t have. They can, however, repeal parts of the law through the budget process, but that will take more time, and Trump himself can undo parts of the law through executive order, such as the mandate to cover contraception (if you want them, get those IUDs before January 20, ladies. Speaker Paul Ryan also won’t say whether contraceptive coverage will make it into the new law).
Many believe that Congressional Republicans will not want to be blamed for taking coverage away from those 20 million Americans, and theorize that they won’t fully repeal the ACA until they have a new plan ready to go into effect, but will instead chip away around the edges. Figuring out exactly a new law looks like will take a while, since current outlines of alternate health care plans are not especially detailed. During the fight that is sure to come over details of a new plan, parts of the ACA are likely to stay in effect, though they will almost certainly repeal the individual and employer mandates at their first opportunity, along with the minimum benefits requirements and individual subsidies, making health care immediately more expensive to retirees. Of course, others think Congress will try to repeal it all before they have a replacement ready, which will mean that those 20 million lose coverage, and will raise a bunch of questions about what will happen to popular provisions of the law, like annual maximum limits, being able to stay on parents’ coverage until age 26, and — most importantly — coverage for pre-existing conditions. (For what it’s worth, Trump currently says there will be no loss of coverage for anyone… we’ll see.)
Will pre-existing condition coverage go away? There’s a bit of an economic quandary that Republicans will now have to tackle, which is how to keep costs low without an individual and employer mandate, which they have sworn will be the first thing to go. In short, here’s the challenge:
Young, healthy people don’t see a need for health care, and don’t typically buy insurance. However, older and sicker people do, because they desperately need it. That means that policies become expensive, to cover the costs of those older and sicker people. You need younger, healthier people in the pool, too, to spread out the risk and costs. That has always been the intent of the individual mandate: to get those young, healthy, cheaper-to-insure people into the pool to keep costs down for everyone.
The main failing of the ACA to date has been not getting enough of those young, healthy people to buy in, so the cost savings were never realized. But now, let’s consider what Congress will do about their repeated promises to get rid of Obamacare’s main provisions. Without an individual mandate, which Republicans staunchly oppose, you can’t contain costs for people’s pre-existing conditions, because you won’t have enough young, healthy people in the system to even out those costs. But Trump is now promising to keep coverage for pre-existing conditions while also bringing costs down, which is hard to understand mathematically.
A big way to cut those costs would be to deny coverage for pre-existing conditions, which was the norm before the ACA went into effect. Of course, doing that is not without shared cost, either, as losing coverage for pre-existing conditions will make people with chronic conditions less likely to seek preventive care for those non-covered conditions, and instead only seek care once things have reached an acute or emergency level, when treatment is much more costly. (They are also more likely to go without insurance if the cost goes up, which will magnify this problem.) Worse, if they can’t get coverage for those conditions or are uninsured altogether, then they are unlikely to be able to pay their medical bills, which shifts the costs to all of us in the form of — you guessed it — higher health care costs. It’s this very problem that the ACA sought to address, and for which Republicans haven’t yet offered an alternate solution. We’ll have to wait and see where this goes.
What about subsidies? Trump and Congressional Republicans have made clear that they plan to do away with the subsidies that help early retirees as well as many low-income and working families. And they have said that they plan to shift Medicaid to a block grant system, and remove federal incentives to expand Medicaid to adults above the poverty line, which will take away the subsidies for even more early retirees on the lower end of the income spectrum (not to mention actual poor people, who need it more than we all do). While this may sound innocuous, historically block granting has led to bigger hurdles between low-income people and benefits, which could impact early retirees. We are in the group of people who will be affected if Medicaid expansion goes away (our entire income plan will be nullified if this happens), so we now have zero idea what we might expect to pay for health care once we lose employer coverage.
What’s coming instead? Every indication suggests that the GOP will be interested in shifting toward a system more heavily focused on health savings accounts, perhaps accompanied by tax credits to be used on state-level coverage. And while the FIRE community tends to love HSAs, we generally love them in concert with traditional health insurance that has the protections guaranteed by the ACA, like an annual out-of-pocket max, and no cap on lifetime coverage. If we shift to a system where we’re solely reliant on our HSAs, then costly health events like cancer, a car accident or a chronic condition go back to being things that could bankrupt us, even if we’ve saved seven figures. That prospect is beyond scary to us, so we’re anxious to know what options the Republican-controlled Congress will give us. And shifting health plan oversight to the states will mean that states which have historically made things tough for the poor will likely have health plans that are extremely costly for early retirees, while states that expanded Medicaid will likely be more focused on ensuring near-universal coverage. (This might be reason enough to consider moving to a different state if you’re in a non-expansion state.)
