At last, it’s official: we are early retirees who have health insurance.
“At last” because it was not as easy to get that Affordable Care Act (ACA)/Obamacare insurance as we’d believed it would be, despite all my familiarity with the health care exchanges, and despite how many times I have gone through the estimation process on our state exchange site.
But I’ll get to that. And to the big surprise that we wish we’d known about — and that you should know about if you’re planning to retire early and buy an exchange plan.
Here’s how it all went down.
Estimating Coverage and Costs for Health Insurance Plans
California has its own exchange, Covered California, which we used instead of Healthcare.gov, but the process is otherwise pretty similar. Whether it’s on the federal exchange or a state exchange, you can go in anytime and estimate what your health insurance would cost at certain income levels.
The Healthcare.gov form is spread out over multiple pages, so I can’t show it here. But the California form is all on one page, and asks for the same basic information:
Covered California estimation tool
I have been plugging numbers into this tool for years, to continually assess what we’d need to save for health care in our early years of early retirement, so was more than familiar with it. And plugging in some numbers kicks out info like:
Example of plan options
Using the federal tool, I pretended we live in Mesa, Arizona, and with the same parameters, the plans there came out on Healthcare.gov as:
Healthcare.gov comparison for Maricopa County, AZ
If you plug in similar income levels in different states, the costs can vary dramatically at higher incomes, but at lower incomes that are covered by the premium assistance tax credits, the net costs come out very similarly.
Picking An Estimated Income
Of course, playing around with an estimator tool and actually buying health insurance are two very different things, and the first step in getting the real deal was actually nailing down an income figure for 2018. Retirement cash flow and retirement income are two very different things, and for us in the early retirement income model we built for ourselves, given the subtraction of depreciation from our rental income, and the subtraction of cost basis from our sales of index fund shares, the only straight up income we’d have would be dividends and a small amount of interest from our personal loan repayment.
Under that model, we could have a very low income from a tax and health insurance perspective, though it would still net us ample cash flow. And that very low income would mean extremely low cost health insurance. Based on what we’d originally estimated our income to be, we might have even been able to get super cushy insurance like this:
In fact, there is even a chance that we could have to work to stay above Medicaid eligibility levels based purely on income, not cash flow. And in California, where MediCal (the state program name) is notoriously bad because so few doctors accept it, we did not want to be forced into the program.
In the end, though, we decided to project significantly higher for our income for 2018, for a few reasons:
- We have realized that we will earn some money in retirement, and anything we earn will be fully considered as income, not just some marginal part of that.
- Mark already has a few contracts lined up for this year, basically to pad us while we’re in this ridiculous health care limbo, and also while the markets continue to climb irrationally.
- I have a few paid speaking gigs lined up that will count as income.
- If we earn less than our projection, we can get an extra tax credit when we file our 2018 taxes. If we aimed lower and came in above that, we could have to pay back the tax credit and some cost sharing reduction (CSR) subsidy, plus potentially a penalty. We’d rather get money back than owe.
- Given the legal battles over the CSRs, we feel icky using them when there are others who need them far more than we do. The tax credits are a different thing, and we feel less ambivalent about them. So we feel better projecting an income that qualifies for tax credits but not CSRs.
Of course, projecting a higher income meant a pricier plan. Instead of the low premium, essentially zero deductible and low copays from the Silver 94 plan, our Silver 70 (meaning it covers approximately 70 percent of costs) now looks like this:
Both Healthcare.gov and CoveredCA.com (and all the state exchanges I know of) have prominent links to update your information, so if we get halfway through the year and realize that we aren’t earning extra income, then we’ll go in and revise down our projection, and reduce our premium costs more.
The Surprise and Headaches // What We Wish We’d Known
So here’s a fun fact we just learned that we hadn’t seen written about anywhere:
When you apply for coverage, they run your projected income against your past tax returns. If there’s a significant difference, you get flagged.
Obviously, for early retirees leaving higher paying jobs for zero paying non-jobs, your income is going to reduce a whole lot. Meaning we’re all going to get flagged.
In our case, getting flagged meant getting kicked into California’s Medicaid Hell Maze, which meant days of calling various offices only to be told they couldn’t help us, until we finally got a hold of the person in our county social services office who could go into the system, reassure it that we weren’t Medicaid-eligible, and then kick us back out into the regular exchange plan system.
This added days, and many, many hours of phone time — plus stress! — to what is already a fairly opaque process.
If we had it to do over again, we wouldn’t break the income out in the application form the way they asked for it (W-2 income, dividends, rental, pensions, etc.), and would have just put our whole total into the W-2 box. We still would have been flagged because the total is much lower than our last tax return shows, but it might not have been flagged for the Medicaid Hell Maze.
The Benefit of a Qualifying Event
Surprising as this may be to those who know my love of planning, I waited until fairly late to apply for coverage. California’s open enrollment goes six weeks longer than national open enrollment (until January 31 instead of December 15), and I mistakenly believed that the coverage was retroactive like COBRA. (Dumb, I know.) But we had such a long to do list otherwise, plus the stress of wrapping up work, and this was one thing that seemed like it could slide — so I let it slide.
I ended up applying over the holidays, thinking that was still well before the end of open enrollment, and would make a January 1 start date for our insurance easy. I learned too late, though, that even with the longer open enrollment period, the deadline for a January 1 start date was still December 15, just like on Healthcare.gov. (D’oh!)
But here’s the good part: because we had a qualifying event (in our case loss of health insurance because of job loss), we were eligible for a January 1 start date even though we applied in late December. Of course, the Medicaid Hell Maze process took us into the first week of January, so I definitely had a few weeks of mild panic that we’d be uninsured in January. (We could trigger COBRA retroactively, but that’s well over $1000 a month for the two of us, so not a good option.) But after we escaped the maze, I went back to the Covered California folks (who are all super nice, btw) and asked if they could please backdate our start date, because Hell Maze. But also mostly because qualifying event. And they made it happen.
So that’s a big lesson worth sharing: if you’re getting exchange health insurance because you’re retiring, flaunt that qualifying event and get your coverage sooner than you might otherwise be able to. And keep asking.
Side note: Even though the ACA individual mandate was repealed in the so-called “tax reform” bill, there is still a penalty for being uninsured in 2018. Though you’re allowed a gap in coverage of up to two months without having to pay the penalty. So if we’d been uninsured for January, we wouldn’t get hit with the penalty.
The Case for Mortgage Payoff
So you know that debate in the early retirement community about whether it makes sense to pay off your mortgage or not before you retire? Here’s some hard proof of why we felt so strongly about paying ours off.
While none of us know how long the ACA will survive in its current form, as long as it does, there is an extremely large incentive to keep your income down. And if you save proportionally more to be able to keep paying off a mortgage in retirement, you push your income higher, and potentially lose a sizeable tax credit.
Let’s say you need an additional $10,000 in annual income from all sources to cover your mortgage payments. If we’d added $10,000 to our estimates this year, we would have gone from the plan above, with a $755 monthly tax credit ($9,060 per year) to this:
Notice the tax credit there? Zero. So we’d earn $10,000 more but our health care costs would go up by $9,000+. Not a great outcome. We’d actually have to earn $19,000 more to net out at $10,000 more, and that’s not taking into account tax implications of that higher income.
That’s why it’s so important to know where you are in relation to the tax credit and subsidy cliffs. (<– Great post by Justin at Root of Good that I link to all the time.) At certain income levels, adding enough to cover your mortgage might be no big deal, but at others, you come out far worse.
Though we aimed pretty high this year, we take comfort in knowing that we can live happily and comfortably on a very small income, and can get that cheap health insurance if we scrap our side hustles. (Although we have no intention of doing that until it’s clear whether the ACA is actually going to survive. Whether it’s this system or another, we — and millions of other people — would just appreciate knowing what to plan for. In the meantime, we have no intention of burning bridges to paid work, even though our top priority is enjoying our retirement, not earning money.)
