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Mindy: Healthcare costs are a wild card for financial independence because healthcare costs rise dramatically from your 30s to your 60s before Medicare kicks in. Even without considering inflation on healthcare costs, you have to treat them differently in your financial planning than you do other expenses. This means a separate analysis and likely an increased buffer versus what the traditional 4% rule guidance suggests. Today, we are breaking down why early retirees need a bigger financial buffer than the standard 4% rule suggests and how to actually plan for the healthcare costs the fire community worries about most. Hello, hello, hello and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen and with me as always is my currently has a health share co-host, Scott Trech.
Scott: Thanks, Mindy. Uh, great to be here. I have a health share because healthcare is unaffordable and I care. So I had to act. Oof, a little political there, but let let’s keep rolling with it. How are you doing today?
Mindy: Scott, I am doing fantastically. It’s a lovely day. We’re out of that deep freeze from uh the the winter storm fern. So it’s a it’s a lovely day to be out and about in Colorado. How about you? What is what’s up with you?
Scott: I’m doing great. We’re recording this a little uh a couple days after Indiana won the uh national championship for college football, which I think is great for the sport, right? They were like one of the losingest programs ever. But I’m just also thrilled. I learned as I kind of learned more about Indiana uh here in the lead up to that that their coach Kurt Cignetti eats a Chipotle burrito for that is a $10 Chipotle burrito every single day. That is every single work day. And I’m like that is a best practice that I’m going to emulate. So I cannot wait for my Chipotle burrito to to come here today. Just a chicken, chicken with guac, you know, brown rice, nothing particular fancy, but I’m excited for that. That’s a that’s a good habit that I can emulate from this guy. So, uh other than that, all is good.
Mindy: Do you get the black beans or the pinto beans?
Scott: I get half and half when I’m there at Chipotle, but uh if I order it like I did today because we’re about to record, I uh get the uh black beans.
Mindy: That is my order too, Scott is the chicken burrito with the guac because I’m a big spender and the black beans and white rice.
Scott: Absolutely. If I’m feeling particularly hungry, I get the uh chips and and red salsa as well. So.
Mindy: So Scott Mindy and Coach Signeti all on the same page.
Scott: Yep.
Mindy: Except there’s no way I could eat an entire Chipotle burrito for lunch every day. It’s too much. I get like two or three meals out of that burrito.
Scott: Oh, it’s not enough.
Mindy: One of us is bigger than the other one. Show me your arms, Scott.
Scott: Ah.
Mindy: Yeah, you’re a little bit bigger. Well, Scott, from healthy lunch choices to health insurance, that’s today’s topic.
Scott: Yeah, so I’ve been really nerding out about this for for a while now and you know, it really took me a lot a surprisingly long time to figure out how do I want to think about healthcare costs in early retirement? How do I want to model that? What what’s going on here? And you know, I I’ve as I’ve looked at this, I’ve kind of gone, I’ve pendulum. I’ve been like, oh, this is a huge problem. This is a fire killer to, yeah, this is not that big of a deal in my situation, uh for various reasons to, okay, I think I now have an answer to the situation. And of course, uh the frustrating answer at the simplest level is going to be it’s that it depends. It depends on where you located, what your family status is like, whether you’re lean fire, traditional fire, chubby fire or fat fire. and all of those are going to be variables that are going to make they’re going to determine how big of a deal modeling healthcare costs are and whether you can depend on the 4% rule uh in the context of your spending. If you’re going to spend 100 grand a year and you have not thought about healthcare costs correctly, you’re going to be in trouble if you’re retiring early. Um but if you have thought about them, it’s really not a deal killer. It’s just maybe a little incremental expense that we got to plan for. So, that’s the the the short version of this. Um I have a very detailed post about this on biggerpocketsmoney.com. It’s called why healthcare costs rise sharply with age in early retirement and why early retirees need a bigger buffer than the 4% rule where I outline all this thinking. So I I I’d encourage people to go and check that out. And with that, I think we should get into the discussion here. So, you know, the first, the first kind of point I want to make is that the fire community gets this. They understand something is off, something is wrong about healthcare and they’re uncomfortable with what’s going on there. at least the Bigger Pockets Money community is. I pulled the Bigger Pockets Money community on our YouTube channel here and you guys are uncomfortable with this and you admit you don’t know what you don’t know in terms of modeling out what’s going to happen with your healthcare costs. So 75% of you said, no, I feel really uncomfortable with this part of fire. I do not feel like I have a good grasp on how to estimate healthcare costs in early retirement. So, um I think that the community is well aware of this and I think again, generally speaking, we’ve talked about this a million times. The community knows that there’s buffers and conservativism that they need to put in place before they pull the trigger on a really big decision um to retire early. So what I’m going to do is is as I I spent a large number of hours going down this rabbit hole. I used my household as an example. and I kind of come away with a couple of takeaways here. ACA pricing, the Affordable Care Act healthcare insurance plans that are priced, you know, with premium pricing create a very predictable what I’m calling the healthcare hump. This is an increase in expenses that I am guaranteed structurally to experience from age 35 to age 65. So my healthcare premiums are going to rise consistently every single year because ACA legislation specifically allows insurers to increase premium prices as I age. Then when I hit 65, I’m going to go on Medicare and my my costs are going to drop precipitously. They’re going to go down dramatically. I’m going to show you what that looks like here in a minute. Okay, so that’s the first thing. Second is ACA subsidies offset this cost for overwhelming, the overwhelming majority of people in the fire community. and I think it’s extremely risky to assume that those are going to continue as a as a foundational planning input here. Third, because healthcare costs are relatively fixed, unsubsidized healthcare premiums are fixed, right? I’m going to pay 18 grand or I think it’s like 14 grand in premiums this year in Colorado if I’m on an ACA plan. I’m on a health share personally, but if I were to pay a a those premiums, I would pay $14 $15,000 in premiums. Um, and I would get subsidies if I was below a certain income level, um to offset those costs, right? And I think the fire community assumes that, but if you’re on a lean or traditional fire trajectory, that’s a huge expense. That’s a huge percentage of your overall spending and that number unsubsidized goes up into the 30,000s by the time I hit 65, even for a family of two, um even after my kids age off. So that’s a huge problem. That’s that’s something that can be absorbed in a chubby or fat fire portfolio. It’s a problem, it’s something to think about, but it’s a really big threat to traditional and lean fire portfolios there because it’s that’s essentially, you know, 30,000 is most of your spending that would be supported by a million dollar portfolio. Fourth, I’m going to talk about the alternatives that mitigate these risks like self-insurance, health shares and catastrophic coverage, which are starting to get attention even as they’re kind of uncomfortable. Last, I’m going to talk about how to exactly model the bridge, the the hump, the the amount of excess dollars you need to save outside of your traditional 4% rule analysis to to cover this risk. So, sound good, Mindy?
