The Health Insurance Hurdle

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Back in the good old days, large employers used to offer health insurance to their retirees. Maybe you had to work a certain number of years or work to a certain age to qualify, but this retirement benefit made things pretty easy. You retired, you stayed on your employer’s health insurance until age 65, and then you hopped on Medicare. Easy peasy.

Unfortunately, as of 2012, only 25% of large employers still offered health insurance to retirees, and with the number of retirees growing and health care costs continuing to rise, I would expect that number to continue to decline. This leaves people hoping to retire before age 63.5 (most people can retire and stay on their employer’s health insurance for up to 18 months by signing up for COBRA) with a bit of a problem. How can you possibly retire early and have health insurance? This hurdle has kept many people working longer than they wanted in recent years, and for good reason. Buying a health insurance policy in your 50s or 60s can be very expensive, and if you have a condition such as diabetes or heart disease, or had a bout with an illness such as cancer, it could be downright impossible. As of January 1, 2014, the rules of the game changed.

(Now I’m about to wade into one of the most politically charged, hot-button issues for a minute, and regardless of how you feel about the Patient Protection and Affordable Care Act, I need you to stay with me. This post is about retiring early and having health insurance, NOT about a law that has done some good and some bad.)

You see, as part of the Patient Protection and Affordable Care Act, insurance companies cannot discriminate against early retirees who have pre-existing conditions such as diabetes, heart disease, or cancer. The newly created public insurance exchanges are also run like large company or group plans, so even though most early retirees are on the older end of the insurance pool of people, the inclusion of younger and statistically healthier people should theoretically lower the cost for an early retiree seeking health insurance. If the cost of buying a health insurance policy to bridge you from retirement to Medicare just became cheaper (some would argue about this), and your ability to buy a health insurance policy to bridge you from retirement to Medicare just became more possible (you can’t argue about this), then the health insurance hurdle to retiring early just got a lot lower!

If you are fortunate enough to work for a company that offers health insurance to retirees, you are very lucky. If you’re like most people and your employer does not offer health insurance to retirees, you need a game plan. Retiring without insurance is not a good option. One big medical problem might not kill you, but it could kill you and your family financially. 

Before you run through the halls naked or start singing that song in a staff meeting about your employer taking your job and… (putting it elsewhere), you need to have the health insurance hurdle figured out. Maybe you can jump on your younger and still-working spouse’s plan, maybe you’re pretty healthy and can find a good deal on a private policy, or maybe you’ll have to keep your fingers crossed and hop on healthcare.gov, but you’ve at least got more options today than you did last year. Either way, if you want to successfully retire early, you need to take the time on the front end to figure out how you can best have health insurance between your retirement date (plus 18 months on your old employer’s health insurance through COBRA) and age 65 when Medicare kicks in, and you need to factor in the cost of that health insurance before you just sail away.

-Tom

Your Humble Abode(s)

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I want you to think about a few things with me. Think about how much the property taxes are on your home. Think about how much your homeowner’s insurance costs. Think about your monthly water bill, gas bill, and electric bill. If you pay someone to mow your lawn, think about that. Do you have an exterminator or a cleaning person? What about the annual fee for your alarm system monitoring? Do you have HOA fees or neighborhood dues? Do you need a pencil and paper yet to add all of that up? Don’t forget there are also those periodic home maintenance surprises that come up like replacing an air conditioning unit, hot water heater, dishwasher, or roof. The point I’m trying to make is that owning and maintaining real estate is expensive.

If you’re a homeowner you already knew that, but have you ever thought about the significant portion of your living expenses that is tied to the upkeep of your residence? Even when not considering any outstanding debt you might have on your house, having your own place requires a lot of cash flow and chews up a lot of assets. It’s important to realize this when you are working, but it is absolutely critical to understand this when you are planning for retirement.

In order to make it in retirement, you have to live off of any income you have coming in (like pensions or Social Security) plus small portions of your investment assets. Some people can live solely off of their retirement income streams, but most people slowly draw down their investment assets over time to supplement their lifestyle in retirement. The thing is, you don’t want to outlive your investment assets, so you’ve got to have a plan to make your nest egg last. A big part of making your investment assets last in retirement is by reducing your fixed expenses, and as we just discussed, a big part of your fixed expenses is often tied to your humble abode(s).

