Why I’m Not Afraid of the Health Insurance Boogeyman

These probably won’t help…then again, you only live once! – Image courtesy of Jean-Marc Buytaert

I occasionally hang out with early retirement minded people. Some of them have already taken the plunge, some are thinking about it more and more as I am, and some are much earlier in their financial journeys but are intrigued by an alternative to the “work till you’re either dead or wish you were” program that has been the standard for far too long. Easily the most common question I hear being asked of the people who have already retired ten, twenty, or even thirty years before the traditional age, is “what about health insurance?”

And I admit that was one of my first questions as well. Most people I’ve met answer this question in one of a few disappointing ways. Some were able to negotiate some sort of arrangement with their final employers, some have a spouse that is still working, and many are structuring their incomes in such a way as to be eligible for subsidies on individual coverage under the Affordable Care Act. None of these is workable for me. My current employer will likely be neither willing, nor able, to make any deal with me, I don’t have a spouse who can keep working so I can “retire,” and I can’t stomach exploiting badly written legislation for personal gain – particularly not when I’m currently paying a substantial share of the associated bill.

After I recently learned of some significant challenges my current employer is facing, which threaten not just my job and those of many of my colleagues, but the company itself as a going concern, I’ve been thinking a lot about my options. I could find a similar job at another company. Since I started my latest job search, there have certainly been some encouraging signs that this will be a viable option – although nothing has come to fruition just yet. But aside from maintaining the status quo as an employee/entrepreneur hybrid, I’ve been looking at other, more adventurous options. One common thread among many of them would be stepping out from under the umbrella of having an employer at all. And this has brought the health insurance question back to the forefront.

But as I’ve begun to explore the issue, I’ve actually been very pleasantly surprised by what I’ve learned. It turns out individual health insurance is both fairly straightforward and less expensive than I had anticipated. I acknowledge that things would likely be different if I had dependents. But at roughly $15k per child, per year, for as long as one is willing to keep the financial umbilical cord intact, having children is one of the most expensive financial decisions a person can make. That is one of several reasons I’ve personally opted out.

Anyway, I searched around and Blue Cross Blue Shield appears to be king of individual health insurance in my neck of the woods. By simply entering my birth date, non-smoker status, and zip code, I was presented with a menu of options ranging from the most minimalist plan at roughly $320 per month to something approaching the top of the line plan I have now at nearly $700. I didn’t see an annual payment option but if one is offered with a decent discount, it would amount to an awesome churning opportunity. One nice thing that I believe came out of the ACA is that it appears all plans now cover the one annual preventative appointment we should all be going to. Of course, that is priced into the premiums. But I digress. Beyond that, as a relatively healthy young adult, I’m almost certain to spend somewhere in the $0-1500 range per year on health care expenses, meaning paying an extra $400 a month for a high end plan that would cover most of that doesn’t make sense. I will note that there are subsidies offered for people with surprisingly high income limits. Sadly, I’m in the group that pays handsomely for those subsidies to be offered, and don’t anticipate that changing, so I’m paying full freight for my own coverage no matter what. But your results may be different – particularly if you have kids. And as the birth rate continues to decline, it is very likely that we will all see the government using more mechanisms like this to force people like me to subsidize your procreation efforts. For what it’s worth, that will likely offset at least a portion of the additional costs you would face in areas like this.

Ultimately, my choice would be a plan that costs $332 per month because it is the cheapest HSA eligible option. With a deductible of $6k, an out of pocket limit of $6650, and no prescription coverage until the deductible is met, I would almost definitely be paying all of my costs beyond the annual preventative appointment. In most cases, I would probably not even use the insurance, instead opting to negotiate directly with doctors since my insurance would effectively cover nothing anyway. I’ve heard there is often significant room on the pricing if you aren’t forcing the provider to deal with an insurance company.

But this is where it becomes important to calculate things out for yourself. If you tend to spend a lot in health care costs, it may make sense for you to go with a plan with higher premiums but more coverage. One thing to consider is that it’s not necessarily the end of the world if a plan doesn’t offer prescription coverage (it can’t if it is HSA eligible). Thanks to a wonderful website called Good RX, anyone can pay much less than retail prices for prescriptions whether or not they have insurance. Don’t ask me what kind of sorcery makes it possible, but this can be an absolute godsend if you don’t have prescription coverage and yes, I did use it back when I worked for an employer that offered a very minimalist coverage option.