Keeping Up on Health Care Developments
Beyond eliminating the individual mandate for health insurance in 2019 and beyond, Congress has yet to make any meaningful changes to the Affordable Care Act, and it certainly hasn’t repealed Obamacare as promised. That’s not to say any of us can bank on this legislation being here long-term: the White House is currently taking administrative action to weaken the ACA by, among other things, loosening the rules on short-term and catastrophic plans to allow them not to comply with the 10 essential services and other ACA requirements. Some experts predict this will draw healthy people out of the market, as will the demise of the mandate, and further destabilize the exchanges.
We shall see. Whatever happens, I’ll keep writing about it here, because this stuff is a BFD for those in the early retirement camp in the U.S. (And everyone in the rest of the world, keep your gloating to yourselves!) ;-) Stay tuned!
Let’s Talk Health Care!
Anybody else have some harrowing health insurance sign-up stories you’d care to share? Have other questions I haven’t answered here? Trying to figure out the question of what your projected income will be, and want to share your logic? Let’s discuss it all in the comments!
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Categories: we retired early
Yay government. (Hopefully online sarcasm still comes through clearly.) I had a similarly bad experience with it once. Then once you get on, you realize the service isn’t anything like private insurance: website and logins inexplicably down for days, hard to even pay the bill, nigh impossible to reach anyone on a phone, and so on.
I am beyond glad not to be dealing directly with Obamacare anymore. I highly recommend finding a broker or someone to help you through the process for anyone starting it (like Health Sherpa, which was started by the guys who made a price-comparison site over a weekend, while the government hadn’t done it yet after months). The Health Sherpa folks were far more helpful than an actual insurer. (And I get nothing for plugging them, they were simply that helpful.)
I’m confused by this only because I’ve also had nothing but negative experiences with private insurers! ;-) In fact, the biggest headache from all of this has come after we got handed off to Blue Shield. The Covered California folks were much nicer and more helpful by comparison. Not that any of this is fun or easy or any of that, but in this instance, my takeaway is definitely not to hate on the government.
So in a nutshell, it is not possible to retire early. Why the long winding arguments that lead to nowhere. Just keep your jobs or find new ones even if they suck.
Hmm.. my comment was directed at the article, not you specifically. The UI for this side is a bit difficult to use.
I know! Scrolling down is so hard! For future reference, if you scroll to the bottom of the comments, you can leave a “non-reply” comment in reference to the post. If you click “reply” next to someone’s comment, it will reply to their comment. The UI is what is it because this is an ad-free site with content provided to you at no charge. If you’d rather read sites for of pop-ups, flashing ads and people selling you things at every turn, I’m sure you can find a more satisfactory UI there.
Tanya, this is also my single biggest worry for early retirement, as we have a young daughter and need good coverage for our family. It has been hard to find reliable information that would be relevant for our situation and I appreciate SO MUCH you providing specifics and lessons learned!!
So glad it’s helpful! Fortunately, the parts of the ACA that require insurers to cover everyone regardless of health status and to cover care for pre-existing conditions still survive, so that’s good for everyone!
Hi. I’m confused about CSRs vs tax credits. How do you know when you’re getting one vs the other when you sign up for a policy? Thanks.
CSRs show up as a higher actuarial value plan, not a reduced premium. So if you are getting CSRs you will see an option for a Silver 87 or a Silver 94 plan, not just Silver 70 options. The subsidy shows up as a reduction in the premium amount.
Sorry, that should say “not just a reduced premium”
Thanks Lauren
:-)
And just a slight tweak that it’s the tax credit, not the subsidy (CSR), that reduces the premium. Thanks for chiming in to clarify this point!
You qualify for CSRs between 138% and 250% of poverty level. Tax credits continue to 400% of poverty level. Based on your estimated income and family size, you get slotted into 1 or both, or fall out the top. Below 138% you get shunted to Medicaid.
Thanks Acastus
All true for states that have expanded Medicaid, but not necessarily true for others. More info at https://www.healthcare.gov/medicaid-chip/medicaid-expansion-and-you/.
I think others have chimed in, but I’ll add that you know if it’s a CSR if a silver plan shows more than 70 percent coverage. The tax credit just reduces your premium, and you can choose whether to get it in advance and have it go toward paying your bill, or you can claim it back the following year when you do taxes. (The latter would be advantageous for someone who can afford to go out of pocket for the whole amount and doesn’t want to risk owing any of it back.) We have an early retired friend who does this, and while I can’t imagine paying $14K out of pocket this year just for premiums, it would make the whole thing easier if we weren’t having to verify our income when it’s close to impossible to verify!
I agree completely with Mr. FWP. We found it very helpful to have a skilled and knowledgeable broker to help us navigate the ins and outs of the ACA. That said, in the years since the act was implemented, we’ve really learned some additional things. We need to be very careful not to make TOO much money in our side hustle business! We have had a year when we made too much, and that payback is NASTY! If you are going to have a side business in retirement and utilize the ACA, I highly recommend also having a great accountant! ~ Lynn
I think the brokers and navigators can be a huge help, so I’m glad you had the benefit of one! I talked to one and found I knew much more than him, but that’s me and my health care nerdiness. ;-)
Oh, I soooo agree. I was a health care nerd as well. I found myself thinking, “How do people with a lesser understanding even BEGIN to navigate this stuff! Our broker had a really firm grasp of the benefits and drawbacks of all of the available providers and plans in our local area – so that’s where she was really helpful! ~ Lynn
That’s a big value for sure! If I’d thought to ask that question, I probably would have gotten the value. Instead, I manually searched for all of our docs and local facilities. So good tip for others! Talk to those navigators for local info!
Healthcare is such a nightmare.
I’ve been unemployed for over a year now since my layoff. Fortunately my wife was smart enough to investigate all the options available to us for healthcare. Ironically, we’re well off from an asset perspective, but have zero income currently since my wife is a stay at home mom.
End result – double comma net worth, but get free health insurance via MediCal.
The system may not be broken, but it is severely sprained.
100% agree! I have no guilt taking a tax credit because I am a believer that health care is a right and we should be finding a way to make it affordable for everyone, and lower cost on the whole. (Like we have got to rein in all the unnecessary tests and procedures that are pushing costs up but not improving people’s actual health or longevity.) But I would probably go farther than you would and say it IS broken.
What is that quality rating about and why is it 2/5 stars?
Oh, don’t get me started on that. ;-) Short answer: it’s member reviews, and there was no option that had a higher rating.
Weird, maybe some political stuff going there with reviews.
Maybe. Or maybe private insurers in the U.S. are just bad. ;-)
I agree with the advice to use a broker. We live in Pennsylvania and used an independent agent. He was very good at explaining and helping us navigate the process, which was challenging even for him, as things kept changing throughout December 2017. His help cost us nothing, and saved us so much effort and angst in deciding on and enrolling in an ACA plan.
I’m glad you got the benefit of his help, Cindy! (Also, so appreciate you reading and commenting!) ;-) I spoke to one that our state exchange referred us to, and found that I was much more knowledgeable than he was, so just went it alone, but I know that says more about me than about him. Haha.
Thanks Cindy. I live in PA as well and am considering early retirement. Healthcare is the biggest reason I have yet to pull the trigger. Would it be possible to share the broker you worked with? (assuming that is okay to post here). Thanks.
Cindy,
I too am in PA and was wondering the same thing Chris F asked in regards to the broker. I will be retiring in February of 2019 and need to know if I apply during open enrollment or if I need to wait and enroll under the special circumstances (loosing coverage) after the open enrollment period.
Hi Linda — While I can’t speak to the particulars of PA, you should at least plan to enroll during open enrollment. The “qualifying event” enrollment we did was more stressful than I think it would have been in open enrollment, and there was a larger lag in coverage. I think we could have avoided that lag with open enrollment.
Tanya,
If I enroll during open enrollment, won’t i need to note that at that specific time, I still will have insurance through my employer? And if I state that, won’t I be disqualified from even making an application? Your guidance is most appreciated, btw. Everyone is telling me I can’t retire until I’m at least 65 bc I won’t be able to afford insurance. I’m feeling very unsupported by may family.