Mindy: This sounds great. I’m really looking forward to your thoughts on this because you have been thinking about the costs of healthcare and how they relate to early retirees and, more importantly, how early retirees really aren’t focusing on this issue as much as they need to be. So I’m super excited to to uh hear all of the thoughts swirling around in your big brain.
Scott: So let’s start with some more background here, right? The most people are going to assume that they’re going to have health insurance and most people are probably going to assume in the fire community that they’re going to get an ACA, affordable care act or otherwise known as Obamacare plan and they’re going to use that until they reach age 65 and go on Medicare. In the fire community, because you’re almost by definition likely to be a millionaire or multi-millionaire, if that’s your planned to to spend at least $40,000 a year, um, you’re typical have a million dollars in assets at the 4% rule. Um, that means that you’re likely if you’re healthy and ablebodied, to prioritize a bronze or silver plan, right? Something that has a high deductible, um, high may have potentially higher out of pocket maximum, but lower annual premiums because you’re going to self-insure the first few thousand dollars, maybe $10, $15,000 of healthcare costs. So, that’s not a problem. That’s what I I think is a absolutely the best practice. The problem is not that that exists, but it’s how it’s typically modeled. Okay, so let’s also set the stage here that premiums and healthcare costs vary widely by state and by county or zip code. And unsubsidized healthcare costs can already be substantial for people even at my age, at age 35, um, and and and I’ll I’ll kind of walk through how just how disparate those costs can be. I picked three state examples here. um, Connecticut, which is one of the most expensive states in the country, New Hampshire, which is one of the cheapest states for healthcare premium pricing in the country, and Colorado, which is where I actually live, which is probably in the bottom third of states in terms of uh, uh cost for for a family for for healthcare premiums. So, in Connecticut, my family of four, two, 35-year-old adults, one, three-year-old and one 10-month-old, unsubsidized healthcare premiums are going to cost me about $24 to $28,000 per year for a bronze plan, a bronze ACA plan. That’s the high deductible plan, the cheapest type. in New Hampshire that same unsubsidized ACA plan is going to cost me $10 to $12,000 a year, and here in Colorado, that plan’s going to cost me $13,000 to $16,000 per year. By the way, if anyone wants to repeat this, you can go to KFF. We had a representative from KFF actually come on Bigger Pockets Money a few months back to talk about what they’re doing and some of the some of the research they’re doing. But you just Google KFF Health insurance marketplace calculator. That’s also linked in the show notes and on this blog post that I wrote. and you can get um estimates of the type that I just produced very, very quickly there by putting in your details. I’m also working on a calculator at biggerpocketsmoney.com. I’m calling it the healthcare Expected Value calculator, which will provide versions of those estimates as well. Although mine is still in beta. The premiums for the that I just listed again, 24 to 28,000 in Connecticut, $10 to $12,000 in New Hampshire and $13,000 to $16,000 in Colorado, um, are probably what you expect to hear, if you’re listening to this podcast and you know, and they may actually come in under the costs that you were you were uh estimating for healthcare if if you’ve been employed your whole life like I was, like I’ve been for for a big portion of my life and and the healthcare costs that employers pay the top line, the top line premium costs are actually even higher in many cases than the ACA premiums that I just discussed, especially uh for younger workers like in like people in the their 20s or 30s. So, you’re probably not not surprised by those numbers or maybe even pleasantly surprised. Um as bad as that is here in America. So the problem that fire community runs into is not those numbers. The problem is that those premiums, people just take those premiums that 24 to 28,000 for Connecticut and say, I’m going to pay 24 to 48 to to $30,000 in unsubsidized premiums for the rest of my life. and that’s not how it works. That’s not how it works. The way that ACA premium costs work is they rise over time with age. So, while let me show you this visual that I created here to model this out. So Mindy, I’m going to pay 14,000 or so, I put the took the midpoint in that range in an unsubsidized premium at age 35 for an Obamacare Bronze plan, that’s going to slowly grow every single year all the way up until age 65. Now, note that because we’re a four-person household with two children in 20 some odd years, my oldest will roll off that plan and no longer be eligible to be on the healthcare plan. And my youngest will then roll off a few years later, right? Which will be a slight offset. but that’s a huge ramp in expenses, right? And the 4% rule, this is not assuming that healthcare costs inflate. This is not assuming that, you know, national health expenditures grow faster than GPI. This is a structural guarantee that my premiums will rise every single year until I reach age 65 and go on Medicare. Further, there’s an out of pocket component to healthcare expenses and I think it’s only reasonable to understand that even if healthcare costs from a nationwide perspective, national health and insurance, like the actual underlying cost of healthcare don’t increase faster than inflation, they increase at something right in line with the CPI. your personal healthcare costs are on an average going to grow at least a little bit as you age, right? There’s a reason why insurers charge more for older folks on their health insurance plans and younger folks. Age is the number one correlate with health care spend. So I think you’ve got to model in of course, the premium costs that are going to go up for your health care plan and some out of pocket costs. And so that looks like my household’s health care spending going from about $18,000, $18,300 in my age 35 year to something approaching, you know, the upper 30s, 30, 37, $38,000, approaching $40,000 by the time I hit retirement. That is a huge problem.
