Medical Costs in year 1 of early retirement

As we get closer to FIRE, one of the things Mrs. 39 Months and I (and so many others) get concerned about is paying for medical costs prior to hitting age 65. In the US, Medicare picks up at that age, and though there are still medical bills, Medicare does help pick up a lot of the slack.

The current plan is to retire early at age 56 for me, 58 for Mrs. 39 Months, so that means 7-9 years in which we will have to pay for our own medical. I’ve written before about how, after reading “The Power of Zero”, I want to try to minimize or eliminate taxes for us in the first 5-10 years. If we do that and they keep the ACA subsidies in place, we should be OK. The problem is that first year.

The plan is to retire early in July 2019. Doing that, I would have several issues pop up which would make us ineligible for Obamacare subsidies:

  • Six months of pay at my six-figure salary
  • A deferred investment account my company has, which will yield me roughly $204K, all of which I will receive on the first day after I leave, and all it taxable
  • The need to live for the remaining six months, and thus to draw money from somewhere.

So my initial plan to use Obamacare won’t work for year 1 of my early retirement. I could use the Cobra to get my work insurance (Cobra is a program where you can get health insurance for up to 18 months after you leave a job, provided you pay both your part and your company’s part). Currently I’m paying about $9,800/year for my Silver plan at work, so I’m expecting that to pick up my company’s contribution, that would at least be double that = $19,600/year ($1,633/mo.).

I’ve spoken about using HealthSherpa before, to assist in your searches for healthcare. When I go online there and type in my expected income for year 1, I get no subsidies. I went with a silver plan (the most popular) and a PPO (we like the flexibility there. The system is showing me an Amerihealth NJ plan for $1,569/month (ouch) with an expected annual cost for medium usage at around $21,577 (or $1,798/mo.). Double ouch! So for that first year, I’m going to need to add an extra $1K a month to my expected medical costs, because I will make way too much money to get ACA subsidies.

Something to plan for and make part of our budget. Thanks to the FI community, at least I am aware of this kind of stuff, and can prepare for it. Also, just because we hit FI doesn’t mean we stop working. It’s possible that I find another position in my company or at another, or Mrs. 39 Months keeps working and gets a job with benefits. Either way, we’ll work it out.

It pays to know what is going on, so thanks to all those who write about this stuff (see links to right). I hope all your plans work out!

 

Mr. 39 Months

Good post at retire by 40 on social security benefits for early retirees

The post gives you the math to determine your Soc Security benefits, and how retiring early will curtail them.

Most folks don’t know that the report from SSN assumes you will continue to work at your current salary till you hit your retirement age. Thus the number showing on the website for you is overstated if you retire early.

I found out that we’ll be taking about a 30% cut to our stated benefits if we decide to retire in the next year.

Interesting article in Kiplinger’s about the FIRE movement

Good article about the FIRE movement, with some examples. They’ve got most of it right, a few details off.

The examples they use is your typical high-income earning couple who made six figures in their early years. I wish we could see more examples of more normal people who do this in these sort of articles.

The article ends with  recommended steps, which folks in the FIRE movement can get behind:

To get on the road to Financial Independence, Retire Early, proponents recommend these nine steps:

1. Determine why you want to achieve FIRE, and envision what you will do once you get there. (This will keep you motivated.)

2. Calculate your net worth (total assets minus liabilities) to see where you stand.

3. Track every dollar spent so you know where your money goes.

4. Slash expenses. To reach a savings rate of 50% or more, you’ll need to cut major expenses, including housing and transportation.

5. Pay off high-cost debt, such as credit cards.

6. Build an emergency fund so you don’t resort to credit cards in a pinch.

7. Take advantage of tax-friendly accounts: 401(k)s, IRAs and a health savings account.

8. Use index funds to keep investing costs low.

9. Find a side hustle to bring in extra income and boost savings.

I’m just a “roady”….

One of the tenets of FI is to have time to do what you really enjoy. One of Mrs. 39 Months hobbies that she has picked up in the last couple of years is playing the dulcimer – a folk instrument with roots in 19th century Appalachia. It’s kind of funny, because Mrs. 39 Months is 100% Italian America (all 4 grandparents from Italy). Still, she really enjoys the instrument. Her father actually helped make one for her from a kit when she was 18 (she still has it) and she continued to have some interest over the years. Lately, though it has become quite a passion.