You might want to call one of the health care navigators in your state who can give you more specific guidance on how and when to do this. They should have time to talk to you right now while it’s not open enrollment! Good luck!
Tanja,
I posted a reply and realized after it posted I spelled your name wrong and there were a few other typos. Please excuse all of the errors….especially the name…how embarrassing! :)
No worries, Linda! You were not the first to misspell it and you won’t be the last. Appreciate your follow-up note very much, though! ;-)
Healthcare is the reason I can’t properly fantasise about living in the US (politics comes a close second). With a pre-existing condition I would never get treatment for anything! I pay a lot of money out of pocket for a couple of different therapies here in the UK with ‘free’ healthcare for everything else but it’s very reassuring to know I don’t have to add the fear of treatment cost to the pain and upset of being ill in the first place. I used to get really annoyed about car park fees at the local hospitals but began thinking of it as the cost of treatment and I feel much better about it if my physio costs me £3 a week for parking.
Don’t beat yourself up about the deadline thing. Happens to the best of us.
I don’t blame you! Though we do still have guaranteed coverage for pre-existing conditions, at least so long as the Affordable Care Act stays in place. (That is critical for us! We are basically big, walking pre-existing conditions.) And I like the mindset shift you made about those parking fees. I know those things are annoying and add up, but seeing it as part of the cost of your affordable care makes total sense.
Whether it’s this system or another, we — and millions of other people — would just appreciate knowing what to plan for
Yeah, that. Thanks so much for detailing your experience here with screenshots and options. Even though I’m in a different state it helps to see what others are getting when diving in. The mess around healthcare is still the main reason why I’m staying part time. I’ll just have to keep watching it like a hawk.
Good luck to you guys as you continue to navigate the mess!
Accidental FIRE – working part time is something I’ve been thinking about more and more, to help mitigate the risk of healthcare costs, etc. Glad to see its something other people have thought about as well. I’ve heard rumors that some companies are dropping healthcare coverage for part time workers, have you heard anything about that? I’m not sure if companies currently have a legal obligation to make medical insurance available to part time workers.
They don’t have to offer benefits for part time employees but every hospital I have worked for does (at higher rate) They have all kinds of non medical positions from food service to CEO and everything in between, plus you get to meet lots of people that also have off during the week and the starting pay is usually slightly above local average. I have heard trader joes and starbucks also offer part time benefits
It’s worth pricing out if those benefits are worth it, though. For a semi-retiree income level, the cost of an ACA plan with a tax credit reducing the premium could easily come out lower than the cost for a part-time employee plan with a company that offers it.
Most companies are only offering real benefits to folks who work 70% or more, so working in a very part-time capacity is probably not worth much — UNLESS your goal is just to work enough to cover the cost of premiums.
Amen, brother! Just tell us what the deal is and we can plan for it. It’s the moving target that is so frustrating. But we’ll keep you posted as the health care landscape continues to shift!
This is such a great post! We are new to the FIRE community and are still trying to figure out our goals and plan to achieve FI. One big question mark that always comes up is the cost of health insurance – and how it feels impossible to know how that cost is going to change over the (hopefully) 50+ years we’ll be retired. Not knowing that makes it really hard to plan for early retirement! Do you have any advice (or posts) on how you factored this variability into your early retirement plan?
Also, thank you for writing about how having a mortgage could increase healthcare costs in early retirement. In considering the argument of paying off a mortgage vs. investing, I never factored in health care costs. It seems like it would be a bit of a snowball – in your example you talk about how needing 10k for your mortgage, but actually needing 19k to factor in the increased cost of healthcare. But if you need 19k, does that bump you into an even higher cost healthcare bracket? For us still on our journey to FI, it’s great to have folks like you to learn from and pave the way. Thanks for the post!
Thanks! So glad it’s helpful. This post (https://ournextlife.com/2017/10/04/problem-isnt-4-percent-rule/) might help answer your question to some extent, but the short answer is that we think most people are undersaving given health care costs rising at levels well beyond inflation and market gains, and the answer is to oversave. I know that’s a bummer, but it’s better to be realistic about these things.
On the mortgage question, it’s worth doing the calculations for your own situation, factoring in your own mortgage payment amount, how much more income that would equate to, what income you’d have with and without the payment, etc. Because in some cases, there won’t be that big a penalty in terms of added premium. But to look only at market gain potential and taxes is to leave out a HUGE cost factor.
Thanks for the link Tanja! I just discovered you guys about a month ago, so I’m still making my way through the archives!
Did you guys play around with increasing your income now in an attempt to reduce minimum distributions later in life? I know that is a loooong way off for you still, but I’m curious if people are trying to optimize that from a tax perspective? But bumping up your income now has an affect on healthcare costs, as you’ve shown, so maybe its a wash?
The archives are BIIIIIIG, so no shame if you need me to point you to a post or two. ;-)
A fun fact about us is that we are not tax optimizers, and are okay if we end up getting forced into RMDs later. That said, we will probably break our rule on not doing Roth conversions in a very small way each year to get to certain income levels for health care and tax purposes. (We won’t spend that money, though, and will just let it grow for phase 2.) The math on taxes and RMDs DOES get a lot harder with health care tax credits thrown in, so there’s no short answer there. But maybe I can work out a formula on that one of these days. ;-)
Just went through this headache myself (also in CA) given that I’m now on a mini-early retirement. Thanks for digging into this Tanja, you just answered a lot of questions about some of the things that made me scratch my head!
Glad it was helpful! Did you get kicked into the MediCal hell maze, too??
Yes! That slowed down the process considerably and we only got it cleared up days before the deadline. We started our application in early November! Gotta say though, despite these occasional headaches…living on the West Coast was definitely the right choice for us. I consider this kind of gong show a cost of doing business, well worth it.
Whew! Glad you got it sorted out. And something tells me the hell maze is not a CA-specific feature. ;-) (And, as I should have said in the post, I do actually appreciate that the reason for the maze is to try to get as many people as covered as possible. If you lose a job, they assume you qualify for MediCal, and that’s so much better than states that do everything possible NOT to cover you!)
Agreed Tanja, it’s coming from a good place and is preferable to the alternative. Definitely creates some excitement though when you barely squeeze in before the deadline!
Haha! True! When we got the official word that we were good to go as of January 1, we definitely did a little victory dance. :-D
Was it a rain dance, by chance?
I mean, if we’re doing any dancing, it’s for SNOW. But clearly we are failing. :’-(
I suppose after the snow of 2015-2016, expectations are high!
Expectations are for SOME. And that is apparently too much to ask! ;-)
Haha I’ll cross my fingers, toes, and eyes for you guys.
Appreciate it. ;-)
Really informative. I’ve heard from small business owners what a headache actually getting coverage can be, especially when you’re right on the border of qualifying based on income, and the complications when you have kids.
And great point about paying off the mortgage in order to have lower expenses/income. That extra $9000 in insurance costs is huge!
I can only imagine the extra complications that come from trying to sign up as a business, or for employees. It was enough of a headache for just the two of us. And the mortgage math is completely dependent on your own personal factors (and whether the ACA survives, of course), but if more folks at least do the math on payoff vs. save more and continue making payments, I will have succeeded. ;-)
It sounds like the high income to very low/zero income is something that will be triggered by ANY retiree, not just early ones like you two. I’ve definitely considered the mortgage payoff for the same reason, but as our 30 year will naturally fall off by 54, I haven’t gone there yet, since we will likely work at least part time until then. If things significantly change and we decide we actually want to be done in 10-15 years (40-45), then the mortgage payoff will get bumped up on the list.
Yes, I believe that’s true that any of us would get that trigger or flag, as would any traditional retiree who’s not yet Medicare-eligible. And do your own math on the mortgage payoff question, because there are certain income levels at which it might not make a big difference. But folks shouldn’t assume that. Of course, by the time you guys are contemplating payoff, it might be a totally different ballgame on health care. :-/
Yeah, who knows where the heck things will be in 10-15 years when it comes to healthcare. Why our FI plans are just ballpark at this point – we’re too far out for any solid plans for now.