Mindy: Scott, is this subsidized cost or unsubsidized costs?
Scott: Everything I’m talking about here is unsubsidized, right? And we’ll we’ll get to that in a minute, but I I I believe that you’ve got to model something as important as this without any subsidies as your base plan um and and fire and I think that subsidies should be treated as a pleasant offset, a reduction in risk to your fire plan. Um we’ll talk about that in a minute. I have strong I have strong feelings on why that’s a really strong really important modeling concept. Um but that is absolutely a offset to this risk that people people can count on. I just think it’s it’s crazy frankly to to plan on those subsidies being there for 30 years to to offset my health care because I’m I’m I’m an early retiree. I I do not think that is a good assumption that is foundational to a good fire plan. I think it is fine to take them if they’re there, but I think I think it’s it’s not something that you should plan on in early retirement.
Mindy: Well, and this highlights another problem, Scott, for those who early retirees who have retired and, oh, my costs right now are $40,000. So all I need is a million dollars. Yes, hopefully, fingers crossed. I shouldn’t say yes. I should say hopefully fingers crossed, your balance of a million dollars will continue to grow, but also clearly your health expenses are going to continue to grow and at the end of your like 57 years old, Scott, 58 years old, you’re paying three quarters of that $40,000 just for health insurance.
Scott: That’s the real challenge. That’s why that’s why this is a real risk. and I’m I’m highlighting the worst case scenario. and we’re going to walk it back and talk about more realistic ways to compute this as we get going forward. but I want to highlight the problem and then then get into the solution. This is not a disaster, right? This is not something that’s going to kill fire for a bajillion people. but it is something to really take seriously and plan around and put a smart plan in place um because it’s a it’s a serious part a component of of of one’s potential spending over the next couple of years. So, you know, one way to restate what I just said here is let’s say let’s say that with the trench household wants to spend $100,000 per year. and I’m a naive fire forecaster. and I say, oh, my healthcare costs next year are going to be 18,300, right? The 14,000 or so in premiums and a 4,300 or so in out of pocket expenses I’m budgeting. Okay? What I’m really saying is I want to spend $82,000 on the rest of my life and $18,000 on healthcare. The problem is that if I want to keep that $82,000 in other spend constant adjusting for inflation, I need something much more or something materially more, not that much is the wrong word. it’s material but not crazy in this this particular example. but I need something more than the two and a $2.5 million suggested by the 4% rule to cover healthcare costs if I want to be as safe in my plan as the 4% rule calls for. That’s the core problem, right? I I have to somehow figure out how I’m going to fund this excess that I know is going to rise faster than inflation. Am I doing okay in framing the problem here? Do you agree with this?
Mindy: Yes, I think you’re highlighting a problem that a lot of people aren’t thinking about. I do hear people asking all the time, what do I do about healthcare in early retirement? That’s a great question to start thinking about, but also don’t just stop there and ask the question. Start doing some research. Read this article that’s on our website. Scott did so much research into this this article and it really highlights what could be I don’t want to say ticking time bomb because that’s super clickbaity, but this could be a big issue, especially now that the current Congress did not extend COVID-related subsidy, additional subsidies. Now we’re back to just the regular subsidies. Who’s to say that those are going to stay around either?
Scott: Yeah, I I completely agree and one one offset, one one counter argument I got from Uncle Frank Vasquez, uh uh when I when I kind of brought this to the the Bigger Pockets Money Facebook group was, well, well, cost and retirement go down for for retirees. And I want to call out that that’s that’s a good art that’s a good thought process here. Um there’s really there’s real research for that. But JP Morgan’s study that talks about spending declining in early in in retirement, doesn’t talk about early retirement. It talks about traditional retirement, right? I think it’s a very reasonable assumption that when I’m going from 60 to age 85, sure, my spending will go down, maybe as much as 30% as is the average in that study. But I do not think that I can assume that this $82,000 of other spending I want for my household in this example is actually going to decline as I approach my 40s, 50s and 60s. Maybe that will happen when both of my kids move out of the household here, but I don’t think that’s a reasonable, as reasonable an assumption that that your spending will go down for early retirees as it is for traditional retirees. It’s certainly not something I’m going to plan on personally in my portfolio. So this really is a cost escalation that does not have a mitigant in my situation, perhaps many others in the fire community. I also want to call out that there are two states where this rule is accepted. Vermont and New York do not allow ACA plans to factor in age into premium pricing. So everybody pays the same rate regardless of age for premiums in those two states. So that makes things simpler, but the bad news is that those states are way, way more expensive in the early years for someone who is in their 30s or, you know, 20s, 30s or 40s than they would otherwise be. So you still have to deal with basically pricing at this level, the 30 in the $30,000 range for for a household like mine right off the bat and that makes that makes everything harder even though the modeling is simpler.
