Financially Independent …and on Medicaid?

I’ve spent the majority of the past decade working full-time, growing my income, and saving aggressively toward financial independence. I made it! I’m financially independent. And now I qualify for government assistance. Huh?

financially-independent-medicaid

During our recent visit to Chicago, we chatted with a young woman who was about to finish her master’s degree at a local university. Though her original intent was to use the degree to advance her career, she had recently had a change of heart and was planning to move to a rural western town to work on an organic farm.

“I’m about to turn 26, though,” she told us, “so I won’t be able to be on my parents’ health insurance anymore. I think I’ll qualify for Medicaid, but I don’t know how I feel about that.”

“That’s interesting that you mention that,” I shared to her surprise, “because we may both qualify for Medicaid next year as well.”

Do we really qualify for Medicaid?

Simply put, yes.

In our home state (one of the 31 states, plus D.C., to adopt the Medicaid Expansion under the Affordable Care Act), the maximum income allowed to qualify for Medicaid benefits is 138% of the Federal Poverty Level. For Daniel and me, two IRS-defined single people with no dependents, that’s $16,242 of taxable income per person per year.

Daniel is not financially independent and not currently working, so he easily qualifies.

My situation is a bit more complicated. I support our living expenses with cash from a variety of sources, including:

  • Side hustle income (1099 earned income)
  • Rental income
  • Dividends
  • Existing savings held in cash
  • Sales of investments (mostly stocks and bonds)

If you’ve taken a look at the expense reports from our three-month road trip in the western U.S. or our summer in Eastern Europe, you’ve surely noted that our cash flow needs are well in excess of $16k per year. But as our friends over at Our Next Life recently noted while discussing The Power of a Low Income in Early Retirement, the taxable income generated by this cash flow is significantly lower.

Side hustle income, rental income, and dividends are all taxable, though deductions and adjustments are allowed for self-employment tax and rental property expenses. For the purposes of Medicaid eligibility, an adjustment is also allowed for contributions to a traditional IRA – meaning I could further reduce taxable income by up to $5,500 per year.

Most notable, though, is the taxation of sales of stocks and bonds. Only capital gains – not the original principal – are taxed as income. Suppose I sell $20,000 of VTI, Vanguard’s Total Stock Market index fund ETF, for which I originally paid $18,000. Only the $2,000 gain is taxable income. For better or for worse, I’m not currently sitting on a ton of unrealized capital gains – meaning I can generate substantial cash flow without meaningful taxable income.

Is Medicaid coverage desirable?

It depends.

Many early retirees manipulate their taxable income (by realizing capital gains, for example) specifically to avoid qualifying for Medicaid. I could do the same.

If you have a chronic health condition, need to visit specialists regularly, or have existing relationships with physicians who do not accept Medicaid, you may prefer to buy a health plan on the exchange. Because of Medicaid’s notoriously low reimbursement rates in most states, patient access is often a challenge.

Daniel and I, on the other hand, are lucky to be in good health today. Beyond the occasional routine physical or travel immunization, we rarely visit a doctor’s office. Access to specific physicians or provider networks is not important to us. And the financial coverage provided by Medicaid – for emergency services, for example – is far superior to most other plans. Medicaid and Medicare do not cover any services outside the United States, but when we travel internationally, we can easily purchase travel health insurance at a fraction of the cost of an exchange plan.

For our situation, Medicaid is actually the most attractive choice by far.

But that’s absurd, right?

Medicaid was established in the 1960s as a health insurance safety net for people with insufficient resources to pay for basic healthcare services.

We, on the other hand, are two young, healthy, well-educated adults. Our incomes are low, but that’s intentional. We’re perfectly capable of going back to work or paying for our own health insurance premiums.

Is it really ethical for us to enroll in such a program?

On one hand, Medicaid is really not that different from a variety of other government benefits, credits, and tax deductions.

Take Medicare as one example. Few people would argue that it’s unethical to take advantage of Medicare benefits, even if you’re a multimillionaire retiree who could easily live without them.

Perhaps even more relevant, what about ACA subsidies? Even if my income exceeds the threshold for Medicaid, I’ll still qualify for a few thousand dollars of tax credits on the exchange. Should I not take them?

What about common tax deductions like mortgage interest or job-related moving expenses? Mr. Money Mustache, who now earns $400,000 a year from his blog, recently took over $12,000 in government assistance to purchase a new electric vehicle that, by his own admission, he doesn’t even need. Are these “government handouts” any different?

On the other hand, that line of reasoning only goes so far.

Would I really argue that early retirees should feel comfortable taking food stamps? What about heating assistance? “Financial independence” seems to become a joke if you’re having your routine expenses subsidized by other taxpayers.

There’s some unwritten spectrum of societal acceptability for taking government benefits. By my estimate, it might look something like this:

Unsurprisingly, the government benefits that typically go to people who are well-off are mostly deemed “acceptable,” while the ones typically claimed by people with low incomes are a bit more stigmatized.

Unsurprisingly, the government benefits that typically go to people who are well-off are mostly deemed “acceptable,” while the ones typically claimed by people with low incomes are a bit more stigmatized.

The challenging question for those of us pursuing early retirement, then, is where to draw the line.

Perhaps it’s a question of intent: if the intention of a government benefit is to be a safety net for people in poverty, it’s questionable. But if the program is designed to subsidize wealthy people buying new cars and taking out big mortgages, then we can feel good about it. Right?