I think just keep an eye on the landscape, but no need to modify anything at this point. So much can happen. :-)
Agreed – that’s the plan for now.
Hi LSF,
You write, “I’ve heard rumors that some companies are dropping healthcare coverage for part time workers, have you heard anything about that?”
The college I work at never provided health care for part-time employees. Even worse, though, we now give part timers fewer hours so they don’t accidentally bump up to full time so that we don’t have to give them benefits. (I believe the definition of full-time here is 30 or 35 hours.)
I hope others chime in and answer your question about other places of employment, and that their answers are more positive.
Thanks for the input Bunny! That is discouraging to hear :(
I’ve heard similar things. 30 hours is 75%, which is close to the 70% threshold that seems to be the norm. There are certainly SOME companies out there that offer benefits to part-time employees, but I think it’s rare. And they might let you buy into a plan that’s every bit as expensive as an ACA exchange plan. So it’s always worth looking at all options.
I just retired at 40 at the end of September and signed up for the ACA this December. I had a really hard time estimating my 2018 income, as I do not plan to have any actual W-2 income for 2018. I ended up using an average of my dividends and realized capital gains for the last 3 years to make my estimate. But, I really have no idea what it could be – I could end up with twice as much income or fall below the Medicaid threshold! I guess we’ll see!
Keep us posted on how it goes! My hope is that we can never get retroactively pushed down into Medicaid, so even if we had a low income year, we could just estimate more for the following and be allowed to get a regular private plan. But that part is still a mystery.
Can you just convert IRA $’s to a Roth in the event this is the case? (I know you don’t plan ln conversions, but hypothetically in a worst case scenario?) That allows you to control the low end of income, right?
For sure. And it’s definitely something we might look at! I expect we’ll have a bit of a scramble each December after we see how dividends and capital gains have netted out, to decide whether we want to convert some funds to Roth (not to spend, just for tax/health care purposes).
Between your commitment to talking about this topic, my own medical bills this year (easily $2500+, despite being healthy and active 26 year old with a Gold PPO plan, and only going in-network…), and a few soundbites from friends…I’ve been more frustrated with the healthcare system than ever.
If you haven’t, yet (I suspect you have, given how well-versed you seem on the topic) check out Bitter Pill. A great read that offers some good color on “how we got here.”
It IS frustrating! I feel your pain on high health care expenses despite being young and healthy, too. (We’re less young that we used to be, but I have always been someone who needed a lot of health care.) Bitter Pill has been on my list for a while, but life has been too busy for books. Hoping to get to it soon, now that we have more time. Thanks for the rec!
Tanja
Very informative post. I think the one thing you could do to help everyone as you continue to discuss this topic is to discuss the impact of having to plan the income (or cash resources) necessary to cover your deductible co-pays and other out of pocket costs. Because what may look like a $80 dollar a month premium with a $750 subsidy could really be a $1,000 a month cost when all those are factored in. If you use healthcare for anything more than wellness events under most plan types, you are paying a lot more than most people ever experienced paying if they were covered by a typical big employer plan. For instance my employer plan for our family of 4 has an annual premium of $24,000 (of which I pay $850 a month for) and has very low individual and family deductibles.
It’s a hidden cost early retirees must plan for, especially if you”re retirement income has to rise to account for it and by doing so cause you to lose your subsidy.
Thanks
Phil
Hi Phil — What you’re talking about is hard to cover well because it’s SO dependent on individual circumstances. Many companies have scaled back on health benefits or shifted more of the cost burden to employees, so not many folks still have a cushy insurance setup like you do. And given that a lot of early retirees become “low income” after retiring, they actually might end up with far better, cheaper coverage than they had through work. I’ll continue to push the message of saving more than what others recommend, though. ;-)
Wow that sounds really stressful. I’m glad you got through that whole ordeal unscathed. Dealing with the government and its bureaucracy can be a big headache. These are all great takeaways early retirees need to take note of.
Congrats on the early retirement! :)
Mostly unscathed, I’d say. ;-) And for the record, the government stuff was annoying, but the far bigger headaches came from dealing with our private insurer. So I know everyone loves to hate on government health care, but given how negative all of my interactions with private insurers have always been, I’m utterly befuddled by assertions that the private sector somehow does a better job. ;-) (You didn’t say any of that — just ranting a little. Hahaha.)
And thanks for the congrats! :-D
I’ve been waiting for the post for so long. Health care is a BFD to us as well. Do you have any thoughts about various markets that only have one potential health insurer that is a captive to a specific network? Mrs. Shirts has a pre-existing condition and there are only a few hospitals in the country that deal with it, so I hear horror stories about people inside a Kaiser or other captive local healthcare plan not getting access in the same way they would if they had insurance with one of the big four providers. We thought about domiciling an address as one of our parents house while we travel, but that captive network is terrible, and not affordable, and the only option.
I’m glad to see California’s costs are still relatively low ($1100 pre-credit/mo for two people), there are other states I’ve run that are closer to $1800/mo. The cost of health insurance is quickly becoming the largest expense and most important geographical factor. Politically, I blame both administrations for not enforcing the individual mandate, the prior one for allowing all these exemptions and a minor penalty (no insurance, just don’t issue a tax refund until paid), and the current one for continuing to gut this.
This is a subject where I get really angry with Congress, because it would be very simple for them to stabilize the insurance marketplaces and get more insurers back in, so there wouldn’t be all these places with only one or two options. But they put politics over people’s wellbeing in a way that’s really shameful. But that’s not what you asked… ;-)
A big learning for us in all of this has been that, though we are with a “big” network, the provider network attached to our actual plan is much smaller than the full BCBS network. So we can’t see most of our doctors without going out of network, which kinda blows. But we also got a pretty affordable PPO, so going out of network isn’t the end of the world. But, honestly, I’d sign us up for Kaiser in a heartbeat if that was available in Tahoe. Re: costs by state, that is what this post was all about: https://ournextlife.com/2017/05/31/rank-state-health-care/. Though virtually nothing in CA is affordable, our health care premiums do trend lower because we’re a healthier state than most, and because the state government has made it clear to the insurers that they’ll step in if the feds bail. States that give insurers no such assurances have higher premiums as insurers gird themselves for the loss of CSRs or tax credits.
Yup, I went through this same experience with our CoveredCalifornia application, but I had a few more weeks to try and figure it out. Proof of income has been problematic, since I retired mid-2017 and neither my 2016 tax returns nor my up and coming 2017 returns will reflect my estimated income for 2018. We stayed on COBRA last year just so we didn’t have to deal with one more change and to give me more time to figure out the finances.
For our 2018 estimated income, basically I subtracted out all my W-2 income and put in a fudge factor for capital gains and other taxable income, including Roth IRA conversions. What I ended up submitting as proof of income was my 2016 returns and a letter from my former employer stating that I retired and was no longer receiving income. Hope that works. It will be tricky to stay in that “sweet spot” of adjusted gross income where we don’t dip too much into cash savings and still qualify for the premium assistance subsidies.
Thanks for sharing your experience! We were told by our county MediCal office that we could use a sworn statement as our proof of income, so that’s what we submitted. We’ll see if it bounces back!
Thank you once again for tackling a tough, yet critical topic.
I’m in Virginia — I met you and Mark in DC last month :) — and for the past three years I’ve had health insurance through the ACA. There’ve been some bumps and frustrations, but mostly I’ve been pleased with my experience and my choices for coverage with Anthem. Of course, there were fewer choices this year, and I do wonder what’s ahead. There’s so much uncertainty.
Each year I’ve chosen a high deductible bronze plan with an HSA, and I’m curious if you considered going the HSA route?
Hi Tracey! Nice to “see” you here. ;-) Have you found that your provider network through Anthem is comparable to what it would be on non-ACA plans? Anthem is what we’ve had for years, it was our other exchange option, but we found that the ACA silver plan had a much skimpier network than the non-ACA option, and we weren’t willing to pay triple just to see our current docs. So we went with the Blue Shield PPO so we’d have the out of network option, and because it had a few more docs on it (but still not the full network).
