Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

Healthcare Analysis: How We Save Our Clients Thousands Before Medicare Begins

• Ari Taublieb, CFP®, MBA • Episode 244

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Healthcare costs shouldn't stop you from retiring early, especially when strategic planning can reduce those expenses from $1,000+ to as little as $50 per month. We explore how proper account structure and withdrawal strategies can save you tens of thousands in healthcare premiums during the critical pre-Medicare years.

• "Superhero accounts" (brokerage/taxable accounts) offer tremendous flexibility for controlling taxable income
• Capital gains from brokerage accounts are taxed more favorably than IRA withdrawals 
• Strategic income planning can qualify you for ACA subsidies, potentially saving $70,000+ over five years
• Tax gain harvesting at 0% capital gains rate provides additional opportunities
• Balance healthcare optimization with other goals like Roth conversions
• Most valuable for those within 5 years of retirement 

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Ari Taublieb, CFP ®, MBA is the Chief Growth Officer of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

“Early Retirement – Financial Freedom” is a podcast produced by Root Financial Partners, an SEC-registered investment adviser. The content provided is for informational and educational purposes only. It should not be interpreted as investment, legal, or tax advice. I may reference planning situations based on real client experiences, but they’ve been simplified for clarity. Always consult your own financial advisor before making decisions.

Listening to this podcast does not create or imply an advisory relationship with Root Financial. Investing involves risk, including the potential loss of principal. Past performance does not guarantee future results. Testimonials and endorsements do not reflect all client experiences and are not compensated. Learn more at our website or by reviewing our Form ADV at https://adviserinfo.sec.gov.

Speaker 1:

I would say healthcare costs are the number one reason people don't retire early. It's hey, how am I going to be able to afford healthcare in addition to travel and paying kids, college and a remodel? Yeah, I'm just going to keep working. Now the reality is you're cheating yourself by saying that, because I have clients that pay $50 a month for healthcare and I also have clients that spend $1,000 a month in healthcare, and it depends on your plan and if you plan well for it, you can minimize costs tremendously. I'm going to do a case study for you so you can see a real client that I have who retired at 60 and was worrying about healthcare costs until 65. And I said you don't need to worry about it, you should have planned for it. And let me show you how. If you pull from the right account, it can significantly reduce your expenses. And if you're interested in retiring early, then I please invite you to subscribe. If you're watching on YouTube, rate the show. If you are listening on the podcast app and you find this helpful in any capacity.

Speaker 1:

I love what I get to do, which is make videos and podcasts around healthcare, tax strategy, withdrawal, long-term care, insurance, estate planning. This is, to me. What allows people to feel confident to retire early, which is all I'm trying to do here is build that confidence so by the time you retire, you don't have any head trash of. I should have considered this, and why didn't I do that one thing. So, healthcare the reason I said I think it's the number one reason people are hesitant to retire early is because I put out a video 10 months ago on my YouTube channel called Health Insurance for an Early Retirement Everything you Need to Know and 170,000 of you watched that one video and you were like, wow, this really helped clarify my options. Meaning do I go to Cobra? Do I instead decide to? A common thing is go to the marketplace. Should I look for private insurance? What about? Do I stick with my company? What about if I make my spouse go work so that we have healthcare and maybe they don't love their job, but at least we're getting healthcare benefits? Like, there's a lot of different options. Today is not me going through each option. Today is a case study so you can better understand the importance of good savings, and so I'm going to be going through this. It's going to be a little bit more technical, a little bit more of the financial weeds, if I must say. So. The example I'm going to start with before I kind of hit you with it and I'll do this often for any of my videos is and there's a true story I went to a doctor it's not a long story, but it's a true story and this was months ago. And I said, hey, doc, what you just said there, it sounded great. I think you think it sounded great. And I told him I have no idea what you just said, so please try explaining again. And he said okay, so he starts explaining to me the lab that the pills are made in that he's going to give me. And he said, respectfully, doc, I don't care about the lab. I don't want to be mean here, but I don't care about the lab. No-transcript, thank you, I'm now good. He's like no, I have more to tell you. I'm like I don't need more. So why do I tell you? This?

Speaker 1:

Today is going to be going a little deeper on certain things, such as Medicare right, irma, surcharges. We're going to talk about healthcare subsidies, and so some of you might be like, hey, this sounds like a little bit like the lab, like I just want the pill. Tell me, what do I do, what do I not do? Well, one, I wish it was that simple. Two this is what we do for a living. So there's a lot of planning points around this, but my hope is I can give you just the answer, which I'm going to be able to do in the next one minute. But then I'm going to give you a deeper analysis and I hope I don't lose you, because I really never want this to feel like I'm so in the lab. But I also want you to go OK, it's the pill, but I know why I'm taking the pill. So a little longer story than I wanted there. But my point here is we're going to hop in. So to hop in.

