What I Spend

Where are you and where are you going?
2Birds1Stone
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Re: What I Spend

Post by 2Birds1Stone »

A few more very specific thoughts on costs vs. quality of life.

Is it possible that you will increase your utility of $$ once you stop working? I know you pay for a lot of convenience and time savings due to your high compensation, and often lay out capital for premium purchases that enhance quality of life.

Once Covid isn't a thing and you're not working, do you still see yourself paying $3-4k/yr in delivery fees and tips for your groceries? Do you think that some of your hobby and leisure costs could be "hacked" by getting more involved in those hobbies to the point where they could eventually become more cost neutral? Have you looked into semi-passive income utilizing creative CC/bank bonus strategy to earn some income and/or score free/cheap travel/accommodation in the future?

Scott 2
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Re: What I Spend

Post by Scott 2 »

2Birds1Stone wrote:
Sun Jan 03, 2021 5:52 am
.
I very much appreciate the input. I added the book to my queue. I do prefer dealing in strategies rather than specific values. I need to learn how to solve my problem, because it will change. A good example - my early numbers did not include my spouse and incorrectly estimated healthcare.


The calculator highlights death risk well. Given my time horizon, it is interesting to see how little impact social security has on success rates. The chosen actuarial table doesn't matter much either. Funny, we just killed two of my safety nets.

One interesting variance - if I say a 3% WR with 15% tax rate, I expect to spend 25,500. I think the calculator expects to spend 30,000 and is adding taxes on top. I know the 4% rule assumes 0 taxes.


My resistance at accepting a 3% WR:

1. I do not trust past results as a predictor of future performance. Declining empires, food inflation, healthcare inflation, CAPE, etc.
2. I do not understand logistics accessing money and monitoring portfolio health

I think education and a monitoring strategy will solve these.

This does highlight a big source of fear. My prior comfort with a casual investment strategy, resulted from my high savings rate. Barring a catastrophe, investment results have been noise in my system. Work has been a sure thing - effectively unlimited money and "free" premium health care. Lately, the price is misery, but I have strong loss aversion. Quitting a secure job sends that needle to 10.


Cost of living adjustments...

So this is where I started yesterday morning. Tiers in increasing difficulty:

1. I found $6k in easy slack - gym toys, miscategorized income taxes, whisky, video games, eating out, podcasts, and audio books.

2. Pandemic induced food delivery (around $3300/yr) - not so easy. The pandemic also pushed larger expenses from life - gym membership, swimming, driving, eating out, travel, house keeper, etc. We miss them.

3. Time intensive claw back of food, entertainment, pet and home budgets. Maybe $2-3k. Painful, really gets at insecurities around food and money.

4. Sacrificing home or healthcare. Home is locally optimized. Healthcare - I am working the system, but will ultimately be top priority. Unfortunately, these are also the heavy hitters.

The slack in tiers 1 and 2 creates quality of life. Can I find different but equal? Maybe. I hate cleaning - but if the trade is a gym membership, video games, whisky, and eating out??? I'll grab my toilet brush and mop.

Do I need to? I'd like to know that before I upend life. My wife being sick complicates the trade - time, energy and resilience are more constrained.


Hacking hobbies, credit card rewards, etc. - I see this as low paid work. I am not better than any job, but planning for it doesn't make sense, relative to my current compensation.

Scott 2
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Re: What I Spend

Post by Scott 2 »

Got a pretty substantial raise for 2021, which will at least benefit me for January. I managed to keep my cool during the conversation. I have clued in a couple long-term coworkers on the departure, who were trying to collaborate with me on planning. I didn't have the heart to fake it with them.

In the immediate term, it would be a lot easier to let the money flow over me, washing away all my non-work problems. Instead, I am contending with both sets. It kind of sucks. Lots of hiding in media to quiet my brain, missed sleep, etc.

My wife made a good point - putting things off means at a later point in time, I'd be in the same position. Only I'd also stack stress-induced problems on the current pile. My mind keeps floating back to the death chart 2b1s shared.

I had two pressing projects that needed my full focus last week, as well as getting medical appointments done. Giving notice would have been too much distraction. It will probably happen early this week.


I've sorted some insurance stuff.

