Budgeting for Healthcare in Early Retirement
[Many FIRE walkers (including myself!) underestimate the cost of healthcare in retirement. It could be because we don’t track our costs accurately, don’t monitor our employer contributions, or forget to account for healthcare completely! Guest authors The Dragons on FIRE explain in today’s post the importance of tracking, budgeting, and planning for healthcare, as well as how to include it in your FIRE strategy. This is advice I wish I had read 5 years ago!]
Open enrollment season is upon us. Time to sign up for 2021 health insurance at work or online at healthcare.gov if you buy it on your own. Most people pick a plan and then don’t think about it until next year, or when they have to use it.
I retired early last year at the age of 43 and my wife Dragon Gal retired three years ago at the age of 40.
In 2011, I was diagnosed with leukemia. I have been in remission for the last 5 years and was able to stop my daily medication last year. As a cancer survivor, healthcare costs were the number one issue preventing me from early retirement. I had to really understand all the costs I was paying and make sure I had sufficient savings to cover all of those costs.
Common FIRE Problem: Not Accounting For Health Insurance Premiums
One cost that I really had to pay attention to was the insurance premiums.
According to the Kaiser Family Foundation (KFF), employer sponsored insurance covers approximately 157 million people. On average, workers pay 17% of the cost of premiums for single coverage ($1,243 per year) and 27% of the cost of the premiums for family coverage ($5,588 per year).
For those of us with workplace insurance, the cost of premiums is usually deducted from our paycheck. Although this is convenient from a net pay standpoint, it makes it easy to ignore the cost in our expense tracking or budgets.
Over the years of reading finance blogs, I noticed that many people in the FI community do NOT include healthcare premiums in their expenses.
As finance nerds, we are known to track every single penny that goes out the door. For health care, we track our doctor visits and prescription costs. So why wouldn’t we do the same thing for health insurance premiums?
Why Track Health Insurance Premiums?
Not including premiums in your expense reports results in a skewed view of what you pay for healthcare. Here are reasons it is important to track your health insurance premiums:
- It is a real expense
By definition, your healthcare premiums are a real expense. But because most of us don’t swipe a credit card, write a check, or pay cash for it, we overlook this cost.
- Employment situations can change
You might say that you don’t need to track health insurance premiums because the costs are low or you never want to quit your job so you will always have employer provided health insurance. But the reality is, there is no guarantee your situation will remain constant.
At the beginning of 2017, we knew nothing about the FIRE movement. Dragon Gal was working and we both had insurance provided by our employers. The combined cost of our portion of the premiums was about $150 per month. After Dragon Gal retired that summer, I put her on my workplace insurance. This increased our monthly premiums by over 3 times! Not only were we not receiving her paycheck, my net paycheck was now smaller because of the increased insurance costs (to the tune of almost $3,500 per year).
- Having non-employer sponsored insurance
If you didn’t get insurance from your job, you would most likely budget and track the costs of the plans you have to pay for on your own (which would probably be much higher than the premiums you pay through your workplace insurance). So why track the costs you pay on your own, but not the costs you pay that are netted from your paycheck? Self-employed, freelancers, or contract workers are all people that would need to pay for insurance on their own, and would most likely be tracking the expense.
- Implications for financial independence and early retirement
People who don’t track costs for premiums are underestimating their FI number.
When I was still working, we paid roughly $500 per month in premiums, via my workplace insurance. Now we are paying $1,100 per month in premiums: Dragon Gal has an insurance plan on the marketplace (Obamacare) and I have COBRA coverage through my former employer.
If I didn’t include any of those costs in my budget, using the 4% rule of Financial Independence, I would be understating my FI number by $330,000!
$1,100 monthly expense*12 = $13,200 annual expense
$13,200* 25 = $330,000
Likewise, if I ignored the $500 per month we paid last year with my employer insurance, my early retirement budget would show the full increase of $13,200 per year. By including the premiums from my work insurance, I was preparing myself for the costs when I needed to buy insurance on our own. Early Retirement didn’t mean a $13,200 increase per year; it only meant a $7,200 increase per year. That is still a large increase, but seeing a $7,200 increase is much more manageable than a $13,200 annual increase.
Without tracking any of the premiums, I would have underestimated our FI number by $330k. But by tracking the premiums I paid through my job, I was only understating our FI number by $180k ($7,200*25).
How We Tracked Our Premium Costs
For most of my working career, I did not track our health insurance premiums. But when I found out about Financial Independence in 2017, I changed that.
I track all of our investments and expenses in Quicken. In the past, I would enter the net amount of the paychecks we received. Once I decided to track health insurance premiums, I started to gross up the income for the premium cost, and then input the premium as an expense.
A $5,000 net paycheck would be adjusted to $5,500 gross pay and an expense of $500 would be deducted for health care premiums. Pre-2017 I would just input a total net salary of $5,000. This was a simple change that added just a few extra seconds to the task of inputting my paycheck. But now I had the additional costs included in my tracking. I could then incorporate this cost into my budget.
Focus on the Total Cost of Healthcare
It is tempting to just pick the plan with the lowest premiums, but that may mean you pay more in total costs when you need to use the services (go to the doctor or hospital).
If you use a lot of services, it might make sense to get a plan with higher premiums and a lower out of pocket max.
Let’s take a look at two plans my former employer offered (numbers rounded):
Healthcare Scenario 1: Doctor Visits Only
|PLAN A||PLAN B|
|Monthly Premium (Employee Only)||$100||$50|
|Doctor Visit||$25 copay||Full cost up to deductible (assume $150)|
In Plan A, if I have one visit to the doctor (aside from the annual physical, which is free), my total annual cost would be $1,200 for premiums and $25 for the doctor visit, or $1,225 total. In Plan B, the same costs would only be $750 total ($600 premium plus $150 doctor visit).
