Retire At 49 With $600,000 - Beating The ACA And Maximizing Your Subsidy

by: Early Retirement Advisor

Summary

It’s possible to retire at age 49 with $600,000 in assets.

An additional $600,000 of retirement assets in my IRA will help me plan for inflation in the future.

Health insurance costs are still very high and this article will focus on “Beating the ACA” and learning how to obtain the maximum amount of subsidy from the plan.

As a CPA for the past 25 years and a CFO for the past five, I have enjoyed my professional career. This year I will be turning 49 and plan to ease into early retirement. While my investments should be enough for daily living expenses, high health care costs can put a damper on any retirement plan. This article will focus on appropriate tax and financial planning to obtain health insurance at a very reasonable cost under the Affordable Care Act (ACA). This is the third article in my early retirement plan series.

The Retirement Plan #1 – Preferred Stocks and Baby Bonds

Image result for picture of preferred stock

Individuals attempting to retire early should have a reliable source of monthly income. The stock market can be up and down, so I have focused on stable income and preservation of capital. Preferred stocks and baby bonds that normally have a par value of $25 are ideal holdings for a fixed income portfolio. During my early retirement, I plan to earn a little more than 7% by investing in these type of securities. A sample of my holdings is listed below:

Ticker Symbol

Approximate Yield %

AJXA

7.20

BRG-C

7.90

CDR-B

8.02

CMRE-E

8.85

GMRE-A

7.60

GNL-A

7.40

UZB

6.98

Currently, I have about 30 t0 40 different holdings in my account, although I am heavily weighted in REIT preferreds. While the price of these securities may vary from time to time, the dividend/interest payments should remain consistent and provide a stable source of income. Many investors do not have a defined benefit retirement plan, but preferred stock dividends do provide a stable source of income.

The Retirement Plan #2 – My Monthly Income

As discussed in my prior articles, I am fortunate to live in an area where the cost of living is relatively low. If you live in a higher cost area, you will probably need more assets to be able to afford an early retirement and this plan may not work for you.

Listed below are the sources of income from my $600,000 in assets. I have an additional $600,000 in retirement accounts that may be used in 10 - 15 years when my monthly income of $3,800 will need to be increased due to inflation. Part of my retirement strategy involves keeping my cash flow as high as possible, but keeping my Adjusted Gross Income (NYSE:AGI) as low as possible, which will help me qualify for the ACA subsidy. Generally speaking, AGI is the bottom line on the first page of your 1040. It should also be noted that I also own one rental property.

Image result for retirement picture

Source of Income

Total Income

Adjusted (Taxable) Gross Income

Preferred stocks / Baby bonds

26,000

26,000

U-Haul Investors Club

3,850

3,850

Rental Income

9,000

2,000

Roth IRA distribution

7,200

0

Annual Income

46,050

31,850

Monthly Average

3,838

Other sources of income for me are my investment in the U-Haul Investors Club (which may be the subject of my next article), rental income from one investment property and distributions from my ROTH IRA. Part of my rental income is excluded from AGI due to depreciation. While the distributions from my ROTH will certainly help me cover my living expenses, they are not taxable because they are return of my original contributions.

The Retirement Plan #3 – Maximizing your ACA Subsidy

Now, let’s get to the real meat of the article and discuss how to maximize your ACA (Affordable Care Act) subsidy. In order do this, you must understand how the subsidy works. When your income is below the subsidy level, you are able to purchase your health insurance at a reduced price. If you go above this level, the subsidy is reduced to zero.

As I am single, the cost of my health insurance will still be substantial. My retirement plan includes keeping my AGI as low as possible to obtain the subsidy provided by the Affordable Care Act (ACA). While the ACA has been controversial, the topic of this article is not to discuss the pros and cons of the health plan. The article is to assist investors with tax and financial planning strategies.

A large deductible on a health insurance plan concerns me a little, so I have decided to go with the Gold plan offered by Highmark. This plan has a deductible of $1,000 and costs $1,100 per month. The subsidy levels for single individuals in 2018 are listed below:

Estimated 2018 household income:

Savings programs you may qualify for:

Below $16,643

Free or low-cost coverage through Medicaid.

$16,643 - $30,150

A health plan with lower monthly premiums PLUS extra savings.

$30,151 - $48,240

A health plan with lower monthly premiums.

Above $48,240

You won't qualify to save on an insurance plan. You can buy one through the Marketplace at full price.

As my AGI will be around the $31,850 level, I will qualify for a subsidy of $913 per month. Therefore, the monthly cost of my health insurance policy will cost approximately $190. That is very reasonable for a plan with a $1,000 deductible.