Part of having any sort of hobby like this is the potential to travel to various shows, with vendors, classes and a network of friends and “fellow travelers.” It also provides her with the opportunity to spend money, and the running gag in the community is, when someone asks “how many dulcimers do you have” to answer back “I still need one more.” Currently Mrs. 39 Months has 3, and may be interested in picking up “just one more.”

Going to the shows offers me the chance to travel, and to spend time with Mrs. 39 Months. When I went through various exercises to go through goals and objectives for the year, determining what makes me happy and what takes energy away, one of the things I wanted to do more of in 2018 is to travel and be with Mrs. 39 Months. So this weekend, we are up in Milford, CT at the Nutmeg Dulcimer conference.

For me, I act as Mrs. 39 Months “roady” for her dulcimer events. The official definition of a roady is “a person employed by a touring band of musicians to set up and maintain equipment.” I don’t think Mrs. 39 Months would let me touch her dulcimers, but I do the driving, help with the packing/unpacking, and generally provide the moral support. For this, I get the companionship of being with my spouse and enjoying the conversation.

She has taken various classes and is looking to buy a music book or two – but hasn’t found a 4th dulcimer that really needs to be purchased. She says she’s learned a few more things and expanded her skills – which is what it is all about.

I would urge those of you with friends and family to take the time to enjoy the comradery and life with them as you journey towards or enjoy FI. After all, it’s the journey which is the thing, not the final destination!

 

Mr. 39 Months

 

When was the day you decided FI was the way?

In my work life, I have to attend major team meetings 2-3 times a year. This are typically 2 day events where we  go over our key objectives for the year, and look at our existing staffing (their professional goals, current level of work, and potential for growth/promotion). It’s actually a very good experience, and I have to give my boss credit for caring to develop and promote those under him. In addition, the key objectives for each team member are not job-based, but are additional goals to help “drive” the team forward and change the organization for the better.

Unfortunately for me, I am looking to reduce my responsibilities and/or early retire in less than 21 months. So when we discuss my own professional development, and potential promotions/opportunities to improve the organization, I have to hedge my conversations and downplay future contributions. Part of my FI plan includes some bonuses that would be due to me, especially in March 2019. While it wouldn’t be a back breaker to not receive the full bonus, I do believe if my contributions were good in 2018, I deserve to get the bonus.

I’ve talked before about the feeling that in some cases technology has passed me by. This was also evident in the meeting, as I was surrounded by many folks somewhat younger than me, with more technical prowess, and burning to move up the career ladder. I did not have that “burning desire” and questioned whether learning new technology and new skills (some of which I questioned if they were truly valuable) was really something I wanted to do.

It was during this event that it hit me again why I wanted to achieve FI. I wanted the freedom to be able to choose how I contribute to the organization, not to be forced into a career path or job that was ill suited for my skills or interests. Since I am pretty much there (yep, I still have “1 more year syndrome”) I have decided that in April of next year – right after bonus – I am going to approach my boss with the request to downshift pay & responsibility.

We will see how that goes over. I think I have a pretty good skill that is in short supply in my organization, so I might be able to step back from a management role and continue to be paid. I guess we will see in 6 months.

Wish me luck, just like I wish all of you luck on your journey to FI!

 

Mr. 39 Months

Drawdown Strategy Analysis – using “Power of Zero” – V2 using lessons from the book

My last post, I covered the traditional way to withdraw upon reaching retirement (all your taxable, then all your tax deferred, and finally, all your tax-free spending. In the end, I was left with $1.1M in my Roth IRA.

I also did the analysis with a withdrawal rate of $84,000/year (of which 8,500 if Fed/State taxes). This works out to $75,500 if I manage to avoid any taxes whatever – based on the guidelines of “the power of zero”. In addition, if I keep my income around $24K (the exemption for married) my medical subsidies will reduce my medical costs by an estimated $7.166/year. So I’m going to assume a withdrawal rate of 68,500 to keep the same lifestyle as my previous withdrawal – again provided I can keep my revenue at $24K for the year.