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Scott: Okay, let’s talk about some good news now. So I’ve I’ve just modled out the problem. Let’s start going through some offsets here, okay? The first offset here is that this is just a bridge for my age 35 year to age 65. This this this graphic that I’m I’m showing here if you’re watching on YouTube or you can see on the blog, shows the ramp from that kind of 18,000 or so in total healthcare expenditure all the way up to like almost approaching 40,000 the high 30 30, you know, 38, $39,000 in spending by the time I hit age 65, with some bumps as my kids roll off um in my 50s and 60s, but that steady upward march. Once I go on Medicare at age 65, those costs drop off a cliff. Premium costs go into like the $6 or $7,000 range and out of pocket costs are going to be in that $5,000 or so range. So that’s going to take this problem, actually spend less when I’m age 65 and beyond for out of pocket healthcare cost, not including long-term care costs, which is a different risk that we’re not covering here. But just for healthcare costs, I can expect a huge drop off when I go on basically the state, the state plan for for Medicare in traditional retirement at age 65. So that’s actually a huge offset and again, creates this problem with 4% rule planning, right? Because I can basically assume I’m going to spend $18,000 a year and if I can bridge this this difference, I can get into Medicare and that problem resolves and I have a huge if I if I just say, oh, I need to plan for $38,000 or $40,000 a year and healthcare expense, that’s way too conservative and overstates this problem because that’s only going to really be a problem in my mid to late 50s and 60s.
Mindy: So just uh just 30 short years, Scott, and your your healthcare costs will drop dramatically.
Scott: If you can picture this, if you’re listening, I’m sorry, this is a graphical problem, but if you can picture this, right? what I think the problem the problem is, people assume, hey, my healthcare costs are going to be like 18 grand in 2026. Great. So everything else costs 82. I’m going to spend 100. I’m fire with the $2.5 million portfolio on $100,000 in spend. And that’s the problem, right? We have to account for this differ, this this healthcare spend in bridge. And so the simplest way to do that is say, hey, you know, at age 36, I’m going to pay a little bit more for healthcare. 500, 600, 700 bucks more that year. I’m going to pay a little bit more in age 37, age 38. So, if you take all those uh uh costs, all that all those cost increases, which you can model out with something like ChatBT or a spreadsheet here, you’re going to get basically a curve, right? You’re going to get this big lump in increased healthcare costs. And I’ve I’m I’m showing a graph here that that colors that blue, right? So we take the the starting point, this 18,300, and by age, you know, 55, I’m going to pay, I’m going to pay something closer to 35,000. 35,000 minus 17,000 or minus 18,000 is going to be about $17,000 per year for that period of time. If I add up all that space under that curve, I’m going to see that my fire plan is really about $378,000 short over a 30-year period to account for that cost.
Mindy: But I’m following that. I’m just shocked at the number. $378,000. I mean, that’s why we’re doing this episode, Scott, is to highlight this isn’t just you’re falling short $10,000 one time. You’re falling short a lot over the course of multiple years. and $378,000 out of $2.5 million, that’s going to alter your financial independence situation, especially if we get a period of years, as you have postulated might happen, where the stock market goes down.
Scott: Yeah, well, the 4% rule covers that, right? The the stock market going down, but the the 4% rule does not cover a known cost escalation well in excess of inflation for a material part of your spending. That’s the problem here with the 4% rule and and health insurance. That’s where they’re they’re fundamentally incompatible, right? So the the the the the problem is I have a $378,000 that is not in excess spend that is not contemplated by the 4% rules of thumb, right? In my that I know is likely to happen if I want to stay on traditional insurance, right? Um, throughout throughout that 30-year period. So that’s the problem. Now, it’s too conservative to say I need to just save up an extra 378,000 and fire, right? We are we are sophisticated, hopefully students of personal finance here and we know that a lump sum of $378,000 is not going to produce a completely complete zero real return over a 30-year period. Right? If that were the case, we wouldn’t be firing. We would that you know, we we have a different fundamental assumption about fire. And those costs for health insurance, by the way, are going to be backloaded, right? So this problem is not going to be acute at age 36 or age 37 or even age 40. It’s going to be acute at age 55, right? So I have some time to invest um this this this some money that I can set aside here. So I can I can really bump that number down to $250,000 on top of my fire number to cover this cost, right? This this exercise of planning for this bridge is much more like the exercise of planning for college education than it is for permanent sustained financial independence with the 4% rule.
Mindy: This is super helpful and maybe you took it the consideration but you didn’t say is if you are retiring at age 35 and all of these problems are hitting you at age 55 or 50 or even like starting in age 45, you’re like, oh, I’m I’m I’m consuming a lot more than I thought I was going to. Now you have a 10-year gap in your resume that you are trying to fill if you’re going to go back and get a full-time job or you’re working a part-time job that you really might not want. I just I think that there’s a lot of risks that people aren’t considering towards the lean fire, uh Bacer, the the the lower end of the fire spectrum.
Scott: Yeah, if we assume zero subsidies, right? This is this is not a deal killer for a $2.5 million portfolio, right? I just said you need 10% more, right? That’s not really, you know, that might that might change things by a year or two for for that person, right? in terms of their timeline or how they want to think about things in there. It’s it’s probably you could almost it’s maybe a rounding era, something that’s that you can absorb into like a $5 million, you know, two and a half to three to three and a half to $5 million chubby fire portfolio and fat fire spending is so flexible, presumably that it’s not it’s not a deal breaker. But at lean fire, at a at a million bucks, right? If you if you if you know you’re going to spend 40 grand, you know, somewhere in the high 30s to 40 grand and that’s your unsubsidized maximum risk in healthcare costs, that’s a really threat. That’s a big threat to a a million dollar fire portfolio. That is that is fundamentally incompatible with that approach at that point in time, you are dependent on subsidies or or something else going going right in that situation. and I think it’s a real risk that needs to be contemplated here um on there. and going from a million to 1.25 million portfolio to cover this risk is is a serious delay to fire. That’s a 25% increase in the timeline to fire to cover just this healthcare risk. So I I think it is a real risk for portions of the fire community and and yes, by the way, as as as uncomfortable or as absurd as it sounds for me to say that 35,000 per year in healthcare costs is a reasonable unsubsidized estimate for someone in their late, you know, late 50s and and early 60s. That is not that is not unreasonable or absurd. That is that is what the reality of health care today in the United States for people in that age bracket.
Mindy: Yeah, that is that I I think that that’s something that people have in the back of their head, but not actually fully thought out yet. This is much more fully thought out and kind of stark, but I want people to be aware that this could be a very real problem.