I’ve mentioned “HSA eligible” twice now. Why? HSA stands for health savings account and it’s a hidden financial gem. Unlike an FSA, which is garbage unless you have health care costs you can forecast very reliably, an HSA is a tax advantaged account that can be built into quite an asset. To put it simply, it is a miniature Roth IRA for health related expenses only. This year, an individual can contribute $3500 into one. The money can be invested in whatever you want, provided you’ve chosen a good provider, and as long as you don’t spend it, it will grow tax free just like a Roth IRA. It does ultimately have to be spent on health care expenses, but given the state of the industry, I don’t believe any of us will have too much trouble accomplishing that. In fact, remember that quarter million dollars the media is always screaming about you having to pay for your health care expenses during your traditional retirement years? Well, if you contribute the max to a Roth IRA for twenty or thirty years and don’t use any until you retire, that is more or less covered – without dipping into your other assets. As usual, a little knowledge can go a long way towards putting out the fires of mainstream ignorance. The important thing to keep in mind with HSAs is that only certain more minimalist health insurance plans are eligible for them. If you have a lot of health care expenses now, you may be better off with a “Cadillac” plan paired with an FSA. No one can tell you definitively without specific information; I recommend that you run your specific numbers yourself to figure it out.

But in my case, a disaster only health insurance plan and an HSA are a home run combination. The only problem is that pesky “Cadillac” plan I have now. But given that I’m kicking in well under $100 a month for it, and that’s tax deductible by the way, it’s obviously the best option available to me as long as I’m with my current employer. However, once that relationship runs its course, likely by the end of this year, it’s nice to know I will have some great options available to me and that they won’t be nearly the financial disaster the media would have folks believing they are.

401k and Roth IRA Basics

My retirement will certainly involve more flights at more breweries. Sadly, this particular brewery did not live up to its hype in my opinion but it was still a great time!

Do you love paying taxes? Ok, stupid joke. But today I want to talk about a couple of great ways to pay a little less and help your future self out in the process. For those who ignore the almost nonstop reminders in the media, the United States has a massive retirement crisis in its not so distant future. It seems that in spite of this being the richest country in the history of mankind, nearly half of everyone living here HAS NOT SAVED A SINGLE FUCKING PENNY for retirement. Many of the people who have saved at least something are still woefully short of where they need to be. With obviously unsustainable pensions (otherwise known as defined benefit plans) mostly relegated to the history books, the criminals fine, upstanding people in charge realized they would have riots in the streets if they didn’t toss a little bread out to those pesky subjects citizens. And thus, some new tax advantaged retirement savings options were born. So far, they don’t seem to be helping much, but that’s why I and countless others are writing posts like this one. 401ks and Roth IRAs are the two most common tax advantaged retirement savings options and an overview of the basics of both is below.

Both of these offer tax breaks, but only to people wise enough to take advantage of them. In my opinion, they should both be maxed out if possible prior to investing in anything else excluding building an emergency fund – which is actually saving, not investing. And yes, there are other types of these but they are less common and I’m writing for a mass audience. And yes, there are various tricks and loopholes that entire posts could be written on but this particular post is just meant to be a general primer. Also, I am not a tax professional and I don’t know the details of your situation so nothing in this post constitutes specific tax advice. This is for information only. Here are the basics.

401k

  • Usually offered by an employer
  • Maximum contribution for 2019 is $19,000 + $6000 “catch up” for people 50 and older
  • Employers often match up to a certain percentage of your income if you contribute at a required level
  • No phase outs but HCEs (highly compensated employees) may potentially have their contributions limited
  • Contributions lower taxable income in the current tax year
  • Distributions are taxed when taken
  • Cannot take distributions prior to age 59.5 without being taxed and charged a 10% penalty

Roth IRA

  • Usually not offered by an employer
  • Maximum contribution for 2019 is $6000 + $1000 “catch up” for people 50 and older
  • Phase outs starting at $122k MAGI (modified adjusted gross income) and completed by $137k for single filers, or $193k and 203k for married filing jointly
  • Contributions are made using post tax dollars
  • Distributions are not taxed
  • Contributions can be withdrawn prior to 59.5 but earnings withdrawn prior to 59.5 will be taxed and penalized except in specific “qualifying” circumstances

I think the easiest general concept to remember about the difference between the two is this: 401ks are taxed on the back end, Roth IRAs are taxed on the front. To get the maximum benefit, you need to contribute $25k in 2019, assuming you are 49 or younger and not prevented from it by having a very high income.

If you can’t max out both, I would do the following in most cases. First, contribute whatever your employer requires to get the full match that is offered. For example, if your employer matches 3% of your salary if you contribute 6%, a fairly common setup, you would want to contribute 6% to avoid “leaving money on the table.” From there, I would work towards maxing out the Roth IRA unless you are phased out, in a high tax bracket, or have some reason to expect your income is going to go down significantly in the future. If you can do that, I would put any additional available money towards increasing your 401k contribution percentage. Anything you can do is better than nothing and slow progress is better than none. For example, you could start out contributing whatever you are comfortable with and set up an automatic increase of 1% a year on one or the other or both. If you get even a basic cost of living adjustment at the end of the year, you won’t feel any pain because you will still be getting a raise after taxes. This would particularly be the case if you’re talking about a 401k since you would be lowering your taxable income by increasing the contribution meaning the 1% increase wouldn’t cost you the full 1%.