Could catastrophic coverage plans be the answer? We’d expect that plans that cover only catastrophic events will return in this case, but those plans don’t cover any sort of routine care, expensive things like mammograms or MRIs, or prescription drugs. Many early retirees would have no choice but to move abroad and get their health care in less costly countries — or to forego preventive screenings and routine health care at their own peril.
What happens now? In the meantime, consensus seems to be that folks who are signing up during the open enrollment period now will still have their ACA coverage start January 1, and that it will have to stay in place until at least the end of 2017. So if you were planning to get on Obamacare, don’t let the election results stop you — hurry up and sign up during the short open enrollment window. Just keep your eyes open for new developments. (And seriously, stock up on birth control. I’m 100 percent sure that coverage is going away.)
The tax changes promised during the campaign could potentially be favorable to early retirees if they happen, but we shouldn’t necessarily root for them — analysts have said that, while standard deductions would increase for everyone including lower-income retirees, Trump’s tax proposal would increase deficits by nearly $10 trillion over a decade, and would increase our national debt to nearly 80 percent of GDP by 2036. Paying off that much debt would virtually require higher taxes in the future, or if we “refinance” our debts (also known as “default on”) as has also been promised during the campaign, then we can expect a huge loss of investor confidence, a massive devaluation of the dollar, a global financial crisis, and who knows what else. Not to mention that you probably hold lots of U.S. treasury bonds in your portfolio, as we do, and so a bond devaluation will affect you directly, doubly so if the dollar also tanks, triply so assuming that all the markets tank together.
And cutting spending to pay for the cuts doesn’t add up mathematically, so that’s not the answer either — this article explains in detail how you can’t get to the numbers Trump is projecting, especially if he exempts Medicare, Social Security and defense from cuts as he’s said he would. As for other campaign promises, they have government spending implications. Rounding up and deporting millions of undocumented immigrants would increase federal spending enormously, as would investing in infrastructure as promised (not that that makes the latter a bad idea!). It’s unknown whether Congress will enact the tax cuts as proposed, but we know we won’t be hoping for them, based on all of that. Tax law is already exceedingly kind to early retirees who keep our incomes fairly low (which doesn’t necessarily mean keeping cash flow low), so additional tax cuts are of little value to us. Plus, we like roads, schools and national parks, which taxes pay for.
But, given that the GOP now controls the White House plus both houses of Congress, we should all expect that tax cuts of some kind are coming, presumably along with some spending cuts that will upset some people. We’ll have to wait and see what they are.
Market futures tanked on election night in response to the results, but then markets ended up the next day. So the markets clearly haven’t decided what it all means.
As for economists, experts on both ends of the political spectrum, including those who advised Republican presidents, have generally predicted that Trump’s isolationist economic policies would lead us into recession, perhaps a long-term global recession. But, many of these same economists also predicted that the Brexit vote would cause immediate recession in the UK and Europe, and that hasn’t happened, at least not yet.
One thing Trump has made clear, however, is that he disapproves of the Fed’s recent monetary policy decisions. Janet Yellen’s term at the helm of the Federal Reserve ends in 2018, so Trump will appoint her replacement along with several members of the board of governors. The Economist predicts certain near-term recession if Trump pushes for more hawkish monetary policy from the Fed. If, on the other hand, he pushes for monetary policy that is geared toward getting him re-elected (which would also mean a less independent Fed), we’d be less likely to see a recession, but more likely to see high inflation, which would hit those on a fixed income (ahem, early retirees) hardest.
It’s hard to know what Trump will decide, but what we do know is that we’re due for a recession anyway, by historical standards, and that presidents need Congress to act on their economic agendas. Will members of Congress and Senators really vote to abolish existing trade deals? Or propose isolationist policies, against the advice of every economic adviser? Or vote to increase the deficit and national debt to record levels? Add another one to the “wait and see” list.
