I have been thinking about retiring early. I have decent cash flow from my rental properties, and a decent net worth. I am several years away from social security and Medicare eligibility though.
A big fear of many people who are financially independent and who want to retire early (“Fat Fire”) is what to do about health insurance. As we get older, our needs for health care increase. When I put my rental income into a marketplace (Obamacare) calculator, it was coming out with health insurance premiums of about $2000 per month per person. Each state has a website that helps you calculate expected premiums for Obamacare. Washington State’s is at https://www.wahealthplanfinder.org/.
One possible solution to the health insurance problem that I heard about is the barista solution. Find any low paying job that provides health insurance. Sorry but this is not my idea of retirement. I’d rather continue working my existing job.
Another solution I read is to take the minimum amount of classes to be eligible for student health insurance. This sounded attractive as I have many interests (such as real estate development, digital marketing, technology, computer programming, venture capital, etc.). I looked into Eastern Washington University’s student health insurance and found that their student health plan is available to domestic students and their family members if they take 10 credits per quarter. For coverage over summer, summer courses need to be taken. For 2022-2023, the costs are $1106 per family member for fall, $808 for winter, $808 for spring, and $789 for summer, for a total of $3511 per year or $292 per month. Totally doable. However, one of my major goals for retirement is to travel. How to travel while also taking courses?
I think talked to a health insurance broker (and recommend you do the same). What I learned really surprised me. Even though my net annual rental income is very high, high enough for me to calculate insurance premiums around $2000 per month, health insurance premiums are not calculated based on how much money is deposited in your checking account and that you actually receive. Instead, it is based on your modified adjusted gross income on your tax returns. This number is AFTER the depreciation deduction! The depreciation deduction is a fiction that your building goes down in value each year as it is used up. You get a tax deduction for this. So even with positive cash flow, you can have a negative income for tax purposes. Well, this quirk of tax law carries through to benefit you when you are shopping for marketplace health insurance. I am basically a pauper, almost indigent, on paper despite having decent positive cash flow from rental income real estate.
The way it works, apparently, is that you estimate your next year’s income in advance. Health insurance premiums are then calculated assuming a tax deduction depending on how low your modified adjusted gross income is. The lower the income, the higher the tax deduction, and the lower the resulting premium. Here are some premiums for 2023 that my health insurance broker quoted.
| Cascade Gold | Secure Care 5 | |
| My premium | $831.57 | $774.87 |
| My wife’s premium | $570.56 | $531.66 |
| $1,402.13 | $1,306.53 | |
| Tax Credit for Income at 25k | ($1,245.00) | ($1,245.00) |
| Modified Premium | $157.13 | $61.53 |
| Tax Credit for Income at 40k | ($1,154.00) | ($1,154.00) |
| Modified Premium | $248.12 | $152.53 |
| Tax Credit for Income at 65k | ($846.00) | ($846.00) |
| Modified Premium | $556.13 | $460.53 |
So there you have it. Rental income properties can help you have a retirement income yet still be able to afford health insurance. If your cash flow is too high, you can consider re-leveraging so that mortgage interest brings down your adjusted gross income. Borrowed money is tax free, you can use it for daily expenses. Qualifying for a conventional Fannie/Freddie loan may be more difficult after retiring but you can always consider a commercial loan, qualification for which will be based primarily on the cash flow that the property shows.
Contact Deepak Malhotra if you need help with real estate investing. Even if you are not looking in Cheney, Medical Lake, Airway Heights, or the Spokane area, mentoring services or referrals can be provided.