RE 'bridge' to Medicare: how did you decide?

[GoodbyeYellow]

Sorry for length; this decision is driving us a little batty.

We (62, 59) are working out a plan to manage health care costs for the next 6 years while also being able to keep our reasonably modest standard of living in the early years of retirement. I retired earlier this year and she is targeting end of this year. Kids are independent.

First and to be clear, I think we are well set up for retirement with a total nest egg > $5M and non-healthcare expenses around $100K/yr (currently, but we might want to increase by say 15%, I don't know the final thoughts on this yet).

To this end, the known items are:
a. $270K cash (so $45K/yr if depleting fully in 6 yrs))
b. $26K/yr dividend income
So about $70K/yr from current sources.

The variable sources revolve around the following:
1. We can harvest some old trading losses and bring in around $300K from the sale of stocks (so $50K/yr), tax free (and MAGI-free) due to loss writeoffs.
1a. This action will cut dividend income to around $15K/year (reduction of $11k/yr from (b) above)
2. Withdraw from tIRA to the tune of ~$20K/yr; this should be nearly tax free but for a few hundred a year (we would use standard deductions).

Net effect of the variables above:$59K, so known + variables add to ~$130K/yr, which should be enough to meet 90+% of spend needs/wants.

Of note is that this leaves a good bit of non-productive cash on hand AND reduces income from dividends. OTOH the cash represents < 10% of NW (if counting home equity), so by itself this amount is not risky I think.

The decision we are struggling with: whether to drive MAGI low enough to get a strong benefit from ACA (current thinking), or to pull much more from tIRA, paying both taxes and higher ACA costs.

The catch with ACA is more than just the premiums - it's the deductibles and MOOP, which can go quite high if not in a Silver CSR plan, which we are shooting for in the base scenario. I know this is not a certain amount but I tend to look at it as such, to be conservative. We are in reasonable health but I may need a minor surgery in the next year or two (hernia).

No SS yet; I think we'll defer this decision for at least 3 years, until I get on Medicare and we can reassess this whole thing.

So for those who have worked through a similar scenario, how did you reason through it to reach the decision you did? Did it work out as planned? And for all reading: if in our situation, how would you approach this, and have I missed anything?

 

[kyzymurgist]

I retired in 2013 and went through similar decision process although you are much better positioned and prepared. Also the ACA landscape has changed a bit since then.

One big recent change is that the ARP eliminated the tax credit cliff so you don't need to obsess about keeping MAGI under 400% poverty level.

The other big change came in 2018 when Trump eliminated the federal CSR subsidies. In most cases, there is no longer any real benefit to keeping income very low and choosing a silver plan to get the huge actuarial benefit.

In a way the republican plan to eliminate federal CSR subsidies backfired. The subsidy continued but most insurers in most states put the full load onto Silver plan pricing which is used to set the ACA tax credit. So the tax credit soared after 2017 for all plans. The law of unintended consequences I guess.

Before 2018, we income engineered to get Silver plan with CSR. I had limited after tax funds so a cheap HELOC was very helpful in that effort. But 2018 to present it was much cheaper to choose high deductible Bronze with HSA and tax credits approaching $20k. Can't justify Roth conversions to give up that kind of tax credit.

You have lots of options for managing income to obtain tax credit every year til Medicare since you have adequate after tax funds. And it probably doesn't matter much where your actual MAGI falls in the $30k to 70k range unless you are anticipating high medical expenses and really want a CSR Silver plan. I think anything in that income range has an effective marginal tax of 25% to 30% when considering the tax credit effects.

Otherwise, opt for a fully or heavily subsidized Bronze plan and keep MAGI income below $70k or so.

Someone will post a spreadsheet link if you still want to optimize every last dollar.

 

[ivinsfan]

You are having a hard time with this decision and from previous threads of yours, you have been struggling with it for awhile.



You got some really good answers in previous threads, I don't know that anything new can be added.


If you had to pick one today which one would you pick? And I think I mentioned beforeACA is one year at a time so you feel you picked wrong you can have a redo next year.