In order to make this work, I would need to use money in my investment account over the next two years to shift $200,000 from my Tax-Deferred bucket, into my Tax-free bucket (using my investment account to pay the taxes. If I do this, at my FIRE date (21 months from now) I should have the following assets:

  1. Taxable bucket: $302,358 (including $156,689 in deferred that I will have just paid the taxes on)
  2. Tax-Deferred: $518,578
  3. Tax-Free: $505,627

So, unless being spent, the items listed will grow at 5.24%.

  • Year 2020 (6 months): Pulling $42K out of Tax-Deferred account (Pop’s IRA). Taxable, but I just got hit with a lot of taxes for my Deferred.
  • Year 2021-2024: Withdraw minimum from Pop’s IRA (a little over $4K) and enough from Mrs. 39 months IRA to hit the $24K (allowance for IRS with no taxes) and remainder from Taxable bucket. This allows us to pay $0 in tax and minimal for insurance, due to subsidies
  • Year 2025-2026: Mrs. 39 Months starts collecting Soc. Security, which alters some stuff. Continue to pull minimum distribution from Pop’s IRA (starting to climb to $5K and $6K), finished depleting our taxable bucket, while reducing money from our tax-deferred bucket to keep total under the $32K minimum for tax-free. Will need to start pulling some from our Tax-Free Roth to make up for lower Tax-Deferred money
  • Year 2027-2028: Mrs. 39 Months goes on Medicare. Assuming medical costs increase about $4500. Continue to take minimum from Tax-Deferred to keep Soc Security under $32K point where we’d have to pay taxes on it. Still Tax free 8 years after retirement.
  •  Year 2029-2031: Mr. 39 Months goes on Medicare. Assume medical costs climb to our final number, so our withdrawal has to be $75,500/year (adjusted for inflation). Still able to pay no taxes by withdrawing minimums from Tax-Deferred and supplementing with Tax-free Roth.
  • Year 2032: Mr. 39 Months begins taking Soc. Security at age 67. However, I’m going to assume that, due to issues with Soc. Security, I am going to assume that I am only going to get half of what I will get (i.e. 50% cut in benefits), so that works out to $16,908/year. So, each year roughly $30K in Soc. Additional funds out of Tax-Deferred and Tax-Free, but I’m going to be past the “don’t pay taxes on Soc Sec – now taxed at 50% of them. Assume income requirements go up to $77K
  • Year 2033-On. RMDs and Social Security force me into higher tax brackets, meaning I’m set at $78500. Mix of Tax-Deferred and Tax-Free withdrawals keep me in good shape.
  • Year 2062: I hit 97 and Mrs. 39 Months hits 99. We have roughly $924K in Roth IRA, and $192K in Tax-Deferred IRA, for a total of $1.16M.

This is more than we had under scenario 1.  This also doesn’t touch our “emergency fund” or house money – which I think of as our backup money in case of major disaster. If this tells me anything, it’s that I should look to shift more than $200k from our Tax-Deferred money, so that we can possibly keep our taxes lower once we start taking our Social Security.

Again, issues with this are that it shows that I could have taken out more and “lived a little more” in my years. In addition, I kept the $9K in medical spending stable, which might not really be accurate.  However, I ended up not paying much in taxes over much of the early part of the retirement.

I think the next step here is to do this study, assuming no social security, and see where that hits.

Other blogs on this top

 

Mr. 39 Months

Drawdown Strategy Analysis – using “Power of Zero”

After reading The Power of Zero  I decided to do an analysis on how effective this would be versus my current drawdown plan.  Some of the key aspects of the analysis include:

  • Withdrawal amount after taking into account taxes
  • Effect of revenue on social security
  • Effect of revenue on medical subsidies

As you remember from my review, the book breaks your funding down to three buckets:

  1. Taxable bucket (savings accounts, CDs, brokerage accounts, etc.)
  2. Tax-deferred bucket (401Ks, IRAs, etc.)
  3. Tax-Free bucket (Roth IRAs, LIRPs, etc.)