Hopefully this will help some folks get a better idea of how to handle these accounts. If anyone would like me to get into more detailed subtopics on this, please let me know in the comments or send me an email at admin@healthwealthpower.com. Have a great day!  

The Real Reason the Media is Flipping Out About Tax Refunds This Year

You’ve probably seen some of the articles talking about people screaming and stomping their feet because their tax refunds are smaller this year. There have been plenty of them. Unfortunately, a lot of people simply don’t understand how the federal tax system works and the mainstream media, which makes its money by fanning up any potential controversy into a firestorm, is all too happy to spread the ignorance around as usual rather than doing the responsible thing and explaining the reality of the situation. So I guess it falls on my shoulders to put out their fire by spraying it with facts. This is not a political post. My goal is not to change anyone’s opinion about the tax reform package that took effect in 2018. I just want to do my part to combat the apparently widespread ignorance.

Let’s say you go to the store and buy a candy bar for $.75. You pay with a $1 bill and the cashier hands you a quarter. Did you just gain 25 cents? No, you simply overpaid and got the change you had coming to you. That is exactly what happens when you file your tax return. In the case of most people, your employer has been withholding a portion of your pay all year. The tax return is a reconciliation. It determines how much you were legally obligated to pay, compares that to the amount you actually did pay, and either gives you your “change” in the form of a refund if you paid too much, or demands that you pay more if you paid too little. You are not gaining or losing anything except cash flow. And if you’re getting a refund, it’s technically bad news since it means you gave the government an interest free loan for an entire year. If you don’t know why that is a bad thing, google “time value of money” and get ready for the most important lesson you’ve learned in a while. Simply put, it’s how people like me use our money to create more money. It is also how people who don’t understand the principle fall further and further behind. Ignorance does not exempt anyone.

In 2018, most people actually paid less in taxes than in previous years, assuming important factors like income, dependents, etc didn’t change. The main category of people who paid more are people who itemized previously. Roughly 30% did so for the 2017 tax year and that number is expected to drop by about half for 2018. This is because the standard deduction, the alternative mechanism to itemizing, was increased at the same time as certain deductions were limited. But the important point here is that most people paid less.

However, most payroll software (and most employers use the same handful of payroll vendors) updated to account for the changes in 2018. Almost everyone who was getting a tax cut got it spread out over every paycheck – just as they would have if they had gotten a pay raise. It wasn’t a lot; for most people, it was $500 or less over the course of the year. If you’re high income, then it was probably more but also a proportionally small amount. A lot of people probably didn’t even notice their paychecks were $10 or $20 higher. Unfortunately, some of the payroll software was a little more optimistic than it had been in previous years and as a result, many people’s 2018 refunds got smaller. However, this simply means that instead of getting their interest free loans back a few months into the following year, they simply never made them in the first place or made smaller ones. In actual financial terms, that’s a gain.

So why all the howling if the majority of people are paying less in taxes? First off, as I already mentioned, there are a lot of people who don’t understand the situation. And it doesn’t help when the media has no interest in doing anything but amplifying that effect. But aside from ignorance, most people are negligent with their finances. They save little or nothing throughout the year and as a result, their tax refunds are found money in their eyes – and usually found money they’re mentally counting on. This is why car dealerships, furniture stores, and tons of other businesses tend to have tax refund themed sales around this time of year; it is the only time a lot of people will have any money in hand. If you’re in this group, it’s time for some tough love. You’re put yourself in a difficult position and I encourage you to take a good, honest look at what you’re doing with your money. If you don’t know how to do that, ask a wealthy person you know to do it for you and give you some tips. Or email me at admin@healthwealthpower.com. Everyone has to start somewhere and I will be happy to help anyone who is serious about improving.

There are people who legitimately paid higher taxes in 2018 but a lot of the people who are complaining about their refunds are not in this camp. For anyone a tax refund is a big deal to, I encourage you to use this as a wake up call. Keep reading this blog and others like it. Evaluate the way you handle your money and make changes. Even little ones will make a big difference if you’re in rough shape, just like how people who don’t exercise regularly will typically get huge results from just getting started in the gym. Turn a negative into a positive. I’m here willing to help and there are a lot of others like me. But at the end of the day, all the information and advice in the world won’t do an ounce of good if you aren’t honest with yourself and/or don’t make the necessary changes. But regardless of what you do, please stop complaining, particularly when the thing you’re complaining about actually benefited you. It’s not a good look.