ACA Healthcare Subsidy – Why Earning $100 More Could Cost You $5,000 or More

The USA healthcare system is a mess. This mess has been created by those we have elected for decades. It isn’t a short term problem, simple problem or small problem. Healthcare costs are a huge burden on the USA economy and the financial costs and extreme burdens (worry, fighting with insurance companies, forgoing needed healthcare…) are huge burdens on all those stuck with the system that is in place.

One of the benefits of the Affordable Healthcare Act (ACA) is that health insurance costs are subsidized for those earning less than 400% of poverty level income. The way that this has been designed you could get $5,000 (or more, or less) in subsidies if you earn just below the 400% level and $0 if you earn just above. Most such income limits are phased in so that there is nothing like the huge faced by those earning just a few more dollars.

If you are close to the 400% poverty level income and are paying for an ACA healthcare plan (self employed, retired, entrepreneur…) then it is wise to pay close attention to what your reported income will be.

Here are several examples, using the Kasier Family Foundations’s subsidy tool:

  • 60 year old in Virginia earning $48,200 would receive $7,073 in subsidies (60% of the cost*). Earning $48,300 would mean receiving $0 in subsidies (for this and also examples, the examples shown are for a single individual, you can use the tool to try different scenarios).
  • 60 year old in Virginia earning $38,000 would receive $8,029 in subsidies (69% of the cost).
  • 34 year old in Virginia earning $48,200 would receive $608 in subsidies (12% of the cost).
  • 50 year old in California earning $48,200 would receive $4,255 in subsidies (48% of the cost).
  • 34 year old in North Carolina earning $48,200 would receive $1,636 in subsidies (26% of the cost).
  • 64 year old in Virginia earning $48,200 would receive $8,283 in subsidies (64% of the cost*).
  • Family of 4 (ages 46, 42, 12 and 10) earning $40,000 in Colorado would receive $13,799 in subsidies. I do not believe the subsidy calculator (in the link) is properly calculating the income limits for families. It is showing the same limits for single people when I try it now. I believe for a family of 4 the income level that no longer qualifies for subsidy would be $98,400 (400% of poverty level – the poverty level would be $24,600 according to that link). But I may be wrong about this?

* The subsidy is calculated using the average silver plan costs (this results in a $ subsidy amount for you – based on your income and the silver plan costs in your area). But you can select whatever plan you want. So if you selected a bronze plan it could be your subsidy percentage is higher, or you could select a gold plan and your subsidy percentage would be lower. The subsidy values will differ in the state depending on what health plans are available specifically in your location.

As you can see the subsidy is based on the hardship the health care premiums would place on the individual. If you have a fairly low cost plan and earn $48,200 your subsidy will be low. Since the costs are largely based on age (smokers also face an increased cost) this means that the subsidy increases a great deal as the costs skyrocket for those aged 50 to 64 (at 65 you can qualify for medicare and escape the huge costs of health insurance at that age.

I think many people would be surprised at how high your income can be and yet you still qualify for a subsidy, especially if you are a family.

The subsidy levels for those with very high health insurance costs (especially those over 50 years old, or with a family) are very large. If you are close to the subsidy cutoff level the costs of going over can be huge, costing you $5,000 or even over $10,000 just by making an extra $100.

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Using Annuities as Part of a Retirement Plan

Annuities have a bad reputation, with a history that makes that bad reputation sensible. The main problem is the high costs (and often hidden costs) of many annuity products. Combine with large sales incentives this has led to annuities being abused by sales people and financial companies while providing poor returns to investors.

However the attributes of annuities fit a specific part of a retirement plan very well. Overall I am a big fan of IRA, 401(k), HSA – all of which provide the investor with control over their own financial assets. And I still believe they should be a large part of a financial plan.

In order to save for retirement, we need to start young and save substantial amounts of money to live off of in retirement. Retiring early requires that investments provide income to live off of for an even longer time.

Pensions provided an annuity (a regular payment over time). Social security (in the USA, and other government retirement payments internationally) provide an annuity payment.

A rough rule of thumb of being able to spend approximately 4% of the initial retirement investment assets (given a portfolio invested in USA stocks and bonds) gives a starting point to plan for retirement. That 4% rule however is not guaranteed to work (especially if you live outside the USA or retire early). In fact relying on it today seems questionable in my opinion (not only even if you retire at 67 in the USA (given the current seemingly high values in the stock market).

The best roll for an annuity in retirement planning in my opinion is to serve as a protection against longevity. The longer you live the more risk you have of outliving your investment savings. Life annuities have the benefit of continuing for as long as you live.

One of the disadvantages of a life annuity is that the principle is not yours to leave to heirs. That is a fine trade-off for protection that you have enough to live off of in most cases. And I wouldn’t suggest having all of your money put into an annuity so if leaving assets to heirs is important you can just factor that into the balance of how much you put into the annuity down payment.

John Hunter with lake and mountains in the background

John Hunter, Bear Hump trail, Glacier-Waterton International Peace Park

It is possible to have the annuity pay for as long as either spouse lives (so if that is a concern, as it would likely be for most married couples, that is a good option to use). The payment will obviously be less but not by a huge amount (though if one spouse is many decades younger, then the amount can be substantial).

An annuity payment is calculated based on projected investment returns and your life expectancy. The older you are the larger a percentage of the initial deposit you can expect as an annuity payment. Something like 5.5% if you are 65 today may be reasonable (this will change as investment projections, especially interest rates, change). So one thing you will notice right away is that is much greater than 4%. And that shows one advantage of using annuities.

Why is the annuity able to provide payments greater than 4%? A big reason is that the insurance company can balance the payment based on a large number of people. And many of those people will die in 10 or 15 years. That allows them to retain the assets they were investing for those individuals and still continue payments for those people that live for 25, 30+ years.

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