I do know you have mentioned that your spouse really dislikes paying taxes and is anxious about financial stuff is that part of what is going on here?


I hope you can thread the needle so you dont stress too much over this.

 

[Dash man]

A $5M nest egg with only $100k expenses other than health care? What are you worried about? We paid about $20k/year for healthcare premiums after retirement up until turning 65 this year. At your age we were in a similar position financially, but had been retired a few years. Healthcare costs did not effect us much because our investments more than made up for the cost. We did run scenarios in case the market perform well, and we would have been fine. For what it’s worth, our spending over the eight years of retirement has averaged over $200k/year.

 

[ivinsfan]

A $5M nest egg with only $100k expenses other than health care? What are you worried about? We paid about $20k/year for healthcare premiums after retirement up until turning 65 this year. At your age we were in a similar position financially, but had been retired a few years. Healthcare costs did not effect us much because our investments more than made up for the cost. We did run scenarios in case the market perform well, and we would have been fine. For what it’s worth, our spending over the eight years of retirement has averaged over $200k/year.

I'm not the OP but IMO he seems concerned about making a bad/wrong decision,ya gotta pick one and roll with it. With their nest egg a wrong decision is just a wrong decision it's not a fatal mistake.

 

[GoodbyeYellow]

I'm not the OP but IMO he seems concerned about making a bad/wrong decision,ya gotta pick one and roll with it. With their nest egg a wrong decision is just a wrong decision it's not a fatal mistake.

Good responses and agree with all. Yes, not fatal. I just got to thinking about holding nearly $600K in cash (at the beginning), non-productive money. But at least it is then protected from the inevitable bear market which everyone says is coming, and has been coming since 2016

kyzymurgist, we are in CA so CSR still exists!

 

[MRG]

I retired in early 2013 with not much knowledge of ACA or healthcare past that years COBRA. To allow me to retire early we were willing to live below our means for a while. I stumbled upon this place and I quickly learned how ACA worked in 2014.

As things happened to work out we had some CDs that were expiring and they provided funds for the first 3 years. Then, like you, we had some tax losses to write off against gains. I was bored in 2020 and withdrew several years expenses to blow some dough and to my surprise I didn't have to repay the subsidy! Now the slope instead of cliff comes in for my last full year.

I didn't have a clear plan in the beginning of 2014 on how to navigate to 2022(for us) but it worked out well. I think you'll be ok.

 

[RetiredHappy]

With $5M nest egg, you should not sweat over making the wrong decision or not. Whatever option you choose, even if it costs you $20K more per year won't break you.

We retired at 67 and 53, and set aside $1M cash to fund us until various income streams kicked in. We blew through them in 5 years by living "large" and we certainly didn't lose any sleep over it. We just pull more money from taxable account to meet expense needs.

Other than my first year on ACA because we managed to limit income, I have been buying an off-exchange private individual plan which provides much better doctor options. You can't make me go back to an ACA plan.

 

[GoodbyeYellow]

Thanks RetiredHappy and MRG.

RH, do you mind sharing that plan provider? Might be good to compare against.

 

[RobbieB]

I did COBRA until it ran out, cost was ~$350/mo. Then I did self funded bronze HDHP (had HSA account) for about 500/mo until Medicare.

 

[RetiredHappy]

Thanks RetiredHappy and MRG.

RH, do you mind sharing that plan provider? Might be good to compare against.

I buy an off-exchange private insurance plan through Sierra Health and Life here in Nevada. They are the cadillac arm of United Health Care in Nevada and may only exist here. It is an EPO - Extended Provider Organization - like PPO except no coverage outside of the EPO providers. Every medical provider here takes this plan. I buy one of their silver plans for $925 per month, including dental. It is rated for when I was 58 years old at the beginning of 2021. If I go with Gold plan, it would be something like $1200 but based on my usage, my silver plan is more cost effective. I don't sweat over not getting ACA subsidies. Having the best doctors accept my insurance is top priority. We are already at the 22% to 24% IRS tax bracket and do not do Roth conversions.