Speaker 1:

So this couple came to me and they said, ari, I just want some statistics Like what do most people even pay when they are 60 for healthcare? And I said, okay, let me, let me look like let's get the statistics, cause I know what most of my clients pay. But I said how much do you want to spend in retirement? And they said about $60,000 a year. I says that before or after taxes. And they're like they thought about it and like, oh, definitely after taxes. I go great, let's assume you want to retire 60 years old and you're just 60,000 a year. That's what allow you to live the life you want to live. And they were like, yeah, that sounds good.

Speaker 1:

Now, between us me and all of you out there that 60,000 for most of my clients it's not enough. That's like the basics. Then there's travel, then there's home remodel or college or things like that, but 60,000 was the basics. So, from a tax perspective which is what I'm going to really be kind of driving the conversation on the reality is most healthcare costs. I would say the average and I want to look up the average after this because now I'm curious. But the average from my clients it's about $950 a month. That is before. Like we analyze and optimize the situation is they are coming to me planning for about $950 a month. Now a lot of things depend bronze, silver, platinum what kind of plan do you want? That's that other episode I did where it's more on.

Speaker 1:

Okay, what are the differences there? Today's going to be the financial side. So let's assume someone's 60, they retire and they want to spend $60,000 a year and $12,000, I'm going to keep it simple $1,000 a month as their annual premium, $12,000 a year. Well, $12,000 a year. I'm going to assume they're going to pay that for the next five years. Once again from 60 to 65. So now it's like, okay, that's a lot of money. Can again from 60 to 65. So now it's like, okay, that's a lot of money. Can we afford 60,000 a year? Will that throw our plan off?

Speaker 1:

That's the first thing I'll do with someone is I'll show them if you had to pay it out of pocket, would you still be okay? And sometimes it makes a really big difference and I'm like you should really work one more year because it's really going to help. Sometimes I'll go look, it's a big expense, but you have the assets to support it. So we're still going to optimize. But you see how, even if we didn't, you'd be okay. And then they're like, yeah, but it just feels so I feel like I'm throwing money away. I go it. I get why it feels like that, because you're a human. But think about what you're getting. You're getting I no longer have to work, you're getting family time, you're getting to prioritize your health.

Speaker 1:

So first I'll kind of take them out and go, hey, do you see why that's the case then? So what I'm going to do is I'm going to assume they have a certain amount of money in a certain account. Now, I'm going to do this because it's going to apply to all of you. Let's assume this person had I'm going to just make an example up right now a million dollars, a million bucks, and it's all in an IRA. If they needed to take $75,000 from their IRA so they can pay taxes, to end up with $60,000 to live off of, well, what that's doing is that's making your income too high that you don't qualify for healthcare subsidies. So the point here is what I'm trying to do is optimize their healthcare front and if they have all of their money in a 401k or an IRA and they want to retire at 60, they have no other way to essentially decrease their income and qualify for a healthcare subsidy because they're living off of their 401k or their IRA, which is pre-tax money. You put money in, you get a deduction, it grows tax deferred and when you take the money out in the future, that's when you pay taxes. So here's where it gets interesting.

Speaker 1:

I have a client, and this is the client I'm thinking of now. They had about $750,000 in an IRA and about $400,000 in a brokerage account, which I call a superhero account, and I'm always harping on. What is this superhero account? Why is this valuable? The reason it's valuable is superhero accounts called a brokerage or taxable or joint or individual after-tax account. They're all the same exact thing. Our industry just uses a bunch of words to try to confuse you. What's really cool about this account is you pay capital gains taxes, which is lower and more preferential than ordinary income. So with an IRA, when you take $70,000 or 75,000, as I said before, that's as if you just made more money. So the first X amount of dollars you take is taxed at 10%, then 12, then 22, then 24. Now those brackets are going to change soon, but that's the way it works. The difference is with capital gains, as long as you've held it for over a year, you pay at 15%. So it's not increasing your income from the traditional kind of marginal scale. So the reason that's important.

Speaker 1:

Let's assume you wanted to spend $60,000 a year. Well, you could theoretically go sell. Let's assume you bought Apple stock. Just keep it real simple. You bought Apple stock for $40,000 and now it's worth $60. Apple stock Just keep it real simple. You bought Apple stock for 40,000 and now it's worth 60,000.

Speaker 1:

Okay, well, if you wanted to sell that Apple stock so you could live off of that money, you have $20,000 of gains that you have to pay taxes on. Now don't forget because, yeah, you have to pay taxes on that, but that's federal and state and most people forget that the state is involved in this, not every state, but you have to pay taxes on those gains, not on all of the money. So, of the $20,000, that's gains. Once again, bought it for $40,000, worth $60,000. You take the full $60,000 to go live.