We didn’t got the HSA route because those plans would have worked out worse for us. Our biggest expense is a crazy pricey drug Mark is on (even the generic is like $1000 a month without insurance), and so factoring in drug coverage, the silver 70 PPO without HSA was by far our cheapest total option. But this is totally a YMMV moment, and everyone should do the math on their own circumstances.
Another highly educational post and with a lot of good info in the comments, too. I used the Health Sherpa website Mr. FWP mentioned to run some hypotheticals on health care costs in some of our “short list” retirement locales and wow, they’re all over the place. Many not in the way I would have guessed.
It’s weird to think that as much as I worry about possibly hanging on to a part-time job to cover health care costs post-FI, that could potentially hurt us overall if we fall off the subsidy cliff. And of course that’s assuming any of this is still around in 4-5 years. Argh! Frustrating for us planners not to be able to plan things… I just have to wait until we’re much, much closer to our target numbers before we can start running scenarios that will tell us if they really are, in fact, our target numbers after all.
Happy New Year!
Glad it was informative! ;-) And yeah, the subsidy cliff must be a very real consideration in all of this, because every household has a dollar figure where you lose the entire tax credit. We have no desire to do that! And yeah, totally with you on the planning frustration! If we could somehow magically take health care off the table of concerns, I would feel a LOT different about the next 50 years!
Happy new year to you, too! I hope 2018 has been good to you thus far. :-D
Two years into FIRE, the ACA documentation is getting easier. Finally, our prior year tax return looks like our projected income for the next year.
In the first two years, I submitted a brokerage report showing projected dividends for the coming year, and realized capital gains from the prior year. I also submitted a copy of my termination letter for the first year.
I don’t know how it works on other exchanges, but Covered CA has a screen part way through the process that tells you what programs you may qualify for. If that screen shows Medicaid (MediCal), you can back up and project a higher income.
One thing that caught me by surprise was that in year two of retirement, i had an income bump from my tax refund from my last year of employment.
This may not apply in other states, but in California, if they don’t approve your income documentation within a few days, it will just sit there. Best thing is to call a few days in and the person on the phone can review your documents with you and approve you on the spot.
In 2016, I nailed the estimate. For 2017, I got fooled by a spike in dividends last December, and will end up having to repay a small amount of my premium tax credit. It’s tricky to manage the dividend flow to maximize your ACA subsidy. For 2018 I will need to have fewer dividends hitting my taxable account. Luckily I can accomplish this by shifting the investment mix in taxable vs tax deferred accounts.
Wouldn’t it be fun if we didn’t have to adjust investment and tax strategy to avoid health care costs?
Thanks for sharing your experience! It’s helpful to know what’s in store for us. We didn’t get the Medicaid screen, or I for sure would have backed up. It just went through the whole process, and then kicked us into the Medicaid hell maze. I even tried to go in and bump up our income at that point, but it didn’t matter. And it’s a good point about tax refunds coming back to bite you — you’re making me feel happy that we always end up owing! ;-)
And yeah, let’s not get started on how ridiculous it is that we all feel we have to try to game this system. ;-)
Good to know about the income documentation approval… I’m going to call them today since it’s been sitting there for a while now. Thanks!
Let me know what they say! (Because we haven’t submitted the sworn statement to Covered CA yet, only to our county Medicaid office to get DQed and kicked back into CC.)
As soon as ACA existed, I bought coverage on the exchange. No subsidies. Just something for peace of mind for a, luckily, healthy woman. Then I moved jurisdictions. I mailed in notice to cancel my coverage because I had crossed state lines. They would not let me. No explanation. Just a recurring bill. I contacted them and the staff said I could not cancel coverage. But I had coverage in my new state. Nope, they would not allow me to cancel coverage. Eventually after many nasty letters, they tell me that I can only cancel coverage over the phone but that the phone staff are not allowed to tell me that.
I was livid. It was so drawn out and silly. Thankfully, the state I moved to does everything much better and I can actually get to the doctor without taking a day off of work. In my new state, I switched to a different carrier so that I could avoid that nonsense.
I lived in Massachusetts when Romneycare happened, and was then eligible for subsidies. It was a very smooth process and encouraged me to get new glasses. It was too difficult to find a doctor for a physical since I lived in a smaller town and did not have a car, but I don’t know what that area of Mass is like now.
All in all, cities continue to be my favorite. I can access care, and hospitals if necessary. The sign-up systems have run more smoothly. And my city is liberal so the rates have not skyrocketed because conservative politicians don’t have the ability to mess it up out of spite they way they can in some small liberal areas in conservative states.
Ugh — how frustrating! I heard similar nonsense from our new insurer just this week, and finally had to stop talking to them or I was going to explode in rage. ;-) (I put a smiley face there, but really… RAGE.) And I’m glad you have a good system now, but it is so infuriating that health care became so politicized. It was not always this way, and the polarization of it has been one of our biggest steps back as a society. (Even Reagan said we should take care of the poor, but that is not the prevailing sentiment these days.)
It saves so much money to take care of folks, too! Homeless advocates in cities where they’ve switched to a housing first model have seen lives transformed and ALL city services save more.
Sigh.
I want humans to live. And not die from lack of care. Or unduly burdensome loopholes that make access to care nearly impossible for some folks.
Dude, I know. :-( I wish people could truly look at this stuff from an economic perspective (as well as the human one!).
Girl, yes! Sigh…
Hahaha. I feel like we could just write “Girl, yes! Sigh…” in response to nearly anything right now. ;-)
It is efficient!
;-)
I noticed the plans mentioned only have two stars for quality. Is that a concern? I’ve looked at Kaiser which had a bad name in the early 2000s but now has a good name.
It is interesting that some people still go with PPOs which give more choices. Traditional Medicare is much like a PPO, but the Medicare HMO patients have been found in studies to get higher quality care and live longer.
You bet it’s a concern! But we didn’t have any higher rated options, unfortunately. And we’d LOVE to have Kaiser, but we’re too far outside of a service area to qualify. :-( Re: going with a PPO, it was really because we saw that the available provider networks on the options we had were drastically scaled back from the usual Blue Cross and Blue Shield networks. The EPO (HMO without referral requirements) had no out of network coverage and covered almost no doctors in our town, and no docs we already see. The PPO we chose worked out better mathematically anyway, but also covered a few more providers. But yeah, everything you see in our choices is a case of choosing under less than ideal circumstances.
Glad to see I could get HSA if I wanted to. Most likely since I work in healthcare I will just work part time for insurance but I looked into in case I want to travel full time. Even with the mortgage my spending still will qualify, guess one perk of being lower/ mid income used to living on lower amount.
You can definitely get HSA plans on the exchanges! In our case, the math on it didn’t make sense, but you have to look at your own circumstances. The HSA options had abysmal drug coverage, and that’s our biggest recurring health care expense, at least for now. And yeah, the mortgage payoff doesn’t make sense for every circumstance by any means! But it’s at least worth doing your own math.
I’m glad to hear that, you were able to sign up the Obamacare. The process is not very straightforward. 2018 is my 4th year using Obamacare. My Bronze plan premium is $442/month, and deductible and out of pocket is $7,350. I’m not eligible for the subsidy. The plan is not that great. But I’m happy. Having coverage is better than none. As an early retiree, health care is the biggest challenge I face. I just accept the reality, and enjoy my retirement life.
Yeah, it sure seemed like none of the bronze plans offered especially good coverage. But as you said, something is better than nothing! Glad you have at least that coverage backstop. Now let’s hope the costs don’t continue to skyrocket!
I haven’t gone down the health care road yet as I am not retired (yet). You mentioned the tax reform act and from the way you phrased it, I take it you don’t care for it. I enjoy your writing and would be interested in an article that hits the high points of the new plan and your thoughts on them. Sorry to go off topic. Didn’t know where else to make the request for an article.
Keep enjoying your early retirement!