The way I chose to do my analysis is as follows:

  1. Identify specific FIRE date to start. This is controversial, in that it is committing me to “retire”, not just hit FI, but keep working
  2. Determine the amount of money I would have in each bucket at that time
  3. Estimate growth of investments while taking out inflation from growth, tax rates, etc.
  4. Determine withdrawal strategy for the two options and apply
  5. Determine a time frame for investments. I am going to assume Mrs. 39 Months and I live till we are 99/97.
  6. Determine if plan will enable us to survive

When going through our budget for retirement, I came up with a spend of $65,104/year, which included $8,892 for medical (insurance, co-pays, deductibles, etc.). Tack on $5,615 for state & local taxes, and I’m coming up with $70,719/year. For the basis of this analysis, I’m going to use $66K/year for expenses (again, I will adjust out for inflation) and $5K for taxes – bringing total to $71K. Just to be “extravagant”, I’m going to assume a spend of $84,000/year. Based on current tax rate and allowances, this would have me paying about $8,500 in taxes (Fed & State).

For investment returns, I’m going to assume 70% stocks (6.8% returns after inflation) and 30% bonds (1.6% returns after inflation) for a blended return rate of 5.24%.

At my FIRE date (21 months from now) I should have the following assets:

  1. Taxable bucket: $364,030 (including $156,689 in deferred that I will have just paid the taxes on)
  2. Tax-Deferred: $729,284
  3. Tax-Free: $294,922

So, unless being spent, the items listed will grow at 5.24%.

  • Year 2020 (6 months): Pulling $42K out of Tax-Deferred account (Pop’s IRA). Taxable, but I just got hit with a lot of taxes for my Deferred.
  • Year 2021 & 2022: Withdraw $63.5K from Taxable bucket & $6K from Pop’s IRA. Pay reduced taxes because Deferred account already paid for them in 2020
  • Year 2023: Withdraw final $45,448 from Deferred, $6K from Pop’s IRA, and $18,052 from Taxable bucket (investments). Again, paying reduced taxes because Deferred account and investments already paid, or income small enough for Cap Gains
  • Year 2024: Pull $63.5K from Investments, $6K from Pop’s IRA. Reduced Taxes
  • Year 2025: Pull Final $3K from Investments, $14K for wife’s Soc Security, and $76K from Pop’s IRA. Wife’s Soc Security pays full taxes on 85% because Pop’s IRA is treated as regular income. Since I am over the ACA limit, my medical costs jump up from $8.8K to $19.4K (ouch!)
  • Year 2026: Pull final $27K from Pop’s IRA and $14K from Soc. Security. Begin drawing down Tax Deferred IRA money ($54.5K). Again, over ACA limit, so high medical. Not taking Mr. 39 Month’s Soc Security at this time.
  • Year 2027: Mrs. 39 Months starts getting medicare, so medical costs drop to about $13.2K (overall revenue needed drops to $89,364/year). Pull $75.5K from Tax Deferred IRA and $14K from SS. Now left with $713K in Tax-Deferred and $430K in Roth IRA.
  • Year 2028-2031: Continue pulling all money from Tax-Deferred Pulling $70-$75K and $14K from Wife’s IRA. All of this is taxable. At 65, Mr. 39 Months converts to Medicare and costs drop
  • Year 2032-2045: Mr. 39 Months begins taking Soc. Security at age 67. However, I’m going to assume that, due to issues with Soc. Security, I am going to assume that I am only going to get half of what I will get (i.e. 50% cut in benefits), so that works out to $16,908/year. So, each year roughly $30K in Soc. Security and $41K from Tax-Deferred accounts. All of this is taxable.
  • Year 2046: Tax-Deferred IRA runs out of money, and have to switch to Roght IRA. At this time, Roth has about $1.02M in it, so the 5.24% return rate will cover this out till we pass away.

So based on that, my excel chart came in at roughly $1,102,346 remaining in my Roth IRA (all of which I could pass on to my heirs tax free). Not bad, though it shows that I could have taken out more and “lived a little more” in my years. In addition, I kept the $9K in medical spending stable, which might not really be accurate. This also assumes the tax rates stay the same in the years ahead (a big “if”).