Perhaps the acceptability of healthcare benefits, in particular, is in a transitional state. Medicaid was intended for a vulnerable population when it was designed 50 years ago, and the vast majority of beneficiaries today likely still fall into that category. But the Affordable Care Act completely changed the landscape of the health insurance market. Means testing was intentionally eliminated, meaning even a multimillionaire can qualify with the right income level. The purchase of health insurance has been made mandatory (and our travel health insurance plans don’t count toward that requirement); how should that factor into our assessment? Many people think we’re on a path toward socialized healthcare or a single-payer insurance system. Our perspectives on the role of government likely influence our perceptions of the ethical choices here, too.

With so many personal judgments and opinions on government policy involved, I don’t know that there’s any one right answer. But with open enrollment going now, I’ll need to make my judgment for next year shortly.

What do you think?

Have you grappled with similar questions in your pursuit of financial independence and early retirement?

Given the current state of government programs and eligibility requirements, where do you draw your own line?

I trust that you’ll keep things civil and respectful in the comments.

30 Comments

  1. LOL to the “whatever Donald Trump does” — though I think lots of people think he’s a genius for taking advantage of every loophole. I promise I won’t invite debate on that here, though. 🙂 There seems to be a stigma with government programs based on whether they were specifically designed “for the poor” or “for everyone.” Even though Medicare and SS do have some form of means testing that really just says you have to pay a little more for Medicare or your SS benefits are some percentage taxable if you earn a lot, they have always been talked about as programs “for everyone.” Therefore, no stigma. But if you make something “for the poor,” then it’s somehow shameful to be on that program, which is essentially saying that it’s shameful to be poor. (Which seems to be the entire premise of Donald Trump’s candidacy — I’m rich, therefore I must be qualified for essentially anything. Whoops, promised not to go there!) But in a capitalist society, we shouldn’t be surprised that we base public policy around that judgment of rich vs. poor. All of that said, where we are, Medicaid is downright horrible, so we will be doing everything we can to stay JUST ABOVE that threshold, even if it means selling shares we don’t want to share in a given year. You guys are lucky to live in a state with good Medicaid, and I’m glad you can take advantage of it! (And of course thanks for the mention and link.) 😉

    • Regardless of how people feel about the ethics of taking advantage of the loopholes, I can’t think of any more compelling evidence for simplifying and removing them from the tax code. But yes, enough about politics. I definitely understand your point about Medicaid not being a good option depending on location; many states have extremely poor physician reimbursement and horrible access issues for patients. Ours does not — at least not yet.

      I don’t understand all the intricacies of exchange plan eligibility, but shouldn’t you be able to buy and keep an exchange plan as long as you project that your income will exceed the 138% threshold? My understanding was that if it ends up being lower, you still get the subsidy tax credit — and then you could always project your income to be higher the following year. Am I wrong on that?

  2. I appreciate that you’re being thoughtful about the decision and that you’ve considered the implications. That being said, just do it and apply for Medicaid. You’ve paid into it for years via taxes on your higher earnings. You’re in good health overall. You’re be eligible for it. There are bigger problems to worry about. When more people start skewing the system by becoming financially independent and getting on Medicaid, THEN we can all get concerned.

    • And I appreciate your straightforward advice, Mollie! I have mixed feelings about the financial sustainability of Medicaid with rapidly increasing enrollment, but that’s an addressable policy issue over time, to your point. Thanks for taking the time to comment.

  3. I love the Pole of Social Acceptability. You should construct an actual pole, label it, and put it up for Festivus this year.

    Medicaid is a personal decision. I don’t imagine I will ever qualify, but if I did, I would have to decline. The reason it can be hard to find coverage is that I know physicians lose money on Medicaid patients; their costs are simply not covered by the meager reimbursement. The reason **I** would decline to use Medicaid is that I would feel uncomfortable being an early retired physician choosing to seek care at the expense of the still-practicing physician. I fear I would be resented for being a burden when they know full well I can afford to buy better insurance. After all, I used to be one of them. [I still am, but will used to be, if that makes sense.]

    Best,
    -PoF

    • I was hoping you would share your perspective on this one, PoF! I’ve worked in healthcare management myself and seen the financials on the provider side of Medicaid. Like you said, it’s rarely sustainable (in most states) for the providers without cost-shifting from higher-reimbursement commercial patients. I definitely understand the hesitation to participate when we could afford commercial insurance. Thanks for sharing, and happy Festivus!

  4. LOLing at the pole of benefits.

    I certainly would not have an ethical issue with receiving Medicaid benefits. It was designed solely for the impoverished in the past, but, rightly or wrongly, our government changed that.

    The stigma of unemployment makes zero sense to me. Unemployment insurance is paid for by your employer, not other taxpayers. That’s your insurance of not having to take a crap job if you had a good one and that’s all you can find. In California, the max unemployment benefit is something like $450/week. Certainly not enough for a life of luxury. But it’s enough that you don’t have to go apply at the local McDonalds if you used to have an office job. In California, you don’t pay state taxes on unemployment benefits, which makes about as much sense as California not taxing California lottery winning,s, but you still pay federal taxes on unemployment income.

    My understanding is that medicaid is really bad in my state. But I never go to the doctor. I’ll be fortunate to keep my current health insurance (and cell phone) after I leave my job. Definitely a privilege of having access to group plan via a family member. But I mean, I could very easily reimburse my dad if he asked me to. We’re switching to a HDHP/HSA plan next month and my premium is going to be like $275/month.

    What other people call “taking advantage of tax loopholes”, I call optimizing your taxes and finances. If anything, I think the people who like to point their fingers at those who have optimized their finances in this way