Whether you are planning for retirement, nearing retirement, or finding that you're eating up your nest egg too fast in retirement, here are some tips that might help:

• Pay off your mortgage(s) before you retire. This will likely reduce your fixed expenses significantly and help you make ends meet in retirement.
• Do major capital improvements to your real estate before you retire. If you’re going to redecorate, finish a basement, or get a new refrigerator, do it while your working cash flow is still coming in. It will make you feel better and give you peace of mind. Think of it as investing in staying put.
• Don’t keep multiple residences if you find it difficult financially or physically. Dusting one house stinks. Dusting two houses is awful! Pick one. Think of all of the property taxes, insurance premiums, utility costs, and lower back pain you will save!
• Get out of town. Sure, stay near the kids, but move to the suburbs or the country. Homes are cheaper, property taxes are lower, and the cost of living is likely lower, too. You’ll feel like you have more purchasing power, and you can add the difference between your urban home selling price and suburban home purchase price to your nest egg to strengthen your overall financial position.
• Consider state taxes on retirees. It’s probably not worth moving states just to save on state taxes, but if you’re on the border or a good portion of your family is in a different state, why not consider it? Take a look at this interactive map, and you’ll see that all states’ taxation is not created equal!
• Finally, think about downsizing. All I’m saying is that if you no longer need five bedrooms, why have five bedrooms? If all of the kids come at once, you can help fund their stays in a nice hotel, and you’ll probably still save money versus maintaining your own five-bedroom “bed and breakfast.” If you do decide to downsize, be careful and make sure you don’t more elegantly furnish a smaller house as opposed to actually downsizing and leaving yourself with some extra proceeds to put with your nest egg.

 

Personally, I plan to have a place on the beach when I retire. If my wife and I can swing it, we’d probably like to keep a place near my parents and her parents and/or near our eventual kids and their families. If we can’t swing it, we’ll just visit a lot because it is often a lot cheaper to pay for a hotel or even rent a place for a few weeks than it is to maintain an extra humble abode!

 

The How to Retire Early Series will continue next time with a look at an important piece of everyone’s retirement puzzle: health insurance.

 

-Tom

Start Strong, Finish Stronger

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Many retirees (or soon-to-be retirees) have a retirement plan based on what is called a “three-legged stool.” They have their pensions (leg 1), their Social Security (leg 2), and their investment assets (leg 3). They worked hard, they went through a lot, and I don’t begrudge them a bit.

If you’re like me and in the early stages of your working marathon that some people like to call a career, it is easy to get caught up in things such as fancy dinners, “flashy” clothes, and expensive gadgets. It’s a lot more fun to think about surround-sound systems, exotic vacations, and big houses than to think about retirement planning. The problem is, I believe our future well-being depends on just that. I believe the three-legged stool is headed to a museum, and younger people, like me, need a new blueprint. I don’t know many people early in their career who are working toward vested pensions, and I’m not willing to make a big bet on Social Security income as we currently know it still being here 20 or 30 years from now. So, if you ask me, the three-legged stool is looking more like a peg leg for us younger folks. Unless you’re willing to walk the plank (yes, that was a pirate pun), it’s important to realize that the ability to retire in the future is probably going to come down to leg 3: investment assets.

 

If it’s going to come down to investments, you’re going to need to get it right. You need to read the fable of “The Tortoise and the Hare” and take “slow and steady” to heart. You need to invest in an appropriate, long-term strategy. You need to make significant progress towards retirement during the first and second decades of your income-earning life, so you can have a decent chance of having significant assets during the last and second-to-last decades of your life.

• Slow and Steady - Saving $100 a month in your bank account, raising your contributions to your employer’s 401(k) or retirement plan by 1%, and opening a Traditional or Roth IRA account that you’re not sure you can fully contribute to can feel almost silly. It seems like a drop in a bucket, and it is, but it’s a drop in your bucket. It’s the first steps on your journey of a thousand conference calls, staff meetings, and expense reports. The hardest part about beginning a savings plan, implementing a family budget, or taking on a debt reduction plan is starting it! Brief sprints of financial progress and long periods or “naps” where you live at your means (or beyond you means) will make you resemble the hare, and you may not win your race. To be honest, you might not even be able to finish! Dedicated, repetitive steps of saving 10% from every paycheck, increasing your retirement plan contributions every time you get a raise, making those annual IRA contributions, and making 13 payments instead of 12 on your mortgage are how you and the tortoise win the race. I think Aesop may have been a financial planner in his free time…
• Invest Appropriately - I keep reading articles about how the market downturn in 2008 and 2009 has really spooked people in their 20s and 30s (millenials). For example, a recent study by UBS found that on average, millenials have half of their assets in cash and less than one third of their portfolios in stocks. I get it, I really do. Our grandparents’ home values went down like lead balloons, our parents’ investment accounts went down like an ACME anvil on Wile E. Coyote, and we couldn’t get jobs even though we went to college and did everything that was asked of us, but we cannot live in fear. My short-term market crystal ball is still in the shop, but I can tell you that plopping all of your assets under your mattress, in a bank account, in a bunch of bonds, or in an annuity with a minimal, yet allegedly “guaranteed,” return is not going to get it done. Young workers need to make diversified, tax-sensitive, and fee-conscious investments, but they also need to act their age! Long-term, 50% cash, 33% bonds, and 17% somewhere else is for grandpa and grandma - not for working millennials who have a longer time frame for their assets to significantly appreciate.
• Make Progress Early - I cannot emphasize how much higher the odds are that you will be in a good financial position if you start planning for retirement now as opposed to six months before you want to retire. Little things like building up an adequate emergency fund so you don’t have to raid your portfolio and sell when markets are down, making the contributions needed to your employer’s retirement plan to get their maximum match, and paying extra towards long-term debts may not seem like much now, but there will be a day when you look back, and you will smile. I wrote about the unbelievable power of compounding earlier this year, but it is worth restating that a dollar saved in your 50s is not the same as a dollar saved in your 30s! Progress towards your retirement goals at any point is great, but the sooner you can start packing away funds towards your future needs, the greater the chance that you will have meaningful compounding in your favor. If you start strong, you’ll have a much greater chance of finishing stronger.