Please note this subsidy is not an ethical issue, it is simply a tax and financial planning matter. Over the past two decades, I have helped clients lower their tax burden by investing in municipal bonds and maximizing retirement plan contributions.

It is critical for potential retirees to understand that by taking contributions out of my ROTH IRA (which does not increase my AGI), instead of tapping into my regular IRA account which would add to my taxable income, helps me qualify for the subsidy. The depreciation on my rental properly also helps to shield income and lower my AGI.

The Retirement Plan #4 – Working Part-Time and the SIMPLE solution!

Image result for simple ira picture


While I have decided to semi-retire early, there is an offer from a local CPA firm to work part-time during tax season. This should be ideal, as the winter months can be cold and there is not much to do outside if there is six inches of snow on the ground. It also works well for the CPA firm, as tax season is their crunch time. This will provide me with supplemental income of about $15,000 per year. However, this additional income will greatly increase my AGI and will knock me out of the ACA subsidy range – which will cost me approximately $11,000 per year. It certainly does not make sense to pay taxes on $15,000 per year and then also lose the subsidy, which means I would essentially be working for next to nothing. However, there is a simple solution. And by simple, I mean the SIMPLE IRA plan. The CPA firm offers this plan, and it will allow me to contribute almost all of my income to the plan. I’ll also contribute to a deductible IRA plan, which will zero out my income for AGI purposes.

Let’s take a look at my Adjusted Gross Income (AGI) now:

Source of Income

Total Income

Adjusted (Taxable) Gross Income

Preferred stocks / Baby bonds

26,000

26,000

U-Haul Investors Club

3,850

3,850

Rental Income

9,000

2,000

Roth IRA distribution

7,200

0

W-2 from the CPA firm

15,000

15,000

Less: SIMPLE contribution

(12,500)

Less: Deductible IRA

(2,500)

Annual Income

61,050

31,850

By working part-time in retirement, and by making contributions to both the SIMPLE and deductible IRA retirement plans, I can still qualify for the subsidy under the ACA. It also helps me accumulate additional retirement funds.

The Retirement Plan #6 – The Single-Person 401k Plan

Image result for 401k plan pictures


While I still plan to ease into semi-retirement, I may have an opportunity to do some consulting work. This would be very limited and I would consult at a rate of about $125 per hour. This work would be about 150 hours per year, which equates to about 3 hours per week. With potential income of $18,750 per year, this would increase my AGI and keep me from receiving the ACA subsidy. However – just watch the magic of the Single-Person 401k Plan! Individuals that are self-employed with no other employees are eligible to set up a Single-Person 401k Plan and contribute up to $18,500 per year. However, if you are 50 or older, you can place up to $24,500 per year in the plan.

Let’s now take a look at my Adjusted Gross Income (AGI) if I perform consulting work:

Source of Income

Total Income

Adjusted (Taxable) Gross Income

Preferred stocks / Baby bonds

26,000

26,000

U-Haul Investors Club

3,850

3,850

Rental Income

9,000

2,000

Roth IRA distribution

7,200

0

W-2 from the CPA firm

15,000

15,000

Less: SIMPLE contribution

(12,500)

Less: Deductible IRA

(2,500)

Consulting Income

18,750

18,750

Less: 401k Plan contributions

(17,300)

Deduction for ½ of Self-Employment Tax

(1,434)

Less: Health Insurance deduction

(2,280)

Annual Income

79,800

29,586

While earning income in a consulting business will cost me self-employment tax, it will also allow me to deduct half of this tax and my health insurance costs. I would then be contributing to a SIMPLE, deductible IRA and the 401k Plan. The ACA subsidy of $913 per month will still be received, even though my total income is close to $80,000.

The Retirement Plan #7 – Final Thoughts

Hopefully potential retirees will find my article helpful and will assist in your retirement planning needs. If you do work part-time or have a small business, these tax and financial planning strategies should help you maximize your subsidy under the ACA. I do recommend consulting with your local CPA if you would like to implement any of these retirement strategies. There has been considerable discussion in the past about the ACA being repealed. Should this happen, I will simply adjust my plan and provide an updated article. Life is short and it’s time for me to ease into early retirement instead of spending more time at the office.


Note on compensation from Seeking Alpha

When I published my first two articles on SA, I declined to take compensation. However, I do plan to take fees for this article and donate 100% of the proceeds to my local animal shelter. Hopefully this article will be well received and the income will allow my local shelter to provide assistance to those animals who are unable to care for themselves.

Disclosure: I am long all securities mentioned in this article.

Disclosure: I am/we are long AJXA, BRG-C, CDR-B, CMRE-E, GNL-A, UZB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.