Financial Independence Daily FI discussion thread - August 14, 2020 |
- Daily FI discussion thread - August 14, 2020
- ACA Healthcare Costs and Strategies
- Weekly FI Frugal Friday thread - August 14, 2020
| Daily FI discussion thread - August 14, 2020 Posted: 14 Aug 2020 01:07 AM PDT Please use this thread to have discussions which you don't feel warrant a new post to the sub. While the Rules for posting questions on the basics of personal finance/investing topics are relaxed a little bit here, the rules against memes/spam/self-promotion/excessive rudeness/politics still apply! Have a look at the FAQ for this subreddit before posting to see if your question is frequently asked. Since this post does tend to get busy, consider sorting the comments by "new" (instead of "best" or "top") to see the newest posts. [link] [comments]  | |||||||||||||||||||||||||||||||||||||||||||||
| ACA Healthcare Costs and Strategies Posted: 14 Aug 2020 06:22 AM PDT In a response to yesterday's alarming thread regarding potential healthcare costs in early retirement, I thought I'd try to make a few points that might help alleviate some concerns. Don't get me wrong, healthcare is broken in this country, but until new policies are deployed (whatever they may be), we have to play by the current set of rules. I hope to outline some information and strategies for health insurance for those of us attempting to bridge the gap between the termination of full time employment and Medicare. So of course the following is all subject to change with new legislation.
Federal Poverty Level, Subsidy Range, Caps and Cost for 2nd Lowest Tier Silver Plan, 2020
Source: https://www.kff.org/health-reform/issue-brief/explaining-health-care-reform-questions-about-health/
Here is a table depicting expected subsidies and costs for a family of four (two adults <65, two children <21, non-smoking) using 2020 numbers. I'll try to point a few things out. Generally speaking, under an income of less than <100% of the Federal Poverty Level (FPL) will qualify you and your family for Medicaid. EDIT: For states that expanded Medicaid, you may qualify until 138% FPL. In non-expansion states there is a coverage-gap between 100-138%, where you would not qualify for either Medicaid or ACA. Between 100-200% of the FPL, I would generally consider these monthly premiums to be 'affordable'. From 201-400%, you can see the costs rise dramatically, until at which point you cease to qualify for a subsidy. For example, a family of four, parents aged 40, children age 8 and 10, will pay $839 per month ($10,073/yr) if their income is $103,000. If their income is $103,001, they will pay $1,473 per month ($17,676), an increase of 75.5%. Due to this fact, the rest of the discussion will be aimed at families with incomes between 100-400% FPL.
The major point of this post I want to make is, for our purposes in early retirement, income does not equal spending/withdrawal rates. Generally speaking, you will have a higher, in some cases, much higher spending limit while still keeping your "income" within these ranges. For the calculations here, the federal government uses Modified Adjusted Gross Income (MAGI). Going through the details of what is included in your MAGI is beyond the scope of this post. Generally speaking, its pretty close to your Adjusted Gross Income (AGI), with most deductions added back in. Your AGI is your gross income minus "above the line" deductions (401k/tIRA, HSA, student loan interest, alimony, etc).
So for most working people (W-2 Income, few deductions) the above ranges are fairly good approximates of what they would be spending on healthcare if they were to purchase ACA coverage on the exchange. Since we will no longer have a work income, the vast majority of our income will be from dividends, interest and long-term capital gains.
However, these numbers change dramatically when we're talking about FIRE. The biggest thing to keep in mind is return of principle is not taxable. Most of us here will not only have tax-deferred accounts (401k, IRA, HSA, etc), but a large brokerage account. In many cases this brokerage account will be larger than the tax-deferred accounts combined, especially in cases of early high income, RSU's, IPO's, inheritance, sale of business, sale of appreciated property, etc. Many of us will use this taxable money to fund our early retirement until we reach 59 ½, at which point we will be able to tap retirement accounts, and in 2.5-11 years after that, collect Social Security.
Due to the generally short accrual period for FIRE'ies, the brokerage/taxable account will be largely made up of principle and not capital gains. Totally back-of-the envelope, out-of-my-ass calculations would put the breakdown for a large portion of people at 40-70% principle (thereby 30-60% being capital gains).
To illustrate this point, here is an example:
Jack and Jill, Bobby and Sue
At face value, it looks like they will be $2,000 over the 400% FPL limit, and will be paying out the nose for health insurance, but not so fast. Let's see where their $105,000 "income" comes from. They elect to fund their first 15 years of retirement solely from their taxable account of $2million. This will hopefully last them until age 59 ½ when they can begin withdrawing from other accounts.
The $2m in stocks will throw off $50,000 in dividends at a 2.5% yield (vast majority qualified if holding US stock) They then choose to sell $55,000 using average cost basis (not optimal) to make up the remaining of their spending requirement. That $55,000 is made up of $33,000 principle and $22,000 LTCG. So their final spend of $105,000 is actually only $72,000 taxable income. So instead of being 408% of FPL, they are actually at 280%, meaning their monthly costs would be $550 ($6,602/yr). To quote Anatoly Dyatlov... "not great, not terrible". However, if they in fact had a MAGI of $105,000, they would be paying $1,618 per month ($19,412/yr), missing out on their $1,067/mo subsidy ($12,631/yr). This is a comparative savings of 66%. As an aside, they are also under the $80,250 cutoff for the 12% federal income tax bracket (MFJ), without even accounting for the hefty $24,800 standard deduction (2020). This means their dividends and capital gains will be taxed at 0%, under current tax law (state taxes not withstanding). Most of us will be paying very little if any in federal income tax, and of course, no more pay roll taxes. This couple will be able to spend very close to the $105,000 they wish to withdraw.
Further Strategies
Other Healthcare Strategies
TL;DR: Healthcare in the US sucks, but there are tactics you can employ to make it more affordable
Helpful Links: Health Insurance Marketplace Calculator [link] [comments]  | |||||||||||||||||||||||||||||||||||||||||||||
| Weekly FI Frugal Friday thread - August 14, 2020 Posted: 14 Aug 2020 01:08 AM PDT Please use this thread to discuss how amazingly cheap you are. How do you keep your costs low? How do become frugal without taking it to the extremes of frupidity? What costs have you realized could be cut from your life without pain? Use this weekly post to discuss Frugality in general. While the Rules for posting questions on the basics of personal finance/investing topics are more relaxed here, the rules against memes/spam/self-promotion/excessive rudeness/politics still apply! Since this post does tend to get busy, consider sorting the comments by "new" (instead of "best" or "top") to see the newest posts. [link] [comments]  |
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