We're going to get a dental policy, with the same carrier my work uses. That's the most affordable path for our current (new) dentist. He's modern and accommodating. He has in office panoramic x-rays, laser drill, crown printer, etc. He made an extra late appointment at end of year, to help us maximize insurance. It's a big improvement from our last dentist, one I'm not prepared to give up. I think we'll spend roughly $400/person/year.

I have narrowed options for my wife's healthcare, but am waiting on communication with an insurance company. The most affordable carrier is not the fastest carrier. I have a backup insurer selected if the slow one doesn't work out, but at an extra $1000/yr. We've run the plan by her doctor, and I have confidence in it. The complexity of her medical care means this process is a little slower. It does try my patience.

My health insurance - this is still up in the air. I have a rough ceiling - basically paying $5k annually, so a doctor can order $200 of labs, which I then also get to pay for. I am obviously not thrilled. The exchange isn't friendly to planning a 4/1 policy effective date, while employed in January, so this is primarily a waiting game. I don't think subsidies or cost sharing will help much. But, I'm also not prepared to risk bankruptcy by a catastrophic illness. I can understand how people arrive at the health share route.

This definitely a money where your mouth is moment for me - I have always been pro-ACA, pro-Medicare for all, etc. It looks like I'm going to pay for it. I remain firmly convinced that having employment embedded in the health insurance equation is bad for society. Insulating decision makers from this pain is a mistake. Longer term, maybe it is a problem I'd like to work on.


I am still learning on the withdrawals side. With my portfolio's current cash position, this is not pressing. It feels very important and urgent, but I could easily do nothing for 10 months and be fine. With current CAPE, the cratered bond rates, and medical/food inflation - I still don't have confidence in a 3% WR. I am chipping away on the education side of things. I clearly have learning to do.

While fretting over 1% of WR, my mind definitely screams - "why are you chasing scraps??? just do your damn work!". Here my loss aversion is coupling with my discomfort avoidance. It's a good sign I am heading towards the personal growth that develops mental resilience. It is harder. Even if the end conclusion is "do some work", it is not going to be "that" work.

2Birds1Stone
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Re: What I Spend

Post by 2Birds1Stone »

Scott 2 wrote:
Sun Jan 03, 2021 12:50 pm
The calculator highlights death risk well. Given my time horizon, it is interesting to see how little impact social security has on success rates. The chosen actuarial table doesn't matter much either. Funny, we just killed two of my safety nets.
When I first played around with the calculator, I forgot to put the correct start/end dates for the expected SS. Your findings seem a bit inconsistent with my own results.

I just put the following parameters in the calculator as an example.

$33,000/yr in spending +15% taxes on this, $1,000,000 portfolio, AA = 60% stock 18% bond 22% cash, .1% investment fees. No SS, no spending flexibility.

Retiring at 40 for 60 years, has a 75% success rate, but by the time you have a 2% chance of being broke, you have a 41% chance of being dead (age 77)!

The same scenario with a 5% flexibility in drawdown has an 83% success rate, but by the time you have a 2% chance of being broke, you have a 60% chance of being dead (age 83)!

Adding $1,500/month in SS at FRA (67 years old), in the first scenario (no spending flex), bring your chance of going broke down to <2% until age 98! You have a 98.5% chance of being dead, and a 2% chance of going broke.

A combination of 5% spending flexibility + even $1k/month in SS at a delayed age (70), gives your 3.3% WR a 99% success rate.

If you increase the % of stocks closer to 75% success rates go up a lot, same with more in bonds vs. cash, and dropping down to a 3% flat WR makes it super easy to see that if you're even the tiniest flexible with regards to spending you will die very very rich.

https://engaging-data.com/will-money-la ... 00&mort=ss

classical_Liberal
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Re: What I Spend

Post by classical_Liberal »

You're smart to work through your healthcare and withdrawal options now.

Believe me though, in a year or so, the long term effects of fattail returns scenarios will no longer be a huge concern. It's just part of the risks of life, like LDL cholesterol. It's on your mind when you eat a meal, but not the dominating force behind all your actions. We become what we focus on, right now your focus is on ensuring you have a good financial shot at success in a long term retirement, so that's where your stress is at. After living it for awhile it becomes the new normal and you get to focus on better things.

Congrats again!