No need to be sorry! I always appreciate requests like this. Brandon recently did a good rundown on some of the basics of retirement savings re: the new law: https://www.madfientist.com/new-tax-law/. I’ll take a look and see if there’s anything meaningful I can add. :-)
Thank you so much for this great information. I struggle in trying to figure this out, but we still have a few years to go at work. I have budgeted a high amount for healthcare in our retirement plan, but am still trying to figure out the AGI, so your chart was helpful, as was the link to Justin’s post. Now that this step is over, I hope you are getting out to ski!
You’re so welcome! I’m of course glad to know that you’re budgeting a lot for retirement health care. That’s super smart considering how fast those costs are rising and how unpredictable the system is. If you haven’t already, run some calculations for your area based on different income levels to get a feel for your current options. (Of course, knowing they could all change.) ;-)
to me this party illustrates the tremendous value of a large after tax war chest you can use for living expenses. you can always convert from pretax dollars to roth dollars to sort of customize your taxable income to the sweet spot above medicaid and below the subsidy cliff. i think you can further customize your 1099 income with a SEP ira.
Word. And re: customizing, health care costs are based off of MAGI, which does NOT allow you to exclude income you put in an IRA: https://turbotax.intuit.com/tax-tips/irs-tax-return/what-is-the-difference-between-agi-and-magi-on-your-taxes/L7kHckNS3.
i am glad to know that. sometimes i don’t know what the hell i’m talking about and the thoughts still come out unfiltered. ha ha.
That’s why we’re all here, right? To check each other. ;-)
What about a SEP IRA. Tonja, say you have an “ONL LLC” you know for your consulting gig and you open a SEP IRA, I wonder if that contribution can come off the MAGI? I was hoping so!:)
I also wondered if the LLC can write off the ACA premiums?
JD
It can! I’d just want to be completely sure first that the LLC would save more for health care than it would cost in LLC filing fees, minimum FTB tax, tax prep costs, etc. ;-) The LLC might be able to write off the premiums IF you purchase a biz plan, which has no subsidies. If you want personal plans, you have to pay for it as a personal (non-writeoff) expense. (I believe. You know the caveat… not a tax professional. Your mileage may vary, etc.) ;-)
Just to be precise. And to check my understanding against others’ expertise and experience:
MAGI not AGI is the basis for both ACA premium subsidy eligibility and cost sharing reduction (CSR) income eligibility calculations.
MAGI counts towards current year income some current income that might otherwise be deductible under AGI for Traditional IRA contributions (depending upon income level). (One of the add-backs from AGI to get MAGI.) https://www.investopedia.com/ask/answers/081414/can-i-deduct-my-individual-retirement-account-ira-contribution-my-tax-return.asp
MAGI counts Traditional IRA to Roth IRA conversions done in that tax year. Because you’re taking previously tax-deferred income and recognizing it as income, paying the tax now, to avoid future income taxation upon withdrawal. A conversion is a contribution to the Roth IRA.
MAGI does not count withdrawals of Roth IRA contributions because they were taxed in prior years. But of course these withdrawals are cash flow to pay expenses in retirement.
And, MAGI counts as income withdrawals from accumulated earnings from a Roth IRA, but these are likely to be taxed as dividends, interest, or long-term capital gains depending upon the sources of the accumulated earnings.
Open to clarification if other’s understand it differently.
Usual disclaimers: This is not financial advice, I am not a financial professional, this information is provided for entertainment and informational purposes only, consult a tax attorney or CPA for your specific situation, there is no advising or coaching relationship implied by this or any other answer, etc., etc., etc.
Yes, it is based on MAGI. And the most accurate way to calculate your MAGI is with this worksheet: https://www.irs.gov/publications/p590a#en_US_2017_publink1000231222. Both Roth conversions in a given tax year and money contributed to Roth in that year count in MAGI (as well as AGI, gross income and taxable income — anything going into a Roth is always taxable and counts in every income calculation). Roth withdrawals do not count in it assuming you’re only withdrawing contributions or you’re over age 59 1/2.
For most people, IRA contributions won’t be added back into MAGI but it depends on income. Solo 401(k) contributions and other “qualified” plans are not added back, assuming you’ve followed the rules correctly in choosing your contribution amounts.
Thanks for the writeup, Tanja! Is it wiser to quit the W2 job mid-year (with higher income than a clean FIRE year, but gradually reduced ~50% compared to pre-FIRE income) or start fresh like you guys did? Pros would be that we only need to take care of healthcare for 6 months on this higher income, and we can be better prepared for 2019, Cons would be that we would have to pay higher premiums for healthcare due to the higher income.
I honestly don’t think it makes a difference. You can get enrolled at a lower income projection and might just have a few more admin tasks to do because of it. But I’d almost wonder if quitting midyear would mean that you get an income flag twice instead of just once? Overall, I’d say quit when you’re confident you have more than enough and feel ready. :-)
Thanks! I’m still working on the mental / physiological part of retiring towards something. Financially I’m comfortable pulling the plug even today!
It’s great you recognize that. Definitely work on the mental part before pulling the plug. I’ve heard from enough folks to know that’s a critical piece in having a successful and fulfilling early retirement.
Wow, that’s very useful info! Thanks for the details. Just to confirm my understanding: If you knew about this trigger, you could have provided your 2017 income as the 2018 estimate, gotten no subsidy, paid the full premium, and then claimed the subsidy as a refund next April, right?
You for sure COULD do that. I don’t know that we would have, but we might have entered our income differently to at least avoid the Medicaid-specific trigger. But most of all we just would have allowed more time! ;-)
Thanks for all the great information, Tanja! We’ll looking at FIREing in June and using the qualifying event of leaving our jobs to enroll in an ACA plan. This plan will mean that we’ll need to carefully control our income so as to not go over the upper income limit (subsidy cliff). In addition to trying to push some sources of income into next year (LLC distribution), and contributing to an HSA, are there other common/obvious MAGI-minimizing tools that I should be using? I thought I’d be able to use our IRA contributions, but this thread showed me that I can’t! I suppose I could always just quit earlier – tempting… Thanks again for all the great information – you two have been quite an inspiration for us.
Thanks so much for that, Scott! That’s amazing to hear. :-D Unfortunately, MAGI is pretty hard to minimize, unlike taxable income. So it’s your choice if you want to quit sooner and get cheaper health insurance, or work a bit longer and just find a way to manage the higher costs through the end of the year. (Or, not that I’d recommend this, but work til end of year, and then buy your ACA plan starting in 2019.) Let me know what you guys decide!
First, thanks much for the terrific resources/guidance made available through your site. We are approaching a planned early retirement, or at least semi-retirement as we run a husband/wife owned law practice that allows us to scale back substantially without shutting down. With two still dependent children finishing up college, we have been paying ridiculous family plan premiums that increase 10+%/year (now well in excess of $2K/month) and figured we might try to work just enough to cover that and office expenses. We had no idea that health insurance subsidies would be possible for us, and while it would be a huge financial benefit to take advantage of the system by manipulating our income while living well off our savings, after some consideration and reflection, we have decided we are very uncomfortable doing so. Maybe it is our northeastern liberal bias, but although we have been big supporters of first Massachusetts Romneycare and then Obamacare as well-meaning (though not without significant flaws) efforts to reform a broken system that left many behind, we find it shocking that subsidies are based only on income without consideration of assets. In our view, subsidies were intended for the poor and not so that successful and fortunate high net worth people can retire early without dipping into savings to pay for health insurance until Medicare benefits kick in. I’m troubled by the current administration’s zeal to destroy Obamacare without a better solution, but would have no problem with modifying subsidy qualification to include consideration of assets. No idea if that has been considered, but it does seem to be a pretty easy target.
I’m with you on the concerns you’re feeling. We were also supporters of Obamacare and other efforts to get healthcare coverage for the poor. Unfortunately, it seems that one of the outcomes of the Affordable Care Act is that it’s made health insurance increasingly unaffordable for people in the individual markets. My wife and I both work and we’ve purchased insurance in the individual market for the last several years because our employers didn’t offer insurance. We’ve been happy with the care, but not the costs. BCBS proposed premium for 2018 for our family of four was $2000 / month for a bronze policy with a $13,300 deductible. In my opinion, this is not affordable healthcare! So, like any good business that organizes itself to take advantage of tax breaks or other incentives, we decided to explore adjusting our income to obtain the Obamacare tax credits. While I agree it’s not ideal, I also think that my shareholders (my family) expect me to save money where I can. I’d be happy to pursue other routes to affordable healthcare when/if they become available. We should all have access to affordable care.