 

The How to Retire Early Series will continue on next week by considering real estate and the pivotal role it can play in retirement planning. I hope you’ll check it out.

 

-Tom

Now or Later

Credit: Stuart Miles

Over the course of your life, a certain amount of money is going to pass through your hands. Obviously you could make this amount be larger or smaller based on how long you decide to work, but regardless, someone should be able to say “X” number of dollars went through your hands after you’re dead and gone. What that means (if you go into a financial vacuum and put investment returns and cash flow strategy on the sidelines) is you are going to have a finite amount of money to spend during your days on this earth. I’m not trying to be morbid, but I am trying to point out that if you are only going to have a finite amount of money, you can choose to spend more now or you can choose to spend more later - you can’t do both. This now or later concept plays a huge role in saving for retirement - especially in saving for early retirement!

In order to retire early, you need to:

• Live within your means - I know I go on and on about this, but it really is one of the keys to long-term financial success. Simply stated, if you want to be in a position to retire early, you need to be make progress almost every two-week pay period, not break even, and certainly not lose ground. You need to spend less than you make and you need to save the surplus, invest the surplus, or pay down debt with the surplus. It’s okay if you don’t make financial progress every once in a while when your spouse has an unplanned surgery, your car has an unplanned blowout, or your very favorite sports team makes an unplanned appearance in the playoffs and you decide to attend, but that must be the exception, not the rule. If you can’t always get the new shoes, go bar hopping every Friday night, or go golfing every weekend with the guys and make financial progress, then don’t! I guess you can get the shoes, bar hop, and golf if you really really want to, but please remember, if you choose now versus later, you are hurting later.
• Annihilate your fixed expenses - Sorry for the strong wording, but sometimes words such as reduce, pay down, or extinguish don’t have quite enough “oomph” to them. Fixed expenses are all around us. They can be phone bills, television plans, HOA fees, gym memberships, minimum credit card payments, car payments, and mortgage payments. If you want to be in a position to retire early, you need to wage war on fixed expenses. Sure, there’s not a lot that can be done about some fixed expenses such as HOA fees and phone bills, but you can try to cut back on some "fixed" expenses like an under-enjoyed cable package or a neglected gym membership (better yet, keep the gym membership and go exercise instead of watching television). As for credit cards, I always say pay them off entirely, live within your means, and don’t abuse them again unless it’s truly an emergency. Consider putting extra principal every month towards any student loans, car loans, or mortgages, so you can pay them off more quickly and reduce your interest expense. Fewer fixed expenses means you will need less income in retirement to support your lifestyle, so you could probably retire sooner and with fewer assets.
• As good things happen, live below your means - With any luck and a decent strategy in place, good things should eventually happen to you financially. Maybe your company will do really well and you’ll get a nice bonus, maybe you’ll receive a surprise check in the mail from your sweet great aunt in Kentucky’s executor, or maybe a bull market will cause your investments to really soar for a few years. When this happens, stick with your strategy and do as my late grandfather often said and “keep on keeping on.” Just because you are making more money or have more assets doesn’t mean you have to act like it! Keep yourself grounded and keep telling yourself that what you are experiencing is financial progress and momentum towards your goal of not having to work. All I’m saying is why get a Mercedes if your Toyota is still doing fine? Why go to the Caribbean when you could have a better time in the Gulf of Mexico? If you want to retire early, I’d keep those champagne tastes in check, and stick with your beer budget!

Next week we’ll continue the How to Retire Early Series by taking a look at why you need to save and invest sooner rather than later and what you should do with those savings and investments so you can start strong and finish even stronger.

-Tom