Speaker 1:

$20,000 of that is gains. You pay 15% federally on that income. Technically speaking, a lot of it would be taxed at 0% because of something called tax gain harvesting, but I'm going to skip that for today's topic. But if that's of interest, look up 0% or retail bleep it'll come up on YouTube or the podcast app. You would pay $3,000 in taxes and you'd have a $20,000. It's called capital gain. So why is that important? Well, let's assume that you want to once again retire early at 60. Well, if your capital gain is $20,000 and you'd be paying 3,000 in taxes, your income is 20,000 plus, once again, there's a standard deduction.

Speaker 1:

Your income might be really, really low on paper which qualifies you for what's called a healthcare subsidy. Now that healthcare subsidy for this client it would be between seven to $10,000 per year, which means instead of a $12,000 of annual healthcare cost, it would be between two to $3,000, which means their five-year total cost of healthcare would be between 20 to $30,000, as opposed to if someone had an IRA couldn't do anything. I'm talking about Once again, we were looking at 12,000 a year for five years, $60,000. So the point here the average annual savings could range from 14,000 to 16,000 a year and then over five years, 70 to 80,000. Why is that? Why is this brokerage account superior? Well, your cost basis isn't taxed. When you withdraw that money, you don't pay taxes on it. It's already been taxed. So you're basically saying I'm happy to pay taxes today to put money into a brokerage account, so it grows and I don't pay taxes on it.

Speaker 1:

You have what's called a 0% capital gains rate for single people. As long as your income is below $44,000, you pay 0% taxes. What does that mean? Let's assume I bought Apple stock for literally $1 and now it's worth $50,000. If I were to go sell, the first 44,000 would be taxed at 0% and from 50 to 44,000, that $6,000 that's taxed at 15%. Why is that so cool? Well, you can go harvest gains, so sell companies that have done really well and get health care subsidy because your income is low, so it's almost like you're getting a win-win there.

Speaker 1:

Now you want to make sure from what's called a cliff avoidance perspective, which is an ACA, which stands for Affordable Care Act, you need to keep your modified adjusted gross income under four per hundred percent of the federal poverty level, which is $58,000, to maintain subsidy eligibility. You also don't want your income so low that now you're in Medicaid, and that's another issue of its own. So, ultimately, what I'm trying to say here is, if you are trying to optimize, for some people it will honestly make a lot of sense to do a combination, because if you have so much in your IRA, you're going to want to lower that what's called pre-tax balance so that in the future, your required minimum distributions which is the amount of money you'll be forced to take, whether you want to or not isn't too high. But at the same time, we want to kind of limit how much, once again, healthcare cost you have to pay, and the point here is this example I'm giving there's significant, like the overall savings. You know it's significant $10,000 plus we can save for a client over five years with really high quality advice.

Speaker 1:

But let's assume this person said you know, yes, I have a $400,000 brokerage account, so I know I could sell $60,000 worth of stock, pay some gains. We do some cool healthcare stuff, but I'd actually really rather retire early because I want to travel and I'd love to help out my son buy a new home. Let's assume they told me that right. Well, let's assume they want to give $200,000 to their home, for to their child, for a down payment, and 60,000 to live, and another $50,000 for travel. That'd be $310,000, which leaves me $90,000 left. And so what people say is oh, I screwed up your healthcare plan. I'm like, no, you didn't, you lived your dream life. Now, maybe we don't do all these things at once, maybe we don't give $200,000, which would be. My recommendation is to not do that because this brokerage account is so important.

Speaker 1:

But I hope what you're seeing here and this is my overall message without going too deep in the lab, the brokerage account allows for flexibility. It is your superhero account. It allows you to control your income. If you only have a 401k, if you only have an IRA, if you only have pre-tax money, then you don't get to massage your income. You don't get to control this. Think about this. Then you don't get to massage your income. You don't get to control this. Think about this.

Speaker 1:

What if you're like Ari I have a brokerage account. There's some gains in there, but there's some big gains. I don't want to sell. I have to pay a ton of taxes on it. I don't want to diversify yet the gains are too big. I'd go. I totally get it. It makes sense. We got to live off of something. And you're like yeah, I already have 100,000 that I'm going to get as a bonus. I'm going to live off of that for next year. I'd say amazing. So you already have cash that we can live off of. You're not worried about health care costs because we've already planned for that. You know what might be a way more efficient than me trying to save you $10,000 plus in health care? And you're like this better be good, that sounds like a lot. I said wait. So like do I have to pick? I go kind of you want to pick. Should I do a Roth conversion, moving money pre-tax to Roth, and will that make me more money over the course of my lifetime, or is it healthcare savings?