Scott: Yeah, I think it’s a miss like I I I don’t think that this this structured analysis has been approached in this manner in the fire community. I mean there’s been a couple of folks that have have talked about ways to kind of think about this. You know, physician on fire did something, you know, in 2019 that was that was really good on this. Um there was a good morning star article by um Vanessa that that uh or Market Watch article by Vanessa um that that that treated this reasonably well. But but but I don’t think that there’s been a a clear like how do you actually solve for this? What is the scope of the problem? how big is it? And what does that going to look like? Remember, I’m in Colorado and I’m going to have a relatively smaller problem here than my peer set in Connecticut or a higher cost state. So, anyways, let let’s let’s go into ACA subsidies, right? So, you know, a a big offset to this is, oh, but ACA subsidies make this not in practice a a problem, right? I mean, most people are going to pay in 2026 way less than this in the fire community as long as they keep their their their Magi modified adjusted gross income below 400% of the federal federal poverty line for a household for their their size households, right? So, you know, I I’ve not assumed ACA subsidies at all in this analysis and quantifying the risk, and it’s clearly an offset, right? Again, I’m I’m I’m saying here’s the potential problem. Now let’s talk about how to plan for it and and and offset it here. What do you think about my my assumption not to include ACA?
Mindy: I think that that’s a really great assumption because this this shows the stark problem that this could be. And if you include ACA subsidies, that’s great, but they’re not guaranteed. That’s not the cost of health insurance. Health insurance is what did you say, 13 to 16,000 for your age, and then you take the subsidies that knocks it down. But what if you don’t qualify for the subsidies? What if the subsidies go away? What if you make a mistake in your math and your Magi goes over that 400% even by a dollar, then all of those subsidies go away. Is that correct?
Scott: I completely agree. The way I had phrased what you’re saying here is I think you’re making an incredibly aggressive planning assumption to assume that ACA subsidies are going to be there for 30 years, right? It’s maybe not be aggressive to assume they’re going to be there for five, six, seven years, right? It may not be that that aggressive to assume they’re going to be there through the end of the Trump administration, for example. But I think it’s very aggressive to assume that these are going to be here for 30-year early retirement. I think it’s actually a very specific political bet that the fire community is not internalizing, right? The three components of that bet are, one, future taxpayers are going to willingly subsidize healthcare for households with high net worth in the millionaire category, but low reported income, low reported Magi, and who are otherwise able to work. That’s a specific political bet, right? The second specific political bet is that subsidy formulas are going to remain favorable despite rising financial pressures for the United States government. That’s a that’s a specific political bet. And the third is that political coalitions are going to continue to support the structure for this population for decades. That’s a very specific political bet. They those political bets, those assumptions may prove true, but I don’t think that’s a neutral base case. I’m not going to plan on that being the case for my family. I do not think that is a strong set of assumptions to ground a base case financial, you know, fire plan, a spending plan. That’s that’s my take on it. Um that’s not it’s not a what what ought to happen. It’s it’s I think that’s a bad political bet to make as as part of the grounding part of your your your fire portfolio.
Mindy: Well, and let’s say you’re wrong, Scott. Let’s say that this just continues forever and healthcare costs go down. Then you just have a little bit more as a buffer.
Scott: Yeah, I completely agree. That that’s how I think people should plan around these healthcare costs, right? Is is I don’t need them. They’re not part of my fire plan, but I’ll take them and they’re going to and they’re going to offset things. Because the subsidies are so meaningful in in offsetting this cost for people below that that uh that that Magi threshold, that will make your plan go from like the 94, 96% succcess rate of the the 4% role to to something closer to 100% in many cases depending, you know, especially for like the lean fire folks that are that are going to really, um, that are that are that are going to really benefit from that that plan. But that’s that’s the cost, right? Is is we got a problem here that’s real and that’s acute that I think we have to really wrap our heads around and model. And then if we get the subsidies, if they do persist for a very long period of time, it just greatly increases the success chance of our portfolio because it’s so consequential. So that’s that’s what that’s what I’m trying to grapple with here. I don’t have the right answer for that in this in this study, right? Like this is a speculative political bet, right? About about subsidies. I can’t apply probabilities to that um or how that’s going to work, but I do think that a consequence of taking this fully seriously and planning on the full cost of this healthcare coming into play is going to be that in practice, if you do receive subsidies, your plan is going to be over stabilized and and more certain than it needed to be. And I don’t have the right answer for that. Personally for me, I’m conservative, so I’m going to plan on not getting the subsidies at all and treat them as an offset.
Mindy: And I think that’s a great plan.
Scott: Now, let’s talk about other mitigators, right? So we talked about the worst case. Let’s talk about let’s continue to go through mitigators including the you know, after after discussing the subsidies, right? First is geographic arbitrage, right? You can move from a high cost state like Connecticut to a low cost state like a New Hampshire and see an enormous decrease in your risk profile if, for example, subsidies go away, right? Having that option to geographically relocate can make a huge difference. Beyond that, you can, of course, do international travel, right? We know we know folks that that meet certain qualifications. I think you’re you’re actually uh stronger on on this point the me by a lot, Mindy. What what’s that what’s the deal with uh international um travel and health care costs?
Mindy: They are generally considered to be way lower than the American health care costs. So there’s geographic, um, a medical tourism, if you have something that can wait to be attended to. A good example is dental work that’s very rarely going to be something that’s an emergency. and if you can make your way to another country, your costs are way lower. Um, different countries specialize in different things. Uh, I have a friend who travels a lot overseas and goes to, I can’t remember it’s like Czechoslovakia or something and gets a whole body workout for like $200. Every scan you can think of, just this amazing bank of information and for $200. In America, one test would cost $200.