You just need to look at your state's Health and Human services site as medical insurance providers are public information. A local broker should be able to provide you with the same information.

 

[pjigar]

First, there is nothing wrong with trying to save money regardless of your nest egg size.


To your original question, I am few years away from FIRE but I tried to answer the same question with extensive analysis.


The basic reasoning: If future marginal tax rate (R) at RMD is higher than current marginal tax rate (C) then "consider" Roth conversions during pre-RMD years. If the R is lower/same than C, then try to drop C in to tax bracket lower than R.


The tricky part is how can you objectively "consider" Roth conversion in light of the ACA subsidies? Assuming that you don't qualify for CSR then ACA premiums are capped at 8.5% of MAGI. So I consider 8.5% as an additional "tax" (A). Now the comparison is somewhat objective. New rule: If R is going to be higher than (C+A) then do Roth conversions to the top of the C bracket. If you add back CSR then it gets complicated because you will have to manually calculate A for your own case.


Nevertheless loosing ACA "tax break" may not matter in the long run for such a small "bridge" in your case. I will have >10 years bridge so getting it right will make a sizable savings for me.

 

[pb4uski]

+1 Look at the likely tax on RMDs once any pensions and SS are online... you'll obviously have to estimate it... and it might cross tax brackets and not be 12%/22%/24%. The look at the tax cost of Roth conversions considering not only the income tax but also any lost ACA subsidies in relation to the amount converted.

If the latter is significantly lower than the former then Roth conversions may be worthwhile even with loss of ACA subsidies.

In doing those calculations, also consider state income taxes and the impact on state income taxes if you plan to move to a lower tax state.

We were lucky to live in a state (Vermont) that had community rating for individual health insurance so we were able to take advantage of a provision of ACA that allows people to buy catastrophic health insurance priced for people under 30 that cost about 60% of a bronze level ACA plan with similar coverage to a bronze plan. Since we are relatively healthly, deductibles and co-pays were not a concern. In 2020 we paid about $260/month for this coverage (for 1).

Since we had access to low cost catastrophic coverage, lost ACA subsidies was not a factor in our Roth conversion decision.

 

[ivinsfan]

Reading these comments reminds me of the old adage, you can have something but you can't have everything! Doesn't hurt to try..



It's good to remember that if you get to stressed out about this stuff.

 

[Magus]

My father did a health share plan his last few years before he was Medicare eligible. Was way cheaper than ACA @ 8.5% and with much lower deductibles. I believe it was ~$250/month with $1k or $1.5k max out of pocket about 3 years ago. His didn't cover prescriptions so he used Goodrx for that.

 

[GTFan]

First and to be clear, I think we are well set up for retirement with a total nest egg > $5M and non-healthcare expenses around $100K/yr (currently, but we might want to increase by say 15%, I don't know the final thoughts on this yet).

You've got a >5mil portfolio and you're worried about HC costs

ROFL.

 

[pb4uski]

^^^ That was my initial reaction as well. What are the poor people with only a million supposed to do?

 

[ivinsfan]

You've got a >5mil portfolio and you're worried about HC costs

ROFL.

The OP is new member and that's not a very kind comment.


The actual question is rolled up into, taxes, Roth conversion, ACA subsidies, etc.


All he's asking for is the way to deploy his money for the max return over the next few years. He didn't ask for people to make fun of him.

 

[fh2000]

We retired 3 years ago when we were 63 and 57. We had 4M then; today much more. We did small Roth conversion and we use ACA Bronze HDHP with $2 monthly premium. I joined Medicare this year. DW's ACA premium will be $0 next year.

We sort of kicking Roth conversion can down the road so we can reduce ACA premium. But we may pay higher tax in later years.

 

[GoodbyeYellow]

The OP is new member and that's not a very kind comment.


The actual question is rolled up into, taxes, Roth conversion, ACA subsidies, etc.


