October 8, 2013

Obamacare and My Early Retirement Planning

This blog is supposed to be centered around about my personal journey to early retirement which I hardly ever write anything about.   Way back when I started Free By 50 over five years ago.. (5 years..  really?)... it was about my personal quest to be financially free by the age of 50.   Early retirement is a gradual journey though and not exactly worthy of daily updates.   So I usually wander far far off that topic and talk about cable TV programming packages and buying cheap beater cars.    Today I thought it would be a good idea to revisit the actual theme of this blog for once.    And I've found what I think is a good reason to do so.

Obamacare officially launched October 1st 2013.  Ok not really.   The exchanges where you can buy insurance opened for enrollment.   OK not completely.  The websites claimed to open but mostly failed to work property.    Which is an amazing thing since everyone knows that large software launches are always perfect on day one.[1]   Well whether or not it works well... this is a lot of peoples real first taste of the meatier part of Obamacare.   This is the first point where people are seeing the prices and options for individuals to buy insurance via the exchanges .   That doesn't impact me now nor does it impact the other approximately 80-90% of the country currently insured by their employer or in a government program.   But it gives me an opportunity to see how the new system can impact insurance costs in the future.

One of the big unknown variables in early retirement planning has been the ever increasing cost of buying individual health insurance coverage.   Until recently we'd seen health insurance going up 8-10% a year pretty steadily.   At that rate insurance would more than double by my early retirement target age.   That kind of uncertainty can throw a wrench into my retirement plans.   On top of that if my wife or I had a preexisting condition then we could be denied coverage entirely.   I wouldn't want to quit work early if I knew we'd be unable to get insurance.    So planning for early retirement had a couple major unknown variables due to health insurance costs and availability.  Would I be able to afford insurance when I'm 58?   Would we even be able to get it?? 

Through its individual subsidies Obamacare creates more certainty in the cost of health insurance for most people and it also removes the worry about being denied coverage for existing conditions.

First of all if you're under 400% of the poverty line then you get a subsidy that is designed so that you pay no more than 9.5% of your income towards insurance.   I discussed how that works before.    I can use that as a good baseline to estimate insurance costs and assume that health insurance will cost 9.5% of my income.   That will work at least for starters, I'd have to estimate some out of pocket cost on top of the insurance premiums.   

Of course it assumes that our income stays under the 400% poverty line.    That may or may not be a good assumption.   The federal poverty line for 2013 is $15,510 for 2 people.   At 400% that would give us $62,040 for 2 people.    If I have a target early retirement income of $50,000 then that is under the threshold for 400% poverty line even for just myself and my wife and for any kids it goes up further.   For 4 people the poverty line is $23,550 and 400% would be $94,200.    Of course I would prefer to have a higher income in the future.    If its just me and my spouse then we could more easily exceed the 400% level of income of $62,040.   For a family of four though hitting the $94,200 level is a higher income target and less likely.    I did a quick, rough calculation and figured that on my current path that by the time I'm 50 years old I would have enough assets that would generate income of about $55,000 annually (in todays dollars).    I'll probably be below 400% of poverty in early retirement but that is not a given.

In some situations I could 'game' the system to limit my income in order to get a larger subsidy.   I'm not sure if I'd consider purposefully manipulating the system for a higher subsidy to be ethical.   I'll have to give that some thought if we'd actually want to do such a thing.     If I'm managing my own real estate and withdrawing money from retirement funds then I'll have flexibility to pull money out when I want to.  If for example I'm on track to hit $63,000 in income for a given year and I know that the 400% limit is at $62,040 then I could purposefully limit my income for that year to $62,000 so I don't exceed that 400% limit.   For example, instead of pulling money out of an IRA which is counted as income, I could instead borrow some money short term and use that for our living expenses then pull out a larger amount from the IRA the next year. So if it was just my wife and I and we had $60,000 of income then we'd get about a $400 subsidy. But if I shifted that so it was $40,000 one year and $80,000 the next then we'd get almost $2400 subsidy for the year with $40,000 of income.   

The amount of the subsidy we might get will depend on who's being insured.  It would be a lot less for two people versus a family of four at the same income level.   I used my states exchange to get some idea of what the plans would cost and what our subsidy could be.   Thankfully our exchange web site works well enough to give you estimated cost quotes and doesn't force you to fill out 10 pages of forms to do so.  If I was 50 years old with an income of $62,000 then the subsidy for my wife and I would only be about $200 a year and the insurance plans would $400 to $950 per month.   A $200 annual subsidy doesn't really amount to much and wouldn't be worth me gaming the system.   Now on the other hand if we had a family of four at that time then the subsidy would be more like $200 a month and insurance would run $600 to $1300 range.   So it depends on whether or not we've got dependents at the time of early retirement.   Of course dependents can be on your plan until age of 26 years old now so thats a long ways into the future.   I'd figure on having 2 dependents under our coverage for a long while.

Summary points:

With Obamacare subsidies I think I can safely guesstimate our health insurance costs to be capped around 10% of income.
We may or may not qualify for a subsidy.
If we have dependent kids at the time  its a lot more likely we would get a subsidy.

With the guarantee coverage provision we no longer have to face uncertainty about whether or not we are able to buy individual coverage.

Bottom Line:  I'm going to use 10% of income as a baseline budget cost for health insurance expenses when figuring our early retirement planning.

[1] If this comment doesn't send your sarcasm meter off the scales then you're not too familiar with software.

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