Scott 2
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Re: What I Spend

Post by Scott 2 »

2Birds1Stone wrote:
Sat Jan 09, 2021 1:04 pm
.
Using similar parameters as scenario 1, with >2% broke as failure age (77), $18k of SS only gives $2500 of extra spend on the $33k:

https://engaging-data.com/will-money-la ... 00&mort=ss

The ~25 basis points of SWR is similar to what I'm reading on ERN:

https://earlyretirementnow.com/2017/07/ ... -security/

It is better than nothing, but my intuition was SS would offer more impact. Worrying about will my SS age be 67 or 70, will I get 100% of promised or 66% - it's not a good focus of energy. It also looks like healthcare costs stay pretty steady when Medicare kicks in. There goes another golden goose.


To my admittedly limited understanding, today's economic environment is unusual. CAPE is so high, bond rates are so low. It seems like if there is a time when higher stock allocation doesn't help SWR, this is it. Heavy sequence of return risks. I cannot predict what happens next, but it seems likely real returns over the next 10 years aren't very good.

I'm not rushing into allocations that test higher, but I am gliding there, I suppose. I wouldn't be surprised to find myself most comfortable at something like 70/20/10. I know I don't want to be an active trader. I'd rather work. I'd earn more too.


This same consideration makes me hesitant to go all in on simple back tested projections of SWR. I am finding myself drawn to the CAPE based rules for SWR to compensate:

https://earlyretirementnow.com/2017/08/ ... sed-rules/

I realize this concept is also back tested, so favoring it is a bit hypocritical :) But it answers this question. Say I have a 1MM portfolio that is 60% equities. And then market values drop by half. Now I only have 0.7MM. What do I do? How do I sleep at night?

Blindly drawing 3% of the prior 1MM will feel tremendously stressful. Taking a 30% haircut on spending will be unrealistic. Having a plan behind how I adjust? I think I can handle that.

Part of the problem here, is I am largely blind to the real value of my investments. I'm not going to put in the work to dynamically allocate assets over time. I think the high percentage of indexers also makes it harder to correctly value assets. I have to compensate for that somehow.

ERN does talk about a concept of prime harvesting, but it seems to offer surprisingly little impact:

https://earlyretirementnow.com/2017/04/ ... arvesting/




Ignoring the fat tail risks, like @cL describes is probably the end game. I can't obsess over that though. I suspect once work is removed from my brain, my interest in the retirement details will also diminish. I am hoping to settle on comfortable strategy before that happens.

Scott 2
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Re: What I Spend

Post by Scott 2 »

Of course, the next article I read in the ERN series is on glidepaths during high CAPE environments, more thoroughly examining my point above:

https://earlyretirementnow.com/2017/09/ ... lidepaths/

classical_Liberal
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Re: What I Spend

Post by classical_Liberal »

I remember reading the SS article awhile ago. I was actually surprised at how big an impact it made for me. That's when I decided I should at least consider some of it in my calculations. Time to SS and % of spending it covers are hugely important variables. I thought you were around 40, so near the age it begins to make a big difference in minimum SWR.

I like glidepaths and I like CAPE based withdrawal metrics for someone who is mostly dependent on index returns for growth. However, they certainly aren't infallible.

CAPE problems, plenty of good arguments about how the CAPE metric has changed and may not be as definitive a predictor of large cap index returns as it has been in the past. Also, it's less definitive if one doesn't purely index.

Glidepath, imagine a scenerio in which both bonds and equities suffer a period of correlation and poor returns. What would that look like... Maybe high equity valuations and low bond yields with inflationary pressures? Sounds exactly like our current situation.

I just like variable withdrawals in general, as long as one understands the risks of their particular strategy and has a counter play. It seems much easier for me to consider how to earn or save 6K a year if/when it's needed than it is to predict macro economic situation more than a year out. I feel comfortable as long as needs are 3%WR or less of my current NW, because that's about the lowest I'd ever have to adjust a WR. Another point to variable WR's, if you get through the first decade or so and still have your capital intact, SS is a lot closer, statistical failure %'s drop dramatically. I think it's important to have a bit of a plan for that potential as well.