Scott: That concept of being willing to travel um is going to appeal to a certain portion of the population and that’s going to drastically offset these risks for that period of time where you are traveling. um, but you will eventually come home to this risk if you decide to to reside in the United States for any any extended period of time prior to traditional retirement. So, just a risk to be aware of, but that can certain certainly mitigate portions of this risk in some years and provide additional buffer. Another one is is part-time work, right? You you can get a job, or you can start a business, or you can do some kind of work that is going to cover these costs, right? And this is not like a joke. This is not like, you know, a fire fire police are going to come after you, they might. but 80% of the Bigger Pockets Money community, 60% say, I’m definitely going to earn some kind of income in in some active way after I fire, and another 18% are open to that, right? And I’m one of those people right here. We’re doing this right now this podcast, right? I I like this. This is fun and it makes some money. And so, you know, that that’s going to that’s going to cover, that’s going to generate income that can cover some of these costs and defray my my core fire plan. And that is very common in the fire community. Some people think it’s not pure um in there, but that’s not that’s not the reality of what what folks in this community are saying they want. at least the folks who listen to and watch bigger pockets money podcast. So those are serious real ways that people are dealing with this problem, but none of them change the underlying problem that you’ve really got to plan on this. And I believe that financial independence is a continuum, but that the end state of that continuum is no requirement to ever earn another dollar of after active income for the duration of one’s life, even if you do plan to earn some passive income after financial independence is met, that’s got to be the core baseline part of the plan and I think that a robust fire plan should plan on this risk and cover it. I’m going to cover some alternatives to traditional insurance next here, right? There are basically three kind of alternatives to traditional insurance, right? The first is partial or full self-insurance. Charlie Munger is extremely confident in his approach to self-insurance. Um he’s a billionaire, of course, but he’s like once you reach a certain level of certa I’m butchering this quote, but once you reach a certain level of wealth, you know, you’d be foolish not to self-insure. I completely agree with that. However, I also don’t have the same gututs that he has, um, because health and and this is obvious to folks and I’m going to express it differently than maybe you would. But but you know, if you self-insure, you’re not going to be paying premiums, you’re not going to take the bad math that is fundamental to insurance in almost every case, right? But the drawback is that healthcare costs are not just volatile, they’re fat tailed, right? They can get these these the the the really bad healthcare events can cost hundreds of thousands or even, you know, sometimes approach seven figures in liability, seven figures is extremely rare. It’s a very, very small probability that that’s going to happen. But it can happen and that’s something that most people cannot stomach over a 30-year period and I certainly can’t in a fire planning analysis.
Mindy: Look at expenses, Scott. When Charlie Munger said that, how old was he? Like mid 90s? What is and mid 90s and a billionaire. What on earth could happen to him that he couldn’t cover with his billions and would actually like not be detrimental to his lifespan? I mean, he lived a really great life. So, I can see why somebody might not want to self-insure. I don’t have an eight figure net worth, but I’m getting closer. I don’t want to self-insure because there are situations where a health incident could take a big chunk of my net worth if I don’t have health insurance.
Scott: The only reason I’m stating self-insurance as one of the options is because it highlights highlights the fact that the math is continually every year moving further and further in favor of self-insurance, right? And that’s a problem, that that creates an the whole bunch of problems for the industry, right? If if health insurance is so expensive that people just can’t afford it, right? Some people in the fire community have this choice. And I might have to delay or think about this as a planning element in in in in my early financial independence. Other people don’t have that luxury, right? It may be I just can’t afford the insurance, right? I can’t I can’t do it. I’m going to have to take the risk in there and they’re going to move off of of those insurance plans. That creates this, you know, this is too extreme of a statement, but the the term is the insurance death spiral, right? Where the healthy people move off the health insurance plan, that leaves the people that are more dependent on health insurance on the plan. Insurers know that’s the case, so they raise the premiums for the people who remain and that continues that continues to escalate the departures of healthy people off of those health insurance plans. That’s the whole reason that the Affordable Care Act or Obamacare was instituted in the first place, was to keep everybody on these plans so that the healthy folks could basically subsidize the cost for less healthy folks, um, in there. And there’s a political construct behind that. I’m not going to talk about what’s good right right or wrong in that context. But that was the the thought process here and as that unwinds, that’s going to be that’s going to be a challenge that America’s going to have to grapple with because the math is bad for insurance right now. And people are going to look for alternatives. Okay, so the second alternative here, besides self-insurance is health shares. Health shares are not insurance. But they functionally provide some of the same benefits for that and they they can and should make people uncomfortable because they’re not insurance, right? I’m part of a healthcare health share personally, as I mentioned in the intro. I’m not going to talk about which one. I have no affiliation with with that. It’s not that’s not that’s this is not a promotion of health shares, but I joined it because of the work I did on expected value leading up to this article. I knew that the health the insurer, one the you know, the that that I that I was offered a quote for had had uh a good track record, but also had a history of denial of claims. And I know that the health share had a history of denial of claims in there, but the reviews were fairly comparable, right? And so you look at this and you say, what’s the risk of a health share denying and claim, what’s the risk of a traditional insurer denying and claim? Well, they’re they both have risk. The health share may have a slightly higher risk, but when you think in probabilities, I’d have to have believed something very incredible about the risk profile of the health share plan for the premium difference not to make this a mathematically very strong choice for my family. Right? So that’s that’s a real challenge for this industry and I think that these health shares are going to attract more people who are going