Are you FI but not MI? Medically Independent, that is. How can there be shockingly simple math to early retirement if no one can estimate their health insurance costs? Having retired years before Obamacare went live, let me tell you our approach to this ever-changing and costly budget item.
Shockingly Simple or Shockingly Complex?
If you’re busy pursuing financial independence, you’ve undoubtedly heard it. Save 25 times your estimated spending and voila, that’s your number. The phrase “shockingly simple” has been made famous by Mr. Money Mustache in his most influential post demonstrating how simple it is to calculate the number of years you need to FIRE, or become Financially Independent and Retire Early.
This 4% rule in itself has been debated in financial circles and many now refer to it as a “rule of thumb” (thanks Big ERN!). In this environment of stock market and real estate highs, it may be better to take a more conservative approach and use a 3% rule as your target for early retirement.
But even then, the big question is this:
How can we estimate our annual expenses if we can’t estimate our health care costs?
In particular, if you are receiving health insurance through your employer, you probably have no idea what it is going to cost when you pick up the tab.
The Big Question
Just this weekend, we got news headlines that a judge declared Obamacare unconstitutional. And while this case will need to wind its way through the courts, it serves as a wake-up call that the current system in the USA is rapidly changing.
Couple that with the fact that not only are costs and insurance plans changing every year, but they vary widely depending on your age.
For instance, consider this graph from eHealthInsurance Services:
As you try to estimate your future health care costs, it is really important to plan differently for the various decades you plan to be living off of your lifetime savings.
And if you think this problem is solved once you reach Medicare age, think again. For example, I handle the finances for my husband’s 89 year old parents. Their premiums for supplemental insurance and prescription coverage run them about $800 per month. And then on top of that, the out-of-pocket costs for prescriptions cost about $3000 every year. Granted, it depends on how many prescriptions you have, but none of us know how many medications we’ll be taking when we are in our 80’s.
As a quick overview, here are several different parts of the cost:
- Premium – the monthly cost of a plan, paid even if you use zero services that year
- Copays – one time fees for routine doctor and lab visits, which don’t count towards your deductible
- Deductible – the amount you pay first prior to any coinsurance cost sharing
- Coinsurance – then a percentage of the bills paid by you until reaching the maximum out-of-pocket expense
- Maximum Out-of-pocket – copays + deductible + coinsurance max per year (does not include premium)
To dig a little deeper, I would highly recommend you read Health Insurance 101 from Ms. Fiology, who works in the field. In it, she explains the possible ways to obtain insurance (employer, ACA, health sharing ministries, Medicaid and Medicare).
These definitions are only valid for the rules in place today, in 2018. Who knows what rules we will navigate going forward. And the younger you are, the more changes you can expect to see in your lifetime.
We Retired Before the ACA Exchanges
When I first quit my job in 2010, my husband was still working and I was covered by his employer-sponsored health plan. It wasn’t until he retired in 2013 that we had to figure out the puzzle of health insurance.
Two big questions needed to be answered in order to fully FIRE:
- What should part of our net worth do we expect to spend on average, over the rest of our lives on health care expenses?
- What do we expect to spend this first year?
Some people consider using COBRA. I recommend reading how The Groovies chose COBRA prior to Obamacare when they quit in 2016. Or this post from TheFinanceBuff weighing COBRA vs the ACA and health sharing ministries.
One problem with COBRA is that the “better” your insurance coverage is, the higher price you have to pay. This is because you are paying to continue the plan you are on. At that price. This was really important back when preexisting conditions could be excluded from coverage.
We did not have any preexisting medical conditions, and COBRA was going to cost over $1600/month in 2013 dollars for the premium alone.
So we opted to buy our own plan. This was the first time we ventured into the private marketplace. It was a little scary, I have to admit.
We Bought a Catastrophic Plan, But…
We purchased a high-deductible catastrophic plan in 2013. And we liked the plan. But it was eliminated in 2014 when the Obamacare exchanges went into place.
Today, you can only purchase a plan like this if you are under 30 or qualify for a hardship. But these plans might return, especially since the Individual Mandate has been eliminated starting in 2019.
The plan we purchased had a premium of $500 per month for the two of us. That’s $6000 to start with, if we used no services at all. Then, it basically covered nothing at all until we hit our $5000 deductible (per person), and then it paid 100% of the costs. So our costs could run as high as $16,000 if we both maxed out.
I’ve written about how we design our expenses for wild swings so this type of plan suits us. We would rather have low premiums and occasionally a large bill to pay since we have a high net worth to draw from. That plan seemed reasonable at the time. It fit our needs.
