Health care costs present a major planning challenge for a pending retiree. The earlier one would like to retire, the more daunting the challenge of bridging the gap to Medicare eligibility.
America has the most expensive health care system in the world. Costs continue to increase far faster than the overall inflation rate. Retirees buying individual health insurance policies tend to have even higher rates than those purchasing through groups.
Economic and political circumstances around the Affordable Care Act (ACA) only magnify these challenges. Some insurance companies have stopped participating in the insurance exchanges. Ongoing political uncertainty surrounding the law has caused remaining insurers to seek additional premium increases for next year. While the ACA has many problems, without it there would be no guarantee that individuals with pre-existing conditions could buy insurance at any price.
In the midst of the challenges and uncertainty surrounding health care, I am beginning my transition to early retirement at the end of this year. Planning for early retirement under these circumstances requires some risk, creativity, and flexibility.
The Challenge of Projecting Health Care Costs
Retirement planning requires projecting future spending and then accumulating the assets to sustain that spending over one’s retirement. Typically, one can get a reasonably accurate estimate of their future spending by tracking and analyzing their current spending. However, healthcare is uniquely challenging.
Consider this example given in an analysis by the Kaiser Family Foundation if ACA subsidies go away. They note, “…a low-income 60-year-old could get a silver plan for $83 per month (with ACA subsidies) but would have to pay $775 per month if he bought that plan without a subsidy, plus he would have a higher deductible because he would no longer benefit from cost sharing subsidies that are only available on the exchange.”
Using the “Rule of 300”, and plugging in the ranges from the example above means that projected savings needs for health insurance premiums would range from $24,900 ($83×300) to $232,500 ($775×300). Each of our individual numbers will vary based on factors such as age and area of residence. However, the case of this individual is representative of, and possibly even underestimates, the challenges faced by those planning to retire early.
In our case, we need to plan for both my wife and myself for the next 25 years until Medicare eligibility. We also need to account for our young daughter for the next 15-20 years. Therefore, our potential high end expenses are significantly larger.
Remember, these numbers only consider health insurance premiums, not out of pocket costs if someone was sick or injured and actually needed to use their insurance. Predicting our future health status and expenses is equally challenging.
An additional challenge is that most retirement projections assume that living expenses increase at the rate of inflation. Health care costs tend to inflate at a rate significantly greater than general inflation. Health care costs also increase with age as people tend to need more health services.
With such instability and unpredictability in this market, unknown personal health risks, and likelihood that health care costs will inflate faster than general inflation, we simply do not know how to plug in a number to project future health care costs with any reasonable confidence.
If we plan for the low end costs, and end up paying the high end costs, it would quickly devastate our portfolio and/or lifestyle.
If we plan conservatively for the high end costs, but never have to pay them, it would obviously be better financially. However, we could waste years working unnecessarily to build such a large additional cushion in our portfolio.
Our General Plan For Health Insurance In Retirement
In my opinion, traditional retirement planning does not currently have a satisfactory long-term solution to the health insurance challenge for an early retiree. Rather than plug in an arbitrary number that may be totally invalid to estimate our health care costs, we decided on an entirely different approach to break our analysis paralysis.
We can not predict the political environment, the rate of ongoing health cost inflation, or our personal health status 25, 15, or even 5 years into the future. We can know exactly what we have spent in the past year and have a pretty good idea of what we will spend in the next year.
Therefore, we are simply planning to work enough to cover our medical costs. We will either obtain health insurance through an employer or earn enough money to purchase coverage year to year. We plan to continue this until the health insurance market stabilizes, and/or we accumulate enough wealth and are near enough to Medicare eligibility to have confidence in a better plan.
While this is not a perfect plan by any means, we do not live in a perfect world. We have a far from perfect health care system that requires alternative solutions. Our solution was to be extremely flexible while providing the lifestyle we desire as soon as possible.
Inside Our Planning for 2017 and 2018
We originally planned to begin transitioning to our early retirement plan with me leaving my job in June of 2017. However, my wife had some expensive medical tests and then required minor surgery early in the year, and so we met our deductible quickly.
Because our family currently has insurance through my employer, we decided it made sense to have me continue working until December when our insurance year ended. This allowed us to avoid the risk of having to pay a second deductible if switching to a new plan in mid-year.
In 2018, we will switch to my wife’s employer provided coverage. On the downside, she has to continue to work 30 hours/week to obtain coverage and our costs will increase significantly.