to be just as uncomfortable leaving traditional insurance as I am. Some people are evangelical about this and really and really love their health share and talk about how great it is. I’m not one of those people. I’m I’m I’m pretty, you know, uncomfortable with it, but I’m also rational in the sense that as someone who’s not eligible to receive ACA subsidies, um, at all, uh at this point in my life, this is a this is a really good choice for my family from a mathematical standpoint, right? So that’s that’s going to be one one one option for folks in here that I think are people are going to take seriously even if they don’t like it. I think the last one, last option, I think is going to be this world of catastrophic medical liability coverage. This is going to depend on where you’re what what state you’re in and what the regulatory environment looks like. Um, and this is not available right now in Colorado, um, at least not that I that I’m aware of. If someone know does know that this exists, let me know, Scott at biggerpocketsmoney.com and I’ll I’ll sign up for that. Um but but I basically my thought process is, as you know, as someone who’s financially independent, I would love to self-insure up to a pretty high amount, right? I could like I know my healthcare cost is going to be fairly low most years, unless I develop a very, you know, some sort of a problem uh over in the future. Um, in which case, you know what, maybe there’s something else that that goes on or or ways we handle things. But I’d be willing to insure, self-insure the first 25,000 or maybe even the first 50,000 of health care costs in any given year. I just want defense against that fat tail, the several hundred,000, you know, seven figure problems that come that that that could come up and that are the boogie man and financial planning for this type of of situation. So, I’m I I I believe that there’s an opportunity for the market to provide some kind of medical liability insurance. This is not a an insurer that will interface with hospitals or anything. It’s just if you have one of those huge huge events and you go to the hospital and you accrue $250,000 in medical debt as part of that operation, you’re on the hook for the first 25 or 50 or whoever it is thousand dollars and the insurance carrier then pays the rest of the medical liability that comes up. I believe that’s a work around that’s theoretically a possible to some of the problems in health insurance because then that’s it’s not health insurance, it’s something else. It’s liability coverage. And I think that that’s going to be an appeal that’s going to appeal to an increasing number of of Americans over time as wealth grows in this country and especially in the fire community. So I really like this this concept. If anybody knows anything about this or has serious intent or the ability to create something like that or knows of services like that, please email me at Scott@bigerpocketsmoney.com. I think it is one of the the answers for this community, at least the the healthy and able-bodied portion of this community to the current situation with costs.
Mindy: Okay, I’ll stop there for a second. Any any thoughts there, Mindy? Yeah, that kind of mirrors those last two, kind of mirrors what uh Carl and I are doing. We have, it’s not a health share, it’s a direct primary care relationship with a medical facility in our town that is so much easier to get into than going to my primary care doctor. I treat my high deductible health care plan as the catastrophic medical insurance plan and primarily use the direct primary care facility. A, because I don’t need a lot of doctor visits. I injured my back. It was excruciating pain, it was instant. If I had called my regular doctor, it would have been something like a week or two before she could get me in. The direct primary care got me in to the facility local to me wasn’t available, so I had to drive to the next town over, but they were able to see me within an hour, they got me the medication that I needed. They did some sort of shot in there. I don’t know, it was mind-blowing. It was so painful and then it wasn’t painful at all. And having that, it’s an extra cost, but I’m willing to do that because I don’t want to wait because when I need a doctor, I need them right away. Um I am I don’t know, fortunate or unfortunate to no longer have my appendix. I remember that was like, oh, I don’t feel good. And then two hours later, they’re like, okay, you’re going to go to sleep now. Your appendix is not something you can plan for, and when it needs to come out, it needs to come out right now. So that I believe and that was in 1996, I think my bills were like $27,000 for that, uh, which sounds really low now, but again, it was like 30 years ago. Um, and I had two C-sections because I had enormous babies. The first one was absolutely not planned. The second one was more so planned and that took the birthing cost from, you know, a nominal amount of several thousand dollars to like $40,000 and the like I said, the first one wasn’t planned. we had no idea she was going to be a C-section. I don’t think not having health care in America is an option right now, but I also don’t like the options that we have.
Scott: I’ll react to a couple of thoughts to what you just said there. First, I have a direct primary care doctor as well and I like my doctor, it’s a little expensive for the the adults in our family, me and Virginia. but the direct primary care relationship we have with our pediatrician is fantastic. It is so good, right? Our Dr. Susie is so wonderful. We when our kids get sick and you know, whatever, we we texture her via this app that we have here, that’s that’s hip and compliant. and you just say, here’s what’s going on. She’s like, oh, yep, that’s this. We get a prescription. The prescription costs are not high for many of the drugs for for for for the common illnesses for our kiddo. I think we had we had we we pay like 125 or 150 bucks a month, something like that for the two kids for our direct primary care doctor. When there’s a problem, we set an appointment, we go in, there’s no administration is so much better than the traditional pediatrician. I mean well, depend on the doctor, right? And all that kind of stuff, but I believe that the folks who like this kind of stuff and like being very survey service oriented are the ones who are attracted to direct primary care relationships. The problem with direct primary care is that I think until recently, and may actually be changing this year, um, you could not use HSA funds to cover those expenses. Um, in there and and and there’s not they’re not usually reimbursed by traditional insurance carriers. So the fact that I’m on a health share with a DPC is a great. The problem is that if there’s a true emergency or a major healthcare event like a cancer diagnosis or a big injury or whatever, you still go to the emergency room and that is where traditional insurance kicks in, right? That fat tail risk is not being covered appropriately.
Mindy: And Scott, if you think an adult trying to get a doctor’s appointment quickly is difficult, try having an emergency pediatrician consult. It’s so hard to get your kid into the pediatrician on a traditional insurance way, uh traditional doctor visit. So having that direct primary care for your pediatrician is life-changing.