In the meantime, we’re talking about saving more than we thought we needed, even though our retirement budget is already significantly padded, just in case the next recession is longer than recessions tend to be. With my hefty travel miles balance (crossed a million miles!), we know we can still travel for years even if we don’t have much money to spend, so long as we travel to inexpensive places.
And while home, we can still do the outdoors activities we love that are or can be free (cycling, backcountry skiing, hiking, etc.), regardless of economic conditions. But still, that extra extra padding will give us more peace of mind. And we might try to keep consulting immediately after leaving our jobs, just to keep a foot in the door. Because going back to work will only get harder than it already would be if we find ourselves in an extended recession.
Potential for Moving Abroad
It was widely publicized on election night that the Canadian Immigration site crashed because so many Americans were researching how to leave the country. But lots of early retirees decide to leave the U.S. for a whole bunch of apolitical reasons — geographical arbitrage, tax advantages, cheaper health care abroad, or just to see the world. Like our friends Jeremy and Winnie who write Go Curry Cracker.
While the election outcome hasn’t changed anything at this point (though it’s not hard to see how an “America first” agenda could sour relations with some countries and make travel harder for Americans), it’s already true that moving to virtually every English-speaking country in the world is exceedingly difficult. And if you’re planning to be early retired when you move, then your chances drop to almost zero, because countries are mostly only willing to take you in if you have skills that align to their most in-demand occupations, and you plan to use them while there. But even then, to move to an EU country, you have to prove that you’re not only the most qualified person for a given job in the country, but that you’re the most qualified person in the EU, and that means competing with people who certainly have many more language skills than the average North American. To move to Canada, New Zealand, Australia or the UK, you also have to prove that your skills are in-demand, that you have lots of assets and are in good health… and that you aren’t too old, which most define as mid-30s or younger.
Of course, going “permanent nomad” is still very much an option, but expect to be time-limited in most countries by visa periods, and to pay more to live in more short-term rentals. Or move to a less developed, non-English-speaking country. Or, if you’re dead set on moving permanently abroad, try New Zealand. They have the most lenient requirements on new immigrants and have been actively working to recruit Americans who are considering moving to Canada.
As for us, we’ve always planned to keep the U.S. as our home base, and we’re not changing that plan as of yet.
What’s Changing for Us?
There’s way too much in the “wait and see” column at this point for us to know exactly how the election affects our early retirement plans. But we do know that this outcome is forcing us to cool our jets. While we had been saying that we could retire earlier in 2017 instead of at year’s end if we get good year-end bonuses this year, given how ahead-of-schedule we’ve gotten, we’re now recognizing that we can’t make any big leaps until we know for sure how we’ll be getting our health care after we retire, and what it’s likely to cost. Health care is too important to us, and its costs are potentially far too high, to gamble on it.
We know that not everyone is as risk-averse as we are (okay, mostly me), but a single bout of serious illness could wipe out a person’s savings before the ACA went into affect, and it’s possible we’ll be back in that situation very soon. Regardless of your politics, this fact should breed caution in any financially prudent person’s mind.
One (tiny) potential upside. Because we’ve done all of our retirement planning in the era of the ACA, we’ve been building our retirement income plan around the assumption that we wanted to stay within Obamacare subsidy limits, which has meant constraining our retirement income. If subsidies go away, then the only downside of earning more in retirement will be paying a little more tax. But even in the highest brackets, which we surely will not be in, you still always come out ahead by earning more. So the disincentive to work in retirement will go away if subsidies go away, which could give us more flexibility. That said, if subsidies go away along with annual out-of-pocket maxes and lifetime caps return, then we’ll clearly be worse off. So we wouldn’t call this an actual upside. Again, we’ll see how this shakes out.
If you’re dead set on retiring now, this might be a good time to explore your options for expat living, to try to find a spouse who can get you legal residency in a country with better and cheaper health care, or to go ahead and accept that vampire’s offer of immortality. (Bad time for a joke?) As for us, we’re way too attached to each other and where we live to consider those options, so we might find ourselves working just a bit longer until the way forward becomes clear.
How About You?
How does the election outcome change your or not change your plans? Anybody going to delay your early retirement to see what’s coming? Or trusting that you’ll be able to figure it out no matter what? For folks who are already retired, what does the potential loss of ACA benefits do to your thinking? Let’s discuss in the comments!
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