All he's asking for is the way to deploy his money for the max return over the next few years. He didn't ask for people to make fun of him.

Correct and thanks.

(I actually typed a much longer answer but thought better of it)

 

[GoodbyeYellow]

First, there is nothing wrong with trying to save money regardless of your nest egg size.


To your original question, I am few years away from FIRE but I tried to answer the same question with extensive analysis.


The basic reasoning: If future marginal tax rate (R) at RMD is higher than current marginal tax rate (C) then "consider" Roth conversions during pre-RMD years. If the R is lower/same than C, then try to drop C in to tax bracket lower than R.


The tricky part is how can you objectively "consider" Roth conversion in light of the ACA subsidies? Assuming that you don't qualify for CSR then ACA premiums are capped at 8.5% of MAGI. So I consider 8.5% as an additional "tax" (A). Now the comparison is somewhat objective. New rule: If R is going to be higher than (C+A) then do Roth conversions to the top of the C bracket. If you add back CSR then it gets complicated because you will have to manually calculate A for your own case.


Nevertheless loosing ACA "tax break" may not matter in the long run for such a small "bridge" in your case. I will have >10 years bridge so getting it right will make a sizable savings for me.

Thanks. We are aiming for a CSR bracket, and do intend to convert into Roth as soon as possible. This may happen before the six years are up, as I have 3 years left to Medicare.

I will need to think about your calcs some more, but in the meantime we will likely go ahead with ACA. As ivinsfan pointed out, it is a year-by-year thing and you get another bite of that apple every year. Like I guess most people here do, we will be re-evaluating things every few months anyway.

 

[ncbill]

Thanks. We are aiming for a CSR bracket, and do intend to convert into Roth as soon as possible. This may happen before the six years are up, as I have 3 years left to Medicare.

I will need to think about your calcs some more, but in the meantime we will likely go ahead with ACA. As ivinsfan pointed out, it is a year-by-year thing and you get another bite of that apple every year. Like I guess most people here do, we will be re-evaluating things every few months anyway.

Well, you could borrow instead to hold mAGI low & so get those sweet ACA subsidies, at least in a couple of cases:

Does your home have significant equity?

Borrow via refinancing an existing mortgage or adding a HELOC to fund the next 6 years.

Or is your portfolio mostly in taxable?

Borrow against it on margin.

Tell your broker to match margin rates at Interactive Brokers...around 1% on $1 million...interest accrues, so no regular payment necessary.

 

[GoodbyeYellow]

ncbill, great ideas.

We already did apply for the HELOC in recent weeks. Yes, significant equity but BoA looks like it may take too long so I am looking at other options.

I had forgotten about the margin thing. We have two brokerage institutions, Fidelity and TDAmeritrade, with enough in taxable funds. I asked Fidelity and it seems they do not do straight margins for cash. Will check with TD soon. 1% seems like a great price.

 

[ncbill]

IIRC, official margin rates are much higher at brokers like Fidelity but posters over on bogleheads report they've had success negotiating margin rates much closer to IB's margin rates.

Because your local brokerage office knows nothing's stopping you from moving your money anywhere you want.

 

[jollystomper]

For my planning I took the worst case scenario. The good news was having a very good pension. the bad news was having pension pushed us off the ACA cliff. Fortunately I saw this enough years in advance to plan on saving a large amount (around $150K) that I thought would be needed for health insurance premiums. Megacorp's retiree insurance was a little more expensive than ACA, but it had the great advantage of being accepted in many more places (we could keep our current doctors) and a much smaller out of pocket amount.

When I retired at 60, Megacorp had sweetened the deal by (a) 18 months of Cobra - 12 at the ver low employee rate, six at a rate still below ACA, and (b) providing a "subsidy" for my Megacorp premiums so that the premiums are less than half the unsubsidized ACA rate. This goes until Medicare (age) late 2022 for DW, early 2023 for me). So our expenses for premiums have been less than half of what I have planned for. Yes, I made the "mistake" of too much cash, but I am fine with it .