How Obamacare Could Help You Retire Earlier (or Destroy Itself Trying)

ObamaCareNow that the Supreme Court has ruled the Patient Protection and Affordable Care Act constitutional, it's time to consider how best to use it to your advantage. One way to benefit is that if you're looking to retire early, the court's decision could have just handed you the biggest gift of your life.

The reason is that two of the law's key features -- guaranteed coverage and subsidized premiums -- play right into the hands of those who'd like to leave the rat race behind them. With guaranteed coverage, anyone who wants to can buy insurance, regardless of pre-existing conditions. With subsidized premiums, taxpayers could be on the hook for paying premiums for anyone making less than 400% of the poverty level.

The Big Change

In essence, unless and until money to fund the program runs out, Obamacare has just made retiring early much easier. Prior to the law's passage, if you wanted to retire early, you needed to do one of the following:
  • Convince your former employer to keep you on its health care plan.
  • Go uninsured and hope for the best.
  • Be healthy enough to qualify for insurance on your own.
  • Qualify for some other group plan (like a trade association or union).
  • Lower your assets down to Medicaid eligibility levels.
  • Follow a carefully prescribed process of exhausting COBRA coverage, then qualifying for guaranteed issue insurance under HIPAA.
In most cases, though, you either would be committing yourself to going broke, or you would be required to pay the full cost of your insurance, plus you'd have to figure out how to cover any premium increases. That's an incredibly risky undertaking, and it means that someone retiring young enough would need to have several hundred thousand dollars invested just to cover health insurance premiums until Medicare eligibility.

With this new law, as long as your income falls below the level of 400% of federal poverty guidelines, your out-of-pocket premiums for "silver" level coverage are capped on a sliding scale that gets to be no higher than 9.5% of your income. The rest of the costs of insuring you are covered by taxpayers.

That's a Huge Subsidy

The table below shows what that means in terms of income levels that qualify for subsidies and the capped out-of-pocket cost of typical insurance:

Household

Size

Annual Income

at Poverty

Level

Annual Income

at 400% of

Poverty Level

Out-of-Pocket

Annual Premium

Cap at

Poverty Level

Out-of-Pocket

Annual Premium

Cap at 400% of

Poverty Level

1

$11,170.00

$44,680.00

$223.40

$4,244.60

2

$15,130.00

$60,520.00

$302.60

$5,749.40

3

$19,090.00

$76,360.00

$381.80

$7,254.20

4

$23,050.00

$92,200.00

$461.00

$8,759.00

5

$27,010.00

$108,040.00

$540.20

$10,263.80

6

$30,970.00

$123,880.00

$619.40

$11,768.60

7

$34,930.00

$139,720.00

$698.60

$13,273.40

8

$38,890.00

$155,560.00

$777.80

$14,778.20

Sources: U.S. Department of Health & Human Services, U.S. Senate.


When you consider that the fully loaded costs for insuring a family of four are already in the neighborhood of $15,000 per year, those out-of-pocket premium caps take quite the pressure off -- as long as those caps really do hold.

For a potential early retiree, qualifying for those subsidies is as simple as keeping your income below that 400% of poverty level. The median household income was $49,445 in 2010, well below the subsidy limits for all but one-person households. If your debts are paid off, you're not overly picky about your car, home, clothes, or food, and you're no longer paying the costs of getting yourself to work, keeping your income down in that range doesn't seem like too difficult a challenge to meet.

What Could Go Wrong?

Nevertheless, in spite of the law being blessed by the Supreme Court, the very generosity that makes it attractive to potential early retirees will likely be the economic source of its ultimate undoing. The law may cap out-of-pocket insurance premiums, but that cap doesn't eliminate the total cost of the insurance -- it merely shifts the difference to taxpayers. Indeed, by so significantly shifting costs, it fundamentally changes the nature of early retirement planning. Rather than "save, invest, and figure out how to cover your costs," the incentive has become "pay off your debts, keep your other costs and your income low, and your neighbor will cover your health insurance for you."

Given that so many people so easily stand to qualify for such large subsidies simply by keeping their incomes below the caps, Obamacare is virtually guaranteed to cost significantly more than initially projected. That's an issue compounded by the fact that many of the tax increases that purport to pay for the program are levied on high earners. As long as your individual expenses are reasonable, it's a lot easier to keep your income down than it is to raise it -- and that's especially true if your income comes from your own investments and you can largely control the timing and the form that income takes.

To paraphrase former British Prime Minister Margaret Thatcher, the trouble with socialism is that you eventually run out of other people's money. Now that Obamacare and its tax, subsidizing, and guarantee rules have been upheld by the Supreme Court, the only real question that remains is: When will that money run out?


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