Scott 2
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Re: What I Spend

Post by Scott 2 »

My take away from the SS article - at age 40, map 1% of net worth in expected social security payments to 25 basis points on SWR. Not terrible, but not life changing either.


@cL - What do you like better than the ERN glidepath for our current situation? I see it as maybe earning another 25 basis points on SWR.

Since I'm roughly 60/20/20 today, a passive glide to 80/20 looks pretty appealing - especially in light of my disinterest towards investing. My aversion to high equity prices caused me to execute the first part of the ERN glide over the past few years. I cannot see myself accepting the volatility of a 100% equities portfolio.


I am not looking at CAPE as a reliable measure of absolute value. The change in accounting standards, plus the culture of index investing, makes me think we'll never see sub-20 CAPE again. Rather, I am treating it as a useful relative metric, guiding SWR up and down. I have the sense this flexibility is worth about 25 basis points.


Learning more is making me less conservative. I am guessing a later article brings all the tools together. Assuming these strategies are additive over a basic 60/40, does still make me nervous. I am also currently ignoring the value of my home, as well as any potential of an inheritance.

Where I stand today - I can bite on a CAPE 1.75/0.5 withdrawal, assuming a 60/40 glide to 80/20 and ~1% net worth in expected SS. That is basically a 3.25% SWR. I would plan to spend 85% of that, using the remaining 15% to cover Roth conversion taxes and the associated ACA subsidy reductions.

Based on what I've read - my risk aversion is producing a capital preservation strategy. It isn't necessarily my goal, but does hedge concerns over long term care. If I can make that initial spend work, without compromising quality of life, I am golden. The money problem only gets easier.

Admittedly, I see any SWR as a ceiling. It's not like if we land $3k under budget, I'm running out to buy a bottle of 30 year Macallan.

classical_Liberal
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Re: What I Spend

Post by classical_Liberal »

My SS situation is different. Even at 2/3rds payout it's 3% of net worth and I'm only 23 years from collecting it. If I can wait 26 , at 2/3rd current payout it's basically enough for me to be FI at current spending. That's why it impacted my SWR so much. Each year that passes now is one less I have to fund until SS basically covers my living expenses. That being said, I certainly do not want to be completely dependent on any annuity, even one backed by the US government. So, goal is to have a good share of my capital remaining.

The above, coupled with a personalized noncorrelation investing strategy (think GB-esque, but tailored to my personal situation and risk factors + my understanding of macro economic circumstances) lead me to the straight up % of remaining balance. My portfolio is theoretically less volatile than most, hence less volatile withdrawals. I want to ensure I have some capital left, and I have a few cards up my sleeve to earn money whenever I want. Even if it's not the most attractive thing at the time, it'll be an available option for at least the next 3-4 years to come.

Everyones situation is so different, which is why (I think) so many people are debating SWR's all the time. My plan is not best or you, yours is not for me.

That being said, if I were looking at a glide path type plan in your situation, I'd consider allocating some part of my bond portfolio to one or more inflation protected assets. TIPS, gold, income producing leverage real estate, etc. This is just my opinion, based on the potential for inflation at this time in world affairs. You don't want the "safe" part of the glidepath to significantly lose value if the "growth/risk" portion is underperforming for the same macro economic reason.

Scott 2
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Re: What I Spend

Post by Scott 2 »

You got me to double check the SS estimate I've been using. It looks like I picked 2/3 of an age 62 withdrawal, at some point in my 30's. The estimators are telling me 100% at age 67, using my current age and earnings, doubles the number. So another 25 basis points. That does start to get interesting.

It's been awhile since I got my benefits summary letter. The online portal won't let me create an account, I believe due to my credit being locked. Sorting that is on my todo list, though I am happy to see the credit lock working.

I've clearly got a problem of compounding safety margins, artificially reducing my SWR. I need to consider that when deciding if or how to discount SS earnings.


Interesting point on the inflation protected assets in a glide path.

2Birds1Stone
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Re: What I Spend

Post by 2Birds1Stone »

There's a really good desktop version of the PIA calculator, that will let you plug in actual inflation adjusted dollars from your SS earnings report, and simulate exactly how much you would receive at FRA given current laws, in todays dollars. Once you figure out how to get your data from the SS site, it's very useful. I run two scenarios for SS, one excludes SS entirely, the other assumes that FRA goes from 67 to 70, and the benefit at that increased age is reduced by 25%. That seems to be a fairly good guess, with the knowledge that FRA could get bumped even higher, or benefit reduced further, though too many people rely on SS (with more in the future as pensions diminish).