Plan B is cheaper in total. But if I wasn’t including the premiums in my expense tracking, I would show that I spent more in costs with Plan B ($150 for the doctor visit versus only $25 for the doctor visit in Plan A).
As a cancer survivor, I have learned to look at the total cost of health care when building my budget (premiums plus out of pocket spend). I know that I need to see my oncologist for lab work at least two or three times a year. Because I will need more services, I am more likely to choose a plan with a higher premium, but lower out of pocket costs.
Now let’s look at the cost of lab work for the two plans:
Healthcare Scenario 2: Lab Work
|PLAN A||PLAN B|
|Monthly Premium (Employee Only)||$100||$50|
|Doctor Visit||$25 copay||Full cost up to deductible (assume $150)|
|Lab Costs||$0 (insurance pays 100%)||Full cost up to deductible (assume $1,000 per event)|
|Total Cost of 1 Doctor Visit and 2 Labs||$25 ($25 doctor + $0 Lab 1 + $0 Lab 2)||$2,150 ($150 doctor + $1,000 Lab 1 + $1,000 Lab 2)|
|Total Healthcare Cost with Premiums||$1,225||$2,750|
Although Plan A has higher premiums, the labs are free and thus the total cost of premiums and labs is significantly lower than Plan B.
Based on my health care needs, although Plan A has higher premiums, I would spend a lot less money in total than with Plan B. On the flip side, Dragon Gal does not use the doctor as much as I do. So Plan B would make more sense for her.
See how this can be confusing if you don’t track the premium costs? Your total costs can vary depending on what your needs are. So it is important to look at all health care costs in your budgeting.
Estimating Non-Workplace Insurance
The premiums you pay for workplace insurance are most likely not the full amount. But it’s still important to think about the full amount in terms of understanding your FI number or if you have a change in job situation.
Here are a couple of ways to estimate the cost of non-workplace health insurance premiums:
In most cases, if you leave your job, you are entitled to 18 months of company-provided health insurance through COBRA. But you must pay 100% of the premiums plus a 2% administrative fee. For Plan A above, the $100 monthly copay is almost $700 per month under COBRA. For the $500 per month plan that Dragon Gal and I had, COBRA is about $1,600 per month.
COBRA is expensive! But it still might offer better coverage than plans in the open market. Although I might find cheaper premiums in the open marketplace, I would spend significantly more to go to the doctor or have lab work done. So those high COBRA premiums made sense to me.
If you don’t know the price of COBRA, using estimates from the KFF survey, assume your single coverage is 15% of the total (so take your premium and divide by 0.15) and assume your family coverage is 30% of the total premium (take the premium and divide by 0.30).
- Healthcare.gov or ehealthinsurance.com
Healthcare.gov is home to the health insurance marketplace (Obamacare). If your state has its own marketplace, this website will direct you to your state specific site. You can find prices of plans and see which doctors and hospitals are in-network.
Ehealthinsurance.com is an aggregator site that shows prices for Obamacare as well as short-term plans and small business plans.
Regardless of the ways you estimate health care costs, don’t just look at the total premium costs; you need to also look at the cost of utilizing services. One easy way is to take the annual premium costs and add in the out of pocket maximum. This is the most you would pay for health care in a year.
Insurance as Part of “The Big 3” Expenses
We all think of housing, transportation, and food as the big 3 expenses. But by including your health care premiums, insurance costs might actually become part of your big 3.
While I was working, the $500 in monthly insurance premiums ($6,000 yearly) was more than our food expenses for our family of two (groceries and restaurants, including travel). This cost was also more than the cost to own and maintain our two Toyota Prius cars. (We don’t have any more car loan payments.) Only our housing costs and travel expenses (we like to travel) were more than the costs of the workplace health insurance premiums.
In 2020, under our new early retirement insurance, the $1,100 per month in premiums will be our largest expense for the year.
Typically, we like to know what our big 3 expenses are so we can find ways to shave our costs. But unlike food, housing, or transportation, you probably feel you have less control over healthcare costs. However, by doing a little research on the plan options, you can have some control over the costs.
Based on how you’ve used healthcare historically, you can think about how to optimize your costs. For me, it makes sense to pay higher premiums in exchange for lower out of pocket costs. Dragon Gal rarely goes to the doctor outside of her annual checkup, so it makes sense for her to pay lower premiums and higher out of pocket costs. We are essentially using her insurance to cover her in case of emergencies.
Final Thoughts on Budgeting for Healthcare
As you go through the open enrollment season at work or think about your budget for 2021, include health care premiums as one of your expenses listed in your budget. Just because your health premiums come directly out of your paycheck, it doesn’t mean they’re not a cost you aren’t incurring.
Since I started tracking health insurance premiums and researching our plan options, I have become more aware of the true cost of health care. This awareness gave me a realistic view of our FI number and allowed me to be better prepared for early retirement.
With the pandemic, we are in an increasingly volatile job market. I think it is important for everyone to understand what your health care costs may be without employer sponsored insurance. Hopefully, you don’t have to think about that situation, but by doing a little research, you can be better prepared for any curveballs that may come your way.
Dragon Guy retired in 2019 at the age of 43 after a 20-year career in finance. He is a 9-year cancer survivor, having been diagnosed with leukemia in 2011. He has been married to Dragon Gal for over 18 years. Together, they blog at The Dragons on FIRE, where they write about their early retirement experiences, living with cancer, and traveling around the world.
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