Scott: Let’s also acknowledge, like we’re talking about the privilege, um for able-bodied healthy folks, right? that don’t have some of these pre-existing conditions or those types of things, right? For folks that don’t have that, I think there’s no choice but to model out the cost for healthcare for for health care and you may want to even go on a silver or gold or platinum plan that has lower out of pocket maximums and and a lower deductible depending on on if you know you’re going to be needing health care costs for for a long time. So this is there’s kind of a there’s kind of an optimism inherent to what we’re talking about in the planning process here around being healthy. I also think I want to call out that some of the the really scary medical bills um that get get really large. Um, there there’s there can always be like some weirdo thing, but though there as I research this, a lot of that often cost around the Nicu, right? The neo native intensive care unit. And that is for, you know, uh children that are born early, babies usually under about a month or two um in age, in the first just first couple couple of months of life. And so during that period of time, they would there would there’s no way that I would be doing what we’re talking about here with different these alternatives to insurance, um, because it’s just the stakes are so high in those situations and I think it’s really I think it’s important to have traditional insurance in in those areas here. So I think this is a really tough um subject here. I’m I I hope to get corrected and and get additional insight from the community because I’m sure have all of these different perspectives that I was not able to grasp and collect in the process of research here. One last thing I’ll call out is is a user, um, uh we talked about this recently in another show, but there’s also different types of of of insurance products coming out for specific risks. So one that I actually signed up for, I have no affiliation with this company at all. Um, just going mentioning from a user is Blister. Blister is an insurance product for active people. So it ensures activities. I think it’s like skiing, right? across country skiing, snowboarding, snowmobiling, mountain biking, road biking, hiking, camping, backpacking, rock climbing, you know, canyoning, surfing, like those types of things. So there’s like a whole list of these activities which are every conceivable variation of the things that I like to do. Um, I don’t play rugby anymore, although rugby has its own actually have a fun insurance product there for if you get injured on the pitch, um, that covers that as part of your dues. But but this is like a $25,000 injury insurance. So the problem with again with something like Blister is, yes, if you break your leg, this will be a huge offset to that, right? Because the costs are probably not going to be an order of magnitude higher than $25,000 to fix that, but it could be depending on what kind of accident you have. So you still need some kind of wrap around insurance to protect the tail risk, but that’s something, you know, given the other choices I’ve made, I actually signed up for that. and it’s like $5 or $600 bucks and it covers you for a year for any of those accidents. and I like to do those things all the time. So there’s, you know, that that feels like a reassurance piece with that. So I don’t I don’t even I don’t even know what I don’t know about the environment there, whether there are competitors to Blister or other things like that. but I I believe that this is an ecosystem that if you you’re paying attention to it and really think about this problem, opportunities and new entrants are going to come up every year that are going to make this easier for you to to to they’re going to provide a slowly increasing set of options to traditional insurance that are going to get slowly better.
Mindy: I have friends, they’ve been on the show, Darren and Joelle. They travel extensively out of the country. That’s something that they’re doing in their retirement that they really love. And the insurance that they have, it covers them in America, but it requires them to be out of the country for more than six months of the year. So they’re spending more than half of the year out of the country. And then it covers them, I think it covers them in all the countries that they travel to, and it covers them while they’re at home. But because they’re out of the country for so long, that they are the chances are that they will either have a medical issue when they’re out of the country, or they won’t have a medical issue at all because they’re healthy and traveling all the time. Um, it’s a it’s a risk for the insurance company, but it’s not that big a risk. I mean, I think that more and more that we’re going to start seeing these alternatives popping up because people are tired of paying this $18 or $30,000 a year for insurance that they really don’t need. And again, this is speaking to the people who are healthy and able-bodied and not the people with chronic conditions.
Scott: And again, that needs to permeate all this. If there’s a chronic condition or you have a different probability of needing health care that you know is different in your situation or your family, then this this analysis does not apply, right? There’s a different there’s a different approach that needs to be taken. And you can be very able-bodied and healthy and that can change in a heartbeat here and that can that can change things, right? And I think one of one of the the the items here is fire is a privilege. It is like the ultimate reward that can be achieved in a capitalist society here. It’s hard to do this. There are a lot of things you got to figure out. You got to accumulate a lot of wealth. You got to produce a lot more a lot more, at least in the format of of what people are willing to pay you than what you consume in terms of what you spend. You need to invest that in a a strategic way. You got to be thoughtful and and aggressive to get there. You got to be defensive once you get there to preserve that position. and they you got to have some options here, right? If if the worst happens and things things happen, are you insured? Do you have a fallback plan or are you willing to go back to work in the event that that things really don’t go your way? Because there’s a there there is there is an also a case here of we have to be aware of these risks and we also have to say, there are risks but they’re all everything is a probability here and that fire is a probability. and there’s a really good reward to you know not not being so conservative that you’re delaying this in an to an undue extent out of fear of these potential probabilities. So, I hope today’s episode and this analysis has outlined the risks, allowed you to quantify it in the worst case, put together concrete ways to offset that risk. And, you know, I think that, you know, I still kind of after all of this settle on, you know, the approach is to really, in my case, tag on about $250,000 to my fire number to cover the rising costs of Obamacare um subsidies, ACA unsubsidized health care premiums out of pocket expenses, and then look for these other ways to uh to offset that cost um in the meantime. So that that’s the that’s the the approach that I’m taking. Um, I would love to hear different approaches and how other people are thinking about this in response to this.
Mindy: Yes, Scott, I really wanted to do this episode because I wanted to highlight this could be a big issue. It could be a big issue for your fire journey. It doesn’t have to be, but you have to be aware that healthcare costs will most likely rise. Again, there’s those two states, Vermont and New York, I think you said, where healthcare costs start off high and just kind of level out uh because they don’t allow the state law doesn’t allow insurance to charge you more as you age. But for everybody else, your insurance costs right now are not going to stay the same. So be aware of it, make a plan. I mean, this is all what fire is about. You you make the plan that your spending is going to be X and you cover your spending. Just make sure that X includes your healthcare costs and your rising healthcare costs.
Scott: Absolutely.
Mindy: All right, Scott, this was super fun. Should we get out of here?
Scott: Let’s do it.
Mindy: That wraps up this episode of the Bigger Pockets Money podcast. He’s Scott Trench. I’m Mindy Jensen saying, see you later alligator.