Speaker 1:

Let's go back to this example here. For this person, let's assume they don't have this superhero account and they have an IRA. Well, they're spending $12,000 a year on healthcare costs. So if they're spending $12,000 a year, well, once again they're not really optimizing. They're just having to pay that because they have an IRA. So they have to once again sell $75,000 to end up with $60,000 to go live. Then maybe they have to go sell another $15,000 or $16,000 so they can pay for this healthcare cost. So that's a lot of money. Versus, if someone has a brokerage account, they can go.

Speaker 1:

You know what? Why don't we only go to this specific bracket? Let me pick my exact subsidy. Let me determine if I should do this amount to the subsidy, this amount for that 0% tax thing and this amount to the Roth conversion. You can almost do a balance of all of this.

Speaker 1:

And you what the best part is? Imagine you retire really early, like 50. Okay, if you retire at 50, you can almost get all of the best of both worlds, because best of three worlds, because what you could do is you could go. I'm going to prioritize health care subsidies the first five years. Then I'm going to pay zero percent taxes the next five years because I've got really healthy gains. Then I'm going to do roth conversions from 60 to 65 five years, because I've got really healthy gains. Then I'm going to do Roth conversions from 60 to 65. So in that 15 year period you could do a ton of tax strategy to optimize.

Speaker 1:

I don't want to go too deep and lose you guys here, but I hope you what you can see. What's just so cool is and I have a few just kind of basic examples here that I wanted to share here. This is a real world example, but it's not my client. It says John here, retired at 60. Real world example, but it's not my client. It says John here, retired at 60. He had a silver plan and his premium at first was $1,250 a month. But because he's a brokerage account he could optimize where he pulled income from. So now it's $175 a month. That decreases deductible from $5,000 to $800. His out of pocket max decreased8,700 to $2,500. And over five years John saved approximately $65,000 in premiums and another $12,000 in out-of-pocket costs for a total healthcare savings of $77,000. That's a lot of money, $77,000. But what if you bought Apple stock for $100 and now it's worth $100,000? Well, you could, over the course of two, three years, go sell Apple stock only a certain amount that allows you to pay 0% in taxes, which once again, is up to $44,000, plus you get your standard deduction, so about $60,000. You could go intentionally sell Apple stock, pay no taxes on a lot of those gains and you could qualify for a healthcare subsidy and you could consider if it makes sense to also do a Roth conversion.

Speaker 1:

I just don't want any of you guys doing any of this stuff too quick. And this is where it makes sense to hire an advisor. There's a lot of times where I'll say it doesn't make sense to hire an advisor and that sounds weird because I'm a financial advisor. But let's assume you're 40 and you're like I'm just adding money to my 401k, I'm just adding money to my IRA. Okay, I don't really know if you need to pay an advisor. If you're 40 years old and you need to max out your 401k, I'd want to give you guidance. Hey, put this amount to your 401k, this amount to Roth, this amount to a superhero account, save for kids college.

Speaker 1:

Okay, like, pick the right investments. Don't use super high fee funds. You're good Kind of more of the Vanguard approach. The difference is when you're a few years out from retirement and you're trying to go. I really need to optimize here because of the importance of this. That's when I'd start to go okay, probably makes sense to hire an advisor, because they can add enough value to justify all of this and you wouldn't have to do it. So I know this was a little bit more in depth, but I hopefully brought it in a way that made you go wow, now I see the value of this Once again. Please let me know if you're like hey, this was a little technical for me. No worries, I have other videos. By the way, if you search Ari Taublieb Healthcare on YouTube or in the podcast app, I have way more examples and you might find visually getting to see this would be more efficient. So, once again, I do all of this on YouTube and that's it. Thanks, guys. See you next time.

Speaker 1:

Thank you all, as always, for listening to the Early Retirement Podcast. I love getting to host these shows and make different content for you guys every single week. I've not missed a single week in years and that is because I love getting to do this Now, please be smart about this. Before you actually execute any strategy that you see me talk about or hear me talk about, should I say Please talk to your financial advisor, your tax preparer, your estate attorney, please be smart about this. None of this should be construed as financial advice.

Speaker 1:

This is for fun, educational, informational purposes only. Once again, just quick disclaimer here, guys. Educational informational purposes only. Once again, just quick disclaimer here. Guys, please be smart about this. Appreciate you listening, as always, and you can, of course, submit a question on my website, earlyretirementpodcastcom. If you, of course, want me to address a specific case study or topic. I will not promise I can get to it, but I respond to every single person and if I find it will be helpful for a lot of people, I will absolutely make an episode on it, at the very least give you some insight. That's it, thanks, guys.