Since 2014, We Limit Our Income to Get Obamacare Subsidies
One advantage to pursuing FIRE is the combination of high net worth and low spending needs.
The tax law generally favors lower income, regardless of net worth. The Obamacare subsidy is an rare example that not only follows this principle, but is available with a fairly high income.
Available if your Modified Adjusted Gross Income (MAGI) is below 4 times the poverty level, this “line” is quite generous for being eligible or a tax credit. In 2018, that is $48,560 for a single person or $65,840 for a married couple.
A good post at GoCurryCracker covering tax minimization and Obamacare, although written in 2015, is still a very good look at the tax tradeoffs.
Each year since 2014, we have used the Covered California exchange to search for and choose the plan that best optimizes our particular situation. We originally projected our spending level to be $70,000 per year. Of that, we thought that we might pay around 20K of that on health care.
But we have received a very large subsidy each year by keeping our MAGI below the 4X poverty line. This coming year for example, we will receive about $20,000 in subsidies and have a premium of $125 per month covering the two of us. That plan is a Gold Coinsurance plan with Kaiser. It has zero deductible, but a whopping $7200 per person out-of-pocket maximum.
We have chosen Bronze plans most years, which are the closest to the high-deductible catastrophic insurance we prefer. That’s just us. As rare medical users, with no prescriptions, we rarely go into see a doctor, so it makes sense to keep our premium low and roll the dice, so to speak.
Our Upcoming Problem — Massive IRA RMDs
There is just one problem with limiting our income. We are not doing any Roth conversions. A large portion of our net worth is tied up in IRA accounts and the tax bill is like a time bomb ticking away.
When we reach the age of 70.5, we will have Required Minimum Distributions (RMDs), which will force us to start withdrawing 3.6% and more each year from our accounts. Here is a table from the IRS that shows how much you have to withdraw year by year.
For us, my husband is 62 and I’m now 59. Assuming I continue on Obamacare until age 65, that will only leave us two years to get money moved over. Once we hit the RMD age, the law only allows the amount over that RMD to be converted to a Roth.
The new tax law makes it even more tempting to convert now rather than wait. The 24% tax bracket for a married couple goes all the up to $315,000. But as California residents, we would pay 10.3% on that extra money. Couple that with the loss of $20,000 in Obamacare subsidies, we have decided not to convert any time soon. We most likely will move out of the state when the time comes.
So for now, we are keeping our income under the “line” and taking the subsidy.
What About the Future?
It is so hard to predict the future. Everyone tells us we can’t forecast the stock market. No one has a crystal ball. And yet, we are supposed to retire early not being able to guess what we are going to pay for health care in our future.
What should we do? What did we do?
Honestly, for us, we did two things. First, we are what many call fatFIRE. Count us as examples of people who overshot the goal post. In this post from Fritz at TheRetirementManifesto, he discusses the unknowns of health insurance costs as one of the big factors to consider when picking your target FIRE number.
The second thing we did was to just say “what the heck” and quit anyway. Figure it out later. Not all things are going to be known. As I wrote about in my post about backpacking, it’s all about flexibility and adapting. You can plan and plan, but the reality is that things will change.
This is one of the main reasons I stay engaged in the financial arena and learn from a lot of smart people out there. It is incredibly helpful to see what others are doing to solve these tricky problems.
What are Other Early Retirees Doing?
Finding out what others are doing can be tricky. For instance, Tanja from OurNextLife has a great post regarding their health insurance decision making. But she also wrote a post warning that famous bloggers are earning money from their websites and may not be a good comparison for you as an early retiree.
That said, here are some posts that I recommend taking a look at to see how others in the FIRE community have tried solving this problem:
- ESI Money explains using Samaritan Health Share Ministry
- ThnkSaveRetire talks about using Liberty Health Share
- MrFr33 shares a story visiting a hospital in Thailand
- RouteToRetire talks about Expat Health Insurance for his move to Panama
- Retirement Manifesto has a post about Health Insurance Unsolved with a spreadsheet showing articles on this topic
Here are some other posts that I found helpful when considering the complex subject of health care costs:
- Michael Dinich on hacking the ACA
- This Bloomberg article talks about people opting to skip buying insurance at all
- Medical Tourism was discussed by Myles Wakeham on this ChooseFI podcast, particularly covering dental costs
- An excellent panel discussion how health affects FI was the topic of this What’s Up Next podcast
- MillenialMoneyMan has an overview of Health Share Ministries
- AccidentalFIRE has a post about the difficulty of making a health insurance claim
And one last thought is simply to try to be healthy and make smart decisions to lower your costs. This post by White Coat Investor has a lot of ideas and recommendations to consider.