Tune in next time when I take the “Power of Zero” lessons and try to do even better.

Other blogs on this topic

 

Mr. 39 Months

 

Quarterly Update – Oct 2018

Well, it’s early October, and the year is three-quarters done. Some of the goals have been completed, some are still being worked on, and some have been dropped – a pretty typical year for most folks. So how am I doing in comparison to my goals for 2018?

My Goals for 2018 (some financial, some not):

Finance:

  • Save $81K in tax-advantaged accounts (saved almost $37K in 2017): Grade A. Saved almost $65K after 9 months, and on track to get about $80.5K in by the end of the year.
  • Save $9K in regular: Grade A. Got this done in 1st Qtr 2018.
  • Increase dividend income from all accounts to $24K/year: Grade B. I’ve gotten over $17K for the year, so I’m on track to get to $24K by the end of the year.
  • Passive income covers 33% of base living expenses in retirement, i.e. $24K of my $72K expected expenses: Grade B. See above. If I hit $24K, that is 33% of my expected $72K annual budget upon hitting FI
  • Beat net worth growth rate of 7%: Grade D. So far, I’ve only made 1.5% this year, beyond the money that I have already deposited. If the market stays flat or drops, I won’t hit this number. I need the market to pop up a bit in the last quarter.

Business:

  • Begin attending regular meetings of my local real estate investors association. Grade D. Attended two meetings in 3rd quarter. Slowing down a bit. Some of the meetings have been for info that I’m not interested in, and some of the meetings that I was interested in got blocked by business travel for my job.
  • Double the number of blog visitors in 2018. Grade A. I’ve already hit this goal, and actually working on tripling the number of visitors before the end of the year. Thanks to all of you for tuning in!
  • Write/publish a book on finance.  Grade: Incomplete. Did some initial work on it, but really haven’t put as much work into this as it needs.

Personal:

  • Increase weight lifted by 10% from 2018 (increased by 12.7% in 2017) Grade B: Up 5% from the beginning of the year, but I’ve had some health issues which have set me back here. Still working on it
  • Average 2 hours of cardio per week (currently averaging about an hour).Grade C: Averaging about 1.2 Hours a week for 3rd quarter. Really need to work on this. .
  • Backpack over 100 miles on AT (did over 100 in 2017) Grade: C. Completed only 79 miles this year. Personal issues got in the way of completing other hikes. Looking to rebound in 2019 and get over 130 miles in.
  • Begin volunteering at Pennsbury Manor at their joiner’s shop (woodworking) Grade A: Volunteer training completed, and I’ve been volunteering since May. Year coming to close, but plan to assist in 2019.
  • Reduce weight by 20 lbs. from Jan 2018 (lost 9 lbs. in 2017). Grade D: Dropped down 11 lbs by July 1, but gained most of it back. Health issues are keeping me from aggressively losing more weight right now.
  • Read at least one book a month. Grade A. Read seven (7) books in 3rd qtr – two fiction, 2 financial, three history. I’m going to need to bump this goal up in 2019, cause I’m enjoying it.

Travel:

  • Visit a national park (visited Shenandoah NP in 2017). Grade: A. Visited two parks in May  (Redwoods NP in California and Crater Lake in Oregon) Planning on visiting another park in 2019
  • Visit family in Tennessee, Vermont and New York. Family is very important to me. One of the things I am looking forward to with financial independence is the opportunity to visit family more often. Grade B. Visited family in TN in March. Plans to visit TN in Oct and Nov (Thanksgiving) and Mrs. 39 Months in early November. Missed out on visiting Vermont this year (plan for 2019)
  • Visit Portland, OR and northern California. Grade: A
  • Visit Ellis Island. Wanted to do this in 2017, but didn’t make it. As 50% Czech from immigrant great grandparents from the turn of the century, I believe they went through there, and I want to see it Grade: F. Still haven’t been there and I have had the opportunities.

Overall, I’d give myself a B. Got a lot done, but still have a few more to close out.

Other updates in 2018

How are you going on your goals for 2018?

Mr. 39 Months