Without healthcare subsidies, healthcare in America is extremely expensive. For example, my family of four is paying $2,250 a month for a Gold plan in 2021 because we are receiving no healthcare subsidies.
This post will discuss how you can receive healthcare subsidies as an early retiree, a freelance worker, and even as a multi-millionaire.
If you can qualify for healthcare subsidies, live gets much easier. Healthcare costs in this country are simply out of control!
The Huge Rise In Healthcare Costs
Before the birth of our son in 2017, our unsubsidized healthcare premiums were roughly $1,625 a month. Each year our premiums went up by about 7% until where we are today. They say the average healthcare premium increase is closer to 10%, so we are by comparison, “fortunate” to only pay a 7% increase.
But if you think about it, paying 7% – 10% more in healthcare cost each year means you need to build a bigger net worth before you retire or lower your safe withdrawal rate in retirement. People who think withdrawing 4% in retirement are fooling themselves partly due to lower structural returns in risk assets, but also due to fast-increasing healthcare costs.
If you have no desire to work longer, accumulate more wealth, or lower your safe withdrawal rate in retirement, then the only solution is to get healthcare subsidies.
Whether you think this is morally right to do, especially if you are a millionaire, only you can decide.
How To Get Healthcare Subsidies
In order to be eligible for healthcare subsidies under the Affordable Care Act, you must earn no more than 400% of the Federal Poverty Limit (FPL) by household size. Each year, these limits will go up by ~2% to account for inflation.
In the chart below, you will see the latest FPL limits under the 100% column. The 400% column shows the maximum amount you’re able to make per household size until you no longer qualify for healthcare subsidies.
If you make less than 100 percent of the FPL, you also don’t qualify for the Affordable Care Act. You qualify for Medicaid. In some states, the income percentage is up to 139 percent of the FPL, so make sure to check.
The amount of healthcare subsidy you will receive will depend on how much over the FPL your household income is and the type of healthcare plan you want e.g. deductible amount, bronze, silver, gold, platinum etc.
The chart below shows how much of your household income you are expected to contribute to your healthcare plan. The percentages are caps.
Healthcare Subsidies Example
Using my household of three as an example, we’re allowed to earn up to $83,120 and still be eligible for the Affordable Care Act.
We would be expected to pay $83,120 X 9.86% = $8,196 a year in healthcare premiums at most. That’s a nice $12,804 in subsidies compared to our current cost.
$683 a month in healthcare premiums seems much more reasonable for a healthy family of three. Unfortunately, due to drug price gouging, soaring liability insurance, general mismanagement, and a growing percentage of the population being overweight or obese, Americans who do not qualify for subsidies must pay much more.
If our three-person household somehow managed to only earn $41,560, or 200% of the FPL limit, then we would only have to pay $41,560 X 6.54% = $2,718 a year in healthcare premiums for our same plan thanks to $18,282 in subsidies. Paying only $226 a month is truly an affordable healthcare plan.
Unfortunately, we will have a difficult time making ends meet on only $41,560 a year in San Francisco or Honolulu. Income under $117,000 a year for a family of four in San Francisco is considered “low income” according to the Department of Housing and Development.
Living A Middle Class Life In Retirement
Given we can’t survive comfortably off of $41,560 (200% of FPL), let’s focus on 400% of FPL for a family of three.
Earning $83,120 a year for a household of three is a healthy middle-class lifestyle. If we apply a 15% effective tax rate, we’re left with $70,652 a year after tax.
Being able to spend $5,888 a month is 55% more than the average spending for a 65+-year-old-household at $3,800 a month.
Here’s how we might spend $5,888 a month after paying off our mortgage.
$1,500: Food and entertainment
$1,700: Our son (tuition, lessons, toys, clothes, shoes)
$1,500: House expenses (property tax, maintenance, utilities)
$600: Personal care and miscellaneous
$588: Transportation and travel
In order to earn $83,120 in gross passive income a year, we would need to have $1,662,400 in capital earning 5% a year, $2,078,000 in capital earning 4% a year, $2,770,666 in capital earning 3% a year, or $4,156,000 in capital earning 2% a year.
Having $1,662,400 – $4,156,000 in capital should be plenty to draw down from if our household expenses exceed $83,120 gross / $70,652 net for whatever reason. We would just need to be careful to not draw down too much given we’ve got 20 years of expenses to pay for our son.
Solution To Getting Healthcare Subsidies After Making Too Much
Given we earn more than $83,120 a year in passive income from our investments, we would have to sell off roughly 65% of our income generating investments and reinvest the proceeds in non-income generating investments.
