How Do Early Retirees Get And Pay For Health Insurance?

How Do Early Retirees In The FIRE Movement Handle Healthcare?

Thinking of retiring under the Biden administration? It's not a bad bet given taxes are going up and there is going to be a wider social safety net. However, how do early retires get and pay for health insurance?

After all, health insurance is expensive. My family of four personally pays $2,300/month for unsubsidized health insurance. And its cost goes up at last 5% a year.

Affordable health insurance is one of the most important considerations all early retirees must calculate before leaving their day jobs. The typical cost of a healthcare plan is about $20,000 for 2020. And the employer usually subsidizes 60% – 100% of the employees cost.

If you are not prepared to pay for you and your family's full healthcare costs, then retiring early and living the FIRE lifestyle may be difficult. However, there are several solutions that will make having affordable health insurance cheaper.

Let me share my thoughts as a father who left the workforce in 2012 and has never returned. I have a wife who is also retired and a young son we both take care of.

How Do Early Retirees Get And Pay For Health Insurance?

For 2021, wife and I pay $2,300 a month or $27,600 a year out of pocket for a platinum plan for a healthy family of four. This is an absurd amount of money to pay because we hardly ever go to the doctor.

But we decided to get this plan because our son was born in 2017. As first time parents, we didn't want to deal with the stress and hassle of having to deal with a sub-optimal plan.

Further, you don't know for sure about all your child's health issues until after the first five years or so of life. Some might have a visual impairment or autism. You just never know. This is a very important point to consider if you are an expecting parent or new parent.

We could have saved $100 – $200 a month by getting a Bronze or Silver plan, but the cost would still be over $1,500 a month. Either way you cut it, paying for unsubsidized healthcare is extremely expensive in America.

How To Plan For Healthcare Needs Before Retirement

When I was working towards financial independence, I always baked in the cost of healthcare and inputted a 5% annual healthcare cost growth rate. Healthcare costs, childcare costs, and tuition costs are three of the fastest growing costs in America. For early retirees, being able to generate enough passive income to pay for these expenses is the bare minimum.

To determine my healthcare cost in retirement, I asked my employer what the full non-subsidized healthcare cost they paid per month for me was, then I built my healthcare cost model. 

How Do Early Retirees Get And Pay For Health Insurance? Health insurance costs go up faster than inflation

Even though we budgeted to pay $1,400+/month in healthcare costs after both of us left our full-time jobs with subsidized healthcare, it still was a big shock. We had to first get over the fact that we both were no longer getting steady paychecks twice a week. Then we had to get used to paying a large new monthly expense.

One good solution I have for everyone is to start doing some enjoyable freelance work on the side to help cover your costs. As an early retiree, you still have valuable skills to leverage. You also suddenly have plenty more time in the day to do things you enjoy.

If you become a sole proprietor or create a company, you may be able to write off some or all of your healthcare costs as a business expense. If your business effective tax rate is 25%, you could save 25% on healthcare costs. However, check with a tax professional first. 

How Will Healthcare Needs Change Over Time

As early retirees, expect annual healthcare premiums to go up by 5% a year forever. We also expect to get more sick and more injured as we get older. But because we have platinum plans, we have low or no deductibles and a maximum cap of $3,000/year in out of pocket expenses from our co-insurance.

We also plan to pay for long-term care insurance when we reach our 70s.

I highly recommend everyone try and stay as fit as possible and get your medical checkups in before retiring. It's the same thing as refinancing your mortgage before you lose your W2 income.

What Are Healthcare Insurance Alternatives

My family may be an anomaly in the FI community for paying so much in healthcare costs a year. Most of my FI peers seem to be getting subsidized healthcare through the Affordable Exchange Act. That, or they have a spouse working who has subsidized healthcare.

For a family of 4, a household need to make less than 400% the Federal Poverty Limit, or $100,400 to be eligible for healthcare subsidies under the ACA. See the chart below for your income limits by household size to be eligible for subsidies. For most early retirees, their incomes should fall within 400% of FPL.

If you are in the Federal Poverty Level, then you get subsidized health insurance

Unfortunately or fortunately, we currently earn about $250,000 a year in retirement income (article with chart breaking down all income streams) to provide for our FI lifestyle living in San Francisco or eventually Honolulu. Therefore, we do not qualify for subsidies.

Due to inflation and the arrival of our daughter in 2019, we have an ultimate goal of trying to generate $300,000 a year in retirement income before our little on goes to kindergarten in 2022. But of course, who knows how our investments will perform by then given how deep we are in the bull market. 

For the majority of places in America, earning up to $100,400 in retirement income to take care of a family of four should be enough. Unfortunately, we choose to live in San Francisco because this is where we've been since 2001. Given our choice, we choose to pay a premium for healthcare. 

Healthcare In FIRE Is Affordable

Healthcare costs in America is truly a great burden for early retirees and regular retirees. But there's nothing we can do except to eat better, exercise more, save more, and invest more to help those who cannot.

After all, helping others is the American way. I've honestly been considering relocating to Canada to reduce our healthcare cost burden. However, until we find ourselves in difficult financial times, we will hold off on this option. 

High healthcare costs is one of the main reasons why the large majority of people pursing FIRE or writing about FIREe live in the heartland of America. But the reality is, half the American population lives on the more expensive coasts due to their jobs, family, desire for more diversity, or personal preferences. Not everybody feels comfortable relocating Kansas City to save on costs.

So long as your household earns below 400% of the Federal Poverty Limit, you will be able to get healthcare subsidies. However, the typical plan is usually a Bronze or a Silver plan with a high deductible. We're talking $10,000 – $15,000 deductibles.

You must plan ahead for this expensive but necessary cost. Once you do, you will enjoy your early retirement lifestyle much more!

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