Totally with you! We *should* all have access to affordable care. It is remarkable that far less developed countries than the U.S. manage to provide better care to everyone for much less money. It’s frustrating that a large part of the increase in cost you’ve witnessed is thanks to people playing politics with our lives (if you’re an insurer and lawmakers are signaling that they might eliminate the ACA or cancel the subsidies, you’d raise costs too, would’t you?), but given the current system, I don’t blame you for looking for ways to bring your costs down. It’s only reasonable!
Hi Joe — I totally respect your point of view on this, and we have long struggled with it. We’d much prefer a single payer system in which unused premiums aren’t just profit to insurance companies, but actually go to pay for care (or to reduce the overall cost). That said, it’s worth looking at the difference between the subsidies and the tax credits, both of which are at play. The subsidies are only for very low income people are enhance the level of coverage (up to 94 percent of expenses covered), while the tax credits are reducing tax liability. It may be a distinction without a difference to you, but it’s worth understanding them. Asset testing is something that gets thrown out every once in a while, but it’s not without its flaws (nor without large political resistance). First, it’s easy to hide assets, and there’s no federal repository for everyone’s total net worth. Second and related is privacy, because you could argue that no one has a right to know how much you have. (Our president certainly argues this!) Third is the potentially intrusive and dehumanizing nature of asset testing in real world practice. I recommend Matt Taibbi’s book The Divide for a fairly shocking look at this. And fourth, from my point of view, is that we have MANY ways we as a society ask the poor to subsidize the rich, from the mortgage interest deduction to the many forms of corporate welfare that just got further enshrined in our tax code. Drawing the line here without looking at the way we benefit the rich more broadly could be seen as arbitrary. But of course you have to do what sits right with you! And TL;DR: Don’t expect asset testing any time soon. ;-)
This year is my family’s first year on an ACA subsidized plan too.
I’m in SC where BCBS is the only insurer on the exchange.
The main scary thing for us is that there is zero coverage for out of network, and the in network is only in the state of SC. If someone gets injured while on a trip out of state, costs could mount up very quickly.
But we’re saving $600/mo in premiums, so we’re taking the gamble.
Have you verified that there’s no out-of-state network? It might be sparse, but I’d be shocked if they offered you literally nothing while traveling. (And also angry, because that’s crazy, if true!) Fingers crossed y’all don’t run into any big health care needs!
Great post, very much appreciate this level of detail! In full disclosure I was “Don” in Justin’s “Don’t Fall off the Cliff” post at Root of Good. Name was changed to protect the innocent! It was a great post. While I did end up quitting my job at a consulting firm I’ve continued working as an independent consultant and do not qualify for a subsidy. After a couple years with elevating health insurance premiums my wife and I (with 3 kids) decided to join Liberty Healthshare this year. We are documenting our experience with Liberty at http://www.mylibertyexperience.com. I don’t know how valuable it will be right now since we just started but after a year of experience I expect it to be valuable to others who are making the same decision we did. Thanks again for the great information!
I LOVE that you are documenting your experience with Liberty because there are pros and cons to the health shares. I’ve heard some horror stories about the low caps and families ending up owing tens of thousands (or worse) after the health shares stop chipping in. But hearing the actual experience of an actual member is so valuable!
Great post. We met a few months back at the ONL meet-up in DC. At that time I was also in the throes of getting my plan selected by the 12/15 deadline on the ACA website. Our 2017 plan which we also got on the exchange would be going up from $1795 a month to $3400 a month for a family of four in Virginia! I’m 56 and have been financially independent for seven years. One thing I’ve noticed, once you turn 55 premiums begin to skyrocket. For 2018 we decided to switch to a high deductible plan from Cigna that comes in at $1603 per month. Our plan is to stay under the 98K subsidy cliff by maxing out an HSA and a SE 401K through an S-Corp I put most of my self-employed income through. ( just saying that is a mouthful) If I can do that, the premium would drop all the way down to $237 per month, and I can apply any paid premiums along with HSA expenses against my income. I was able to do something similar in 2015 but last year went over the cliff. I find it fascinating how complex all of this is, so it really helps to read about it and write about it! Thanks for a great article and the extremely helpful link to the Root of Good Post.
Hi there! Nice to hear from you! Are you sure that the HSA is deducted from MAGI? (From what I’ve read, it’s not, and won’t help with the cliff.) Though the S-corp is a nice vehicle to have for this as you can control your own personal income.) The ACA allows premiums for folks over 55 to be higher than under 55, but it’s capped at double the under 55 rate. (Recent congressional proposals would have allowed it to go up to 3x! So things could get worse.)
We’re in the same boat with managing our income to stay below 4x FPL to ensure we get a PTC. Yes, HSA is deducted from MAGI – Form 1040 Line 25. If you put your income through a business, you also get to deduct part (50%) of your self employment tax (Form 1040 Line 27). Also think about setting up a Solo 401K – the limits are pretty generous and it reduces MAGI. BTW – you can make contributions to an IRA (but not 401K) or HSA until the tax filing deadline for that year e.g. ~ 15 April 2018 for 2017 tax year so you can figure out your 2017 taxes and then make the necessary contributions to reduce your MAGI to just ($1!) below the limit.
Thanks Tanja and Alistair!
What about a pass thru LLC instead of a S-Corp and a SEP IRA instead of a Solo 401k?
I was hoping to take advantage of the post December contribution to “adjust” my MAGI and get to that $1 threshold you mention.
JD
I’m working on more on this. Stay tuned! ;-)
All great tips — thanks, Alistair!
Tanja, thanks so much for this great information! I’m not surprised that there was at least one gotcha with signing up. My state doesn’t have an exchange, so I’ll be going straight through healthcare.gov when I get to that point. My megacorp employer switched us to a high deductible plan with an HSA a few years ago. I’ve been fully funding the HSA and just letting it grow as an investment fund. I’m leaning towards doing COBRA which would give me two more years of funding the HSA, but it’s a trade off with the premiums being higher than what I can get through the ACA. Doing COBRA also might help me avoid that income trigger since I’d have 18 months at a lower income. Sure would be nice to know what Congress is going to do with healthcare once and for all, so I could finalize my plans!
You’re welcome! And doing COBRA to fund your HSA further is an interesting idea. If the math works out when it’s time for you to make your choice, why not! In our case, we need the prescription drug coverage most of all, so the HD plans weren’t good options, but you have to do your own number crunching based on your circumstances. And yeah, it WOULD be nice to be able to plan for some of this stuff!
Thanks for the insight. This is one of the reasons why pulling the trigger on early retirement just might not work for us. Not the insurance premiums per se, but the fact that it only covers 70% of the costs and the health insurance isn’t that great. I wonder if there is a post out there for early retirees who has a spouse/partner with health issues that experience this and have written about it? Anyway, keep up the great work. Love reading about your adventures as always.
You absolutely *CAN* buy a platinum plan that would give you 90% coverage, it would just cost more. Or if your income is just above Medicaid thresholds, you can get a “super silver” plan that’s enhanced by CSRs all the way up to 94% coverage… but your MAGI has to be in the low 20s for most family sizes. It’s worth researching those options where you live because if you have ample cushion, working JUST for health insurance will only feel worse and worse with time. I am not thinking of anyone who has specifically written about a spouse with high health care costs in early retirement, but I’ll keep my eyes open!
herein lies the reason taxes and health care are so expensive for those of us working. obviously you are using the system for health care when you have plenty of assets. Hopefully these programs will be means tested in the future. In order to stop this kind of fraud from happening .
Hi Mark — It sounds like you misunderstand several things, including the actual content of the Affordable Care Act, as well as the meaning of the word “fraud.” If you have concerns about the way the bill is written, which is to deliberately benefit people with high unearned income (hmm, sounds a lot like the most recent tax reform), you should take it up with your lawmakers, not with people who answer all the applications questions truthfully and completely and follow the law to the absolute letter.