Some non-income investment ideas include: buying a property and not renting it out, buying a property and not earning a profit due to depreciation and other expenses, buying growth stocks that don’t pay dividends, making a private equity investment, and paying down debt.
To receive healthcare subsidies based on your own situation, you would simply:
- Earn a modified gross income (MAGI) up to 400% of the FPL based on your household income size
- Restructure your investments so they produce less income
- Stop working full-time or find a lower paying job
- Throttle down your freelance income or entrepreneurial income
- Be ineligible for health insurance coverage through an employer or government plan
- Not file a Married Filing Separately tax return (unless you meet the criteria in section 1.36B-2T(b)(2) of the Temporary Income Tax Regulations)
- Can’t be claimed as a dependent
- Apply for the Affordable Care Act at Healthcare.gov
Just know that even with a $5 million net worth, I’ve shown that it may be barely enough to retire early on comfortably with a family if you remain in a high cost of living location.
Therefore, to even think about reducing your income to receive healthcare subsidies might be like the tail wagging the dog.
The Maximum And Average Healthcare Subsidy Amount
Based on the contribution chart, the poorest households (sizes 1-6) must pay a minimum of $253 – $702 a year in healthcare premiums under the ACA. The richest of households (sizes 1-6) that still qualify for ACA must pay $4,788 – $13,307 a year in healthcare premiums.
In other words, the maximum healthcare subsidy per person is about $7,000 depending on plan, household size, and household income.
The average healthcare subsidy per person is around $5,000 depending on the same variables.
In our three-person household’s case, we would receive a $4,268 per person subsidy if we earn 400% of FPL. But losing out on $150,000 a year in passive income to receive $12,804 a year in healthcare subsidies doesn’t seem like a great trade.
Note: If you become a business owner, you can deduct the premiums you pay for your employees.
Is It Morally Right To Take Healthcare Subsidies?
Everybody has the right to the Affordable Care Act if they legally qualify. But is it morally right to accept healthcare subsidies, especially if you are a multi-millionaire who is not in the best of health due to your own lack of discipline?
This moral dilemma is something I struggle with despite paying a fortune in annual healthcare premiums and forking over millions of dollars in taxes over the past 20 years. When I die, there’s a possibility I will have to pay even more taxes to the government due to the estate tax.
I feel it is my duty to help subsidize the less healthy and less wealthy through higher healthcare premiums and higher taxes. That’s what being a good American citizen is all about.
However, as I get older, I no longer have the desire to work and workout as much. Instead, I’d rather focus more of my time on family in my mid-40s and beyond.
If the average number of hours an American works a week is 40, I feel like I’ve already worked a 35 – 40-year career given I’ve regularly worked between 70-80 hours a week for the past 20 years.
Perhaps instead of charging more to those who’ve worked a lot, saved a lot, paid a lot of taxes, and stayed in shape through vigorous exercise and healthy eating habits, the government might charge less or incentivize the general population instead.
Can you imagine how much healthier our nation would be if the government gave a healthcare premium or tax credit to those who walked or ran 20 miles a week and never consumed sugar?
Not only would we as a nation be healthier, but our healthcare system would also be less costly because there would be less of a need to subsidize less healthy people.
Let’s Not Abuse The System
At the moment, I draw the line at taking advantage of the Affordable Care Act if you are a millionaire and are purposefully unfit. I’m not talking about millionaires who have some type of genetic disorder or disability that prevents them from staying healthy.
I’m talking about the millionaire who has all the ability and resources in the world to lead a healthy life, but for some reason does not.
Not only is the millionaire taking advantage of the system that was intended to help the financially vulnerable, the unhealthy millionaire is also burdening the system through his or her poor health.
If you are wealthy, it behooves you to get in the best shape as you can. You’ve won the lottery. Therefore, you might as well enjoy your luck for as long as possible.
To be rich and out of shape and then apply for the Affordable Care Act is a slap in the face to the American people.
To be a wealthy early retiree and brag to everybody you’re a wealthy early retiree while receiving healthcare subsidies is also a slap to the American people.
May we all live long and never have to take advantage of the Affordable Care Act, even if Joe Biden plans to offer more healthcare subsidies. Let’s let the people who are financially struggling the most get subsidies from those of us who can pay more.
After getting healthcare insurance, it’s also important to get life insurance if you have dependents and/or debt. Check out PolicyGenius, the #1 marketplace for affordable term life insurance customized for your personal situation. My wife was able to get double the life insurance coverage for less money through PolicyGenius.
If we’ve learned anything during the pandemic, it’s that tomorrow is not guaranteed. Getting life insurance is the responsible thing to do.
For more nuanced personal finance content, join 100,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience because our finances are too important to be left up to pontification.