As c_L pointed out, SS can make a profound difference in success rates if your spending is relatively low enough. Plugging in my historical 5 year average spend ($24k/yr) with 10% spending flexibility, the difference just $1k/month in SS starting at age 70 makes is 84% success rate -> 99% success rate.

Assuming your spouse didn't work long enough to earn more SS on their own, you could account for an additional 50% of whatever you project for yourself). As a higher income earner, even working 10 years you should be getting at least $1,500-2000/month between the two of you, which is a nice chunk of change on an annual basis.

On the engaging-data calc, the biggest difference seems to be spending flexibility. The difference just 10% makes is huge. These calculators are also assuming you blindly withdraw an inflation adjusted amount each and every single year. Surely someone as smart and resourceful as yourself would figure out a creative solution to trim/earn 10% of your annual budget in a really bad investment year rather than increasing spend by CPI from the previous year.

The biggest risk I see, is just having no clue what our wants will be in a decade or three. But the absolute worst case is going back to work for a bit.

2Birds1Stone
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Re: What I Spend

Post by 2Birds1Stone »

Scott 2 wrote:
Sat Jan 09, 2021 7:27 pm

I realize this concept is also back tested, so favoring it is a bit hypocritical :) But it answers this question. Say I have a 1MM portfolio that is 60% equities. And then market values drop by half. Now I only have 0.7MM. What do I do? How do I sleep at night?

Blindly drawing 3% of the prior 1MM will feel tremendously stressful. Taking a 30% haircut on spending will be unrealistic. Having a plan behind how I adjust? I think I can handle that.
Think about it, even if you ended up with a portfolio that starts at 60/20/20, and suddenly equities drop by 50%. You have $200k in cash with this scenario. You continue spending your 3.25% or whatever by drawing the cash for the first year after this supposed 50% market correction. Then by the second year, you continue to do your 3.25%, and if the market has not begun to recover, you could then implement a tiny bit of tightening to the budget, or look for a creative way to earn just 10% of your annual spending, by the third year.

ERN does a good analysis of how long the average crash/bear market lasts, in most scenarios the market will have recovered the majority of the loss before the end of year 3.

There are just too many known unknowns, and unknown unknowns to sweat these tiny basis point decisions.

Scott 2
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Re: What I Spend

Post by Scott 2 »

I'll look for the SS estimator. I agree on spending flexibility and unknowns.

My sleep at night metric goes way up if I have a plan, with health indicators and controls. Taking X% SWR on faith would leave me constantly thinking. Working through all those thoughts, capturing them into a framework - that puts my mind at ease. I wouldn't say I abdicate control to the system, but it does broaden my capacity for other ideas.

classical_Liberal
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Re: What I Spend

Post by classical_Liberal »

Scott 2 wrote:
Mon Jan 11, 2021 11:36 am
My sleep at night metric goes way up if I have a plan, with health indicators and controls.
Both 2B1S and I also have "buckets". Basically a portion of portfolio that is reserved for post traditional working age retirement, no matter the circumstances. Not sure if you've followed along on any of our conversations on that in different threads? I won't repeat unless your interested.

Scott 2
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Re: What I Spend

Post by Scott 2 »

Gave notice. It felt anti-climatic. The conversation confirmed, even if I do work again, moving on is the right choice.
classical_Liberal wrote:
Mon Jan 11, 2021 3:07 pm
.
Is the bucket strategy different than described here:

https://www.theretirementmanifesto.com/ ... -strategy/

I don't think that is something I am looking for. You guys have good ideas, so maybe I am wrong?

classical_Liberal
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Re: What I Spend

Post by classical_Liberal »

Sort-of what I do. Mostly though, I simply have a bucket of about 40% of NW that is off limits, no matter the circumstances, until I reach a traditional retirement age.

That being the case, I invest differently for retirement bucket because the time horizon is much longer. In the pre-traditional retirement bucket, I invest based on the knowledge that I may/will need this money in the shorter term for income or various other opportunities.