Fantastic post Tanja! I am in the planning process for FIRE date of June 2018 and healthcare is a huge priority. I live in Texas and I can use some advice for sure!! Seems like there is an opportunity for Healthcare Consulting for a FIRE Affinity Network (our own version of AARP!)
Glad it’s helpful! Given your date, it will be worth pricing out COBRA through the remainder of the year, and just see which nets out better in your circumstances. You’ll definitely have too big a gap to go uncovered unless you don’t mind paying the tax penalty (and rolling the dice on not needing any health care — that would feel like too big a jinx to me that we’d get into an accident or something horrible). And hahaha — if I desired a new job, I might consider that new consulting gig, but that sounds like so much work! ;-)
We are planning on retiring next year at 59 and 58. We should have enough saved where we will not need an income to survive. If the majority of our income is withdrawing from savings and then from our 401k in a few years, what amount should we use to determine our premiums? Would we use what small amount we might get from part-time employment plus what we take from our savings? We’ve budgeted $1000 a month for health insurance, but from what I’m seeing here, that is probably too high? (Which would be a good thing)
Hi Bob — It’s worth doing the estimation on your state’s or the national exchange to get a sense of what your premium would be right now given the circumstances you expect to have. You would need to count interest on your savings, the full amount of 401(k)/IRA withdrawals (since they were pre-tax before) plus any income you earn as your income in the calculator. If, with all of that included, you’re in a heavily subsidized category, then if all things stay as they are (definitely NOT a certainty), you should feel okay about having affordable coverage next year. If you’re slightly above the subsidy limits, though, or in a category in which you’re subsidized but still paying a bit, then factor in fairly high year-over-year growth. Many states has 20% increases this year, so it’s not crazy to think that could happen again, unfortunately. Fingers crossed for you that you don’t need your full allocation, but remember that you’ll pay more than just the premium — most plans will have a high deductible plus a separate drug deductible, plus copays, etc.
Beginning to investigate purchasing insurance on the exchange as my husband (and our insurance carrier!) is retiring as of March 2. Our plan has been to draw down the contribution portion of our Roth IRAs as living expenses until accessing 401K funds in two years when he will be 59 1/2. Would the monies from the Roth be considered as income for our insurance application? I thought that since the taxes had already been paid, these are not counted as income. What’s the real deal here? Thanks for your help!
Congrats to your husband (and both of you!)! The Roth contribution money should not be considered income because you’ve already paid tax on it, so you should be in the clear!
ACA premium subsidies are based on modified adjusted gross income (MAGI), but the calculation for it is specific to the ACA (and different from the general MAGI rules)
Hi there — I deleted the source your referenced because it’s not credible, but here’s a good one that has the info you were getting at, for folks who are interested: http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf.
Another option for getting your income down in semi-retirement and you’re hovering around the subsidy cliff is to have a solo 401k. You have to open it this year (Vanguard and Fidelity have good options), but you can save retroactively when you file your taxes next year, including the extension.
Our approach this year is to just pay the horrendous premium (almost $1100) a month, then if our income is getting close to the cliff, we’ll take money out of our taxable account and put it in the 401k tax deferred to bring it just under the cliff. I estimate we’d get @ $10K back when filing.
Re mortgage: We have a pool of preferred stocks, and those dividends pay the mortgage. When the mortgage is paid off in ten years, we’ll still have the pot kicking off dividends for us. So I’m not inclined to pay off the mortgage directly, especially with the precarious future of the ACA.
Trish,
That is my plan for next year. Pay the full price of ACA Covered California plan each month and get the ACA tax credit on my 1040 the following April. Non-discretionary income from interest, dividends, and capital gain distributions will keep me above the Medicaid limit (and thus eligible for ACA tax credits) and will use I401K to shield side-hustle income to keep me under the ACA tax credit ceiling. The only downside I see is not getting ACA Silver Cost Sharing Reduction CSR subsidies. If side-hustle is $0, then will still have some room for strategic Roth conversions as low marginal rates.
I appreciate the information of what income sources are taxable. I was wondering about that and how to keep income low. We are nearing the end of a 2 year mini-retirement and have private health insurance. We had the Medicaid problem too because they couldn’t find documentation of our low income. Anyway, I got tired of calling the state and just went ahead and signed up in the exchange saying “no” to the question of if we are eligible for Medicaid. I figured the actual income by the end of the year will correct the situation. It worked out just as I expected. Back to work soon for a few more years then early-ish retirement 😊
I too, was recently shocked to find out that after 20+ years of state service, I’d lose my health benefits if I separated from the state prior to 120 days from retirement date. Minimum age to retire is 50 and I am 44. Our plan was to move next year to another state and retire early and then collect my pension after age 50. Well, my husband and I both thought we’d get 100% of our healthcare along with the pension once I am fully retired, but they actually take away that benefit if you separate more than 120 days before retirement. That put a big damper in our plans, so now the dreaded story, do I really have to stay in this job 5+ more years just to get healthcare, or do I get out like we planned and just do what most early retirees do, and get healthcare on our own….:( I really appreciated your story, as it helped to see your struggles, the income information and different plan options. Thank you for the great article.
I live in Arizona and planning to retire at the end of Aug 2018. Not sure yet how my experience with the ACA will play out. However, I anticipate there will be a problem due to how my income will be initially viewed as I transition to a much lower number going forward.
I’m new to this blog, and I really enjoy how substantial it is, compared to, let’s say, one of your fellow bloggers who suggests to try cat food (seriously!).
That out of the way, I’m also a fan of single payer and while I’m glad we did a first step in this direction with the ACA, I had quite a few discouraging experiences with Covered California over the past years. One of them is that they want to know how much my wife and I will earn next year. So they want us to look in the future, which is a bit challenging for self-employed people, and folks who are in the middle of switching careers. For the past years I have thus understated my predictions, and then at tax time payed what I owe them. That usually works out quite well, as there’s a ceiling to the amount they can request “back.”
Incredible article and comments! Thank you so much!
This article notes that traditional IRA, 401k, and HSA contributions are removed from MAGI for ACA: https://www.healthinsurance.org/faqs/with-my-income-im-barely-over-the-eligibility-limit-for-a-premium-subsidy-is-there-anything-i-can-do-to-lower-my-income-so-i-become-eligible/
Should I trust it?
I’m new to this site and to my whole health care situation, so bear with me. I’ve read your article and I have some basic questions. My husband and I plan to go either on ACA or private insurance when his job ends. At his age, there is no more point looking for a new job and we have an inheritance we can live on quite easily. The trouble is health care. While I can go on Medicare in June, my husband is younger than me and will have six years to wait. So we need insurance. We both have pre-existing conditions.
In order to figure out what we need, how do we determine what our income will be when it will go from the full-time job to nothing? (I am already retired and don’t earn money anymore.) Do we take a percentage of the savings and project that as our income?
We can use COBRA for a year, but that might be a bad idea as we will miss the open enrollment period in December.
Any advice will be appreciated.
My situation is complicated. I will be 62 in December 2018 and want to retire with social security. I live and work in Missouri but I will be joining my husband in Oregon Jan 1 2019. Oregon has it’s own healthcare exchange. Can I apply now during open enrollment even tho I am still a Missouri resident? My husband is an Oregon resident and we a own a house Oregon and one in Missouri.What do we put for the income? They ask for the adjusted income from 2018 which is quite high. My husband is not employed and is currently on my health insurance through my job in Missouri. Do I have to wait until January and apply for a special enrollment?
Best advice I would give after going thru the whole process is to sign the affidavit to declare income instead of trying to appease the various agencies (we are a split household so kids on medi-cal and we are on Covered CA) with statements from all possible income streams (i.e. airbnb, bank interest, dividends, cap gains, tax returns, etc). I was going round and round with both agencies as there was always another statement needed…eventually discovered the sworn affadavit which allowed me to declare income for the upcoming year on a single piece of paper.