On the upside, she has a part-time, work-from-home, location-independent job with flexible hours that is compatible with our lifestyle. Her employment will allow our family to obtain affordable health insurance, while also delaying needing to withdraw any substantial money from our investments for at least the next year.
Our plan, as long as my wife continues to have such excellent working conditions and enjoys her work is for her to continue working part-time. However, we acknowledge that this presents two major challenges.
On a societal level, there is already a strong trend among small businesses to stop offering health insurance coverage to their employees, because steady rate hikes have made it cost prohibitive. Therefore, there is no guarantee that she will continue to receive this benefit, let alone having it extended to our family.
On a personal level, she was among the first hires at a small company that continues to grow. She currently loves her job and work conditions. However, we do not want her to be bound to having to work a job just for health insurance if these conditions change.
Therefore, our future plans include a lot of flexibility and uncertainty.
There are many moving parts in the American health care system and our personal lives that make planning beyond next year very difficult. Therefore, our approach is to leave open as many options as possible.
Beyond 2018, we will consider three potential future solutions to obtain health insurance. Each option currently has upsides and downsides. Also, these options could change substantially by the time we would need them.
Option 1: Buying insurance with ACA Subsidies.
Justin, who writes the blog “Root of Good”, has been very transparent in what using the ACA looks like to make health insurance affordable for his family with young children. He also wrote an excellent article that simplifies the process of understanding and navigating the different ACA subsidies. We would most likely follow a similar path if having to buy insurance today.
If the ACA remains intact by the time we need it, the obvious positive benefits are that it guarantees that we can buy health insurance. As long as we structure our income carefully, as most early retirees should be able to, it will be affordable.
The negative aspects of doing long-term planning around the ACA are that it is under constant political assault, and so there is no guarantee what it will look like in the future. The other negative aspect is that we hate the idea of complicating our financial lives to have a low recognized income just to obtain government subsidies.
Option 2: Health Care Sharing Ministries
We like the idea of health care sharing ministries (HCSM) as an alternative to traditional health insurance. One idea that is particularly appealing is the simplicity of paying our share without the added complexity of manipulating our income to receive subsidies. While more expensive than subsidized insurance, HCSM would allow us to pursue whatever opportunities we want, whether financially lucrative or not. This is ultimately what financial independence is all about for us.
HCSM come with downsides. Because they are not insurance, they are not bound to the ACA rules related to pre-existing conditions. Therefore, they may not be an option by the time we would need them. The lack of legal protection that comes with traditional insurance also makes me slightly apprehensive, though anecdotally HCSM seem to function very well.
Because they are not bound by ACA rules, HCSM can cap the benefits an individual can receive. While this helps HCSM remain more affordable than traditional insurance, it would add risk to an individual in a worst case scenario.
HCSM also have a Christian affiliation and have varying degrees of exclusivity as to who and what conditions they cover. This is another reason HCSM are more affordable than unsubsidized insurance, as HCSM are better able to control their risks and costs. As our society becomes progressively more secular, this gives me pause in banking on the long-term viability of HCSM as they could become political targets.
Option 3: “Health Insurance Insurance”
Part of our plan is for me to continue to maintain my physical therapy (PT) license, and possibly do some occasional PT work for at least the next few years. In the event that all else fails, I would have the option to simply return to work and obtain health insurance through an employer. Essentially, I will maintain my professional license as “insurance” that I could go back to a job at which I can obtain health insurance.
The positive here is that it is pretty easy and inexpensive for me to maintain my license. Also, if I do small amounts of work to help me stay current, it would allow me to make and maintain social connections. I would also make a significant amount of money doing small amounts of reasonably enjoyable and rewarding work.
The obvious downside is that I am retiring from PT in the first place because I became burnt out on it. While doing some occasional part-time or seasonal work could be fun and rewarding, having to return to full-time practice just to obtain health insurance is a worst case scenario.
No Clear Answers
Unfortunately, after working diligently on our early retirement plan over the past five years, my wife and I have not reached a satisfactory long-term solution to the health insurance challenge. While I would love to write a single blog post that prescribes the best of two or three good options, I simply don’t see that as being the case.
My hope is that sharing our plan demonstrates the real challenges and trade-offs that come with transitioning to early retirement in the current health insurance environment. There is no quick, secure, long-term fix to the health insurance challenge for most early retirees. However, with careful planning, flexibility, and the ability to accept some risk, the challenges around obtaining affordable health insurance are not insurmountable.
[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at firstname.lastname@example.org.]
* * *