Sunday, April 17, 2016

Early Retiment and Obamacare

Ironically, Obamacare has made early retirement a viable option.

One of the problems with early retirement is dealing with healthcare.   In addition to the issues of saving up enough money to retire and having a place to live that is low-cost, you have to think about health care expenses.

In the old days, well, it was pretty scary.  As you got older, your health care costs would escalate, and health care premiums weren't even deductible, unless they exceeded 3% of your income or so.  For example, a friend of mine retired a decade ago, at age 61.  His health care premiums were $1800 a month, due to his pre-existing conditions.   Until he reached age 65, his largest single monthly expense was health insurance, and it ate into his retirement savings considerably.  Of course, he is on Medicare now, but still has to pay for supplemental insurance premiums, and they aren't cheap, either.
In more recent years, health care premiums were deductible, which made the pain a little easier to bear.  However, with the advent of Obamacare, you could get a tax credit for your health care premiums.   You could get about 70% of your premium money back, so long as you didn't make a lot of money.

Early retirement starts to look more affordable.

In July 22, 2017, I will have been working in the Patent field for an even 30 years, and it seems like a good time to get out.   I will still be far too young to collect Social Security or qualify for Medicare.  However, I have enough money in pre-tax assets, to survive without working for two years, at which point (age 59-1/2) I can tap into an IRA if I want do.  Three years after that, I can collect Social Security.  Between now and then, we have sufficient after-tax assets to live on, for quite a number of years.

So the question is, when do you retire?   It is a question that has been bugging me, because frankly, I just don't want to do Patents anymore, and that is a good sign to get out.

I am not one of those people who enjoys doing the same things again and again.  Christmas got old for me, after ten Christmases.   Writing Patents was fun for a while, but after 30 years?  Well, it kind of loses its allure.   I simply don't want to do it anymore, and I don't have to.   Others are not so fortunate.  A friend of mine, a few years older, has two children to put through college and a retirement that is not fully funded.  He will have to work at least another decade.

Myself, I have been tapering off for some years now, to the point where the overhead costs (malpractice insurance being the big ticket item) is pretty large compared to my income.   For the diminished returns, it almost isn't worth it.

One reason I kept at it was that people told me "You're too young to retire" and I worried about a number of things.  Suppose my investments went South?  Suppose inflation eats away at retirement funds?  Suppose I need to go back to work?  It isn't an easy decision to make, and it illustrates why getting old isn't a fun prospect.

In the last two weeks, the pollen count has been through the roof, and I have been incapacitated.   I see how other folks fare here on old people's island, and realize that my time left in this world may not be long.  Some folks live to be 95, while others barely make it to 70, if they are lucky.   Sadly, age is measured in the number of years you have lived, and not in the number you have left.

When you are sick, it dawns upon you that it would be grossly unfair to work to a ripe old age and hope to retire, only to discover you have only months to live.   Life should be enjoyed, particularly as the clock winds down.

The mechanics of this are pretty simple.   Our home costs less than $1000 a month to live in, with insurance, taxes, utilities, various fees, and simple repairs.   So we would need $12,000 a year to cover home costs.   Another $1000 a month covers food and liquor bills, which is a pretty generous amount, which brings us to about $24,000 a year.   Health insurance is about $13,000 a year, but with the Obamacare subsidy, our actual costs are closer to $3000 a year, if our income is below $63,000.   And if you are living on savings, well, your income is essentially zero, unless you have some huge capital gains.

So we can easily live on $50,000 a year or less, which is the median income in the United States, and a comfortable middle-class lifestyle.   With savings and the sale of the condo, we should have enough to live on for at least 5-10 years, depending on how lavishly we decide to spend.  At that point, we will be able to tap into the IRAs and also start to collect social security, both of which are taxable.  And a few years after that, medicare kicks in, although premiums for medicare supplemental insurance can get kind of steep.

Of course, there is always the option of taking other kinds of jobs - second career kinds or working doing "overflow" work for other firms (which would be flexible in terms of time and also avoid liability and dealing directly with clients).

One problem with early retirement and Obamacare is that if our income does go up over $63,000 a year, not only will we be knocked into the 25% tax bracket, we lose the Obamacare subsidy, which is $12,000 a year.  So, for example, if we sold the condo, we would be socked with a hefty capital gains tax bill, which might push us over the limit for that year, causing us to lose the Obamacare subsidy - in effect, a windfall tax on the capital gain.

But I think I will pull the trigger on this thing and start winding things down now with the goal of getting out by the end of next year, or before my malpractice insurance is due in March.

It is a tough decision, but I am excited to go to more places and do more things and not have to worry about responses due and docketing cases and whatnot.

EDIT:  A reader chastises me for having such an expensive lifestyle.   However, when planning retirement, you need to pad your budget for contingencies.   I am using a target of $50,000 a year as that allows us to keep our Obamacare subsidy and also is the median income in the United States.   One should be able to live comfortably on that amount.   In reality, we likely would spend far less.

One thing we eventually plan on doing is downsizing, but not for at least a decade or so.   We are looking actively at future retirement options - smaller houses in communities that are more set up for retirement.  Since we have no children to rely on to "put us in the home" we can't just stay in our current home forever.

Others wrote to say that retiring was a bad thing - that I would be bored without a hobby, etc.   However, I presently work only 20 hours a week (if that) so I have been slowly sliding into this for some time.   If I get bored, I am sure I will find something to do.   Having too much time has never been a problem for me.