This does three things.

1) Draws a line in the sand if SHTF so that I'm not broke and entirely dependent on SS at 67+.

2) Allows me to invest more appropriately based on what I actually want the capital to do for me at any given time.

3) Allows for ERE-type synergistic thinking with my capital. Particularly the the early-RE portion. I don't view it as an income stream (SWR) only. It's also their to take advantage of other opportunities that may flow into both the financial realm and other realms that may decrease dependence on financial capital. IOW, thinking more like a business or renaissance person than a "salaryman".

The first is a sleep well at night factor. The second helps me make better investment decisions based on my personal circumstances at the time. (Edited to add: I'm a firm believer most investing mistakes are not because of the investing strategy, rather that folks fail to take into account their personal situation and weak points, forcing them to deviate from strategy. IOW, investing strategy does not match up with life strategy. The same can probably be said for withdrawal strategies.) The third allows me to pursue additional "insurance " mostly within the bounds of ERE systems thinking. Hopefully, eventually, making the financial stuff much less important.

PS congrats on getting the notice in, that's not always easy.

Another Edit: Sorry I should have formed my thoughts better before posting. Having the 67+ bucket untouchable also creates a situation in which I have roughly 13 years of expenses saved that needs to last 23 years. It creates a problem that needs to be solved. This, in nutshell, is hormesis, but it's also quite fun. There are so many angles to take.

Scott 2
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Re: What I Spend

Post by Scott 2 »

That makes sense. With such a high percentage of my net worth in IRA and 401k accounts, I am already forced into a bucket pattern. I don't have hard rules for minimum account values at this time, but it is something to consider.

All things being equal, I think there is advantage in maximizing the Roth conversion umbrella now, as I think tax rules for my 401k/IRA will get less favorable over time. The ACA subsidy implications do complicate it.

Earning more income from work is the biggest risk to my optimization strategy. If I burn off roth conversion space through additional income, that money will get trapped in my 401k at higher tax rates. Not a reason to avoid work, but definitely a factor in evaluating any return to work.

classical_Liberal
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Re: What I Spend

Post by classical_Liberal »

Yeah. ACA is my main concern with tax sheltered funds. It's nice to keep a certain amount in tax deferred accounts to manufacture income in roth conversions for ACA subsidies. Right now I have a health share, but if I get sick with a chronic disease I need ACA. The worst time to NEED work to create income above Medicaid thresholds is when you've become sick. Hence, until Medicare, I'll always have enough money sheltered to cover at least a few years of conversions to minimum ACA threshold (max subsidy level). The later tax liability is a calculated risk, but worth it in the current healthcare environment. That being said, I have more than enough sheltered right now, so do need to find some years to sneak in conversions at some point. Although the tax status of the money has little to do with the actually bucket strategy above, outside of longer term compound growth pretax.

This is actually a good example of how my investing practices seek to counter the weaker points in my personal plans.

Scott 2
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Re: What I Spend

Post by Scott 2 »

Threading that 1.39-2x poverty level needle, specifically to maximize ACA cost sharing when sick, is something my plan will consider. Going from 2x poverty to 2.51x raises max out of pocket (per person) from 2850 to 8550. It's another incentive to bump up the roth conversions higher than intuitive, while I am relatively healthy. I can say from experience, accumulating $8550 of medical spend while sick is easy.

IMO, the tax advantages of the roth conversion are lost under a sick on ACA scenario. During that period of life, it doesn't make sense to go over 2x poverty level in earnings, unless you have absolutely no other option for bridging the gap to Medicare age. The max out of pocket cliffs are huge.

Something else I found, is that the ACA subsidy for a married couple is based upon household income only. It does NOT depend on the number of people using ACA. This introduces more gaming into the system. At the low level - it raises the poverty income thresholds. Depending how the 2nd person's insurance is handled, that can be good/bad. At moderate incomes though, in the 2-4x poverty range, it means the subsidies start to suck. You're effectively paying 2x the intended per person premium. Most married couples with an age gap will run into this problem, at Medicare/SS age.

I think you are smart to plan on avoiding Medicaid if sick. Everything I've seen with my wife's care, having the right insurance gets you a vastly different patient experience. Providers taking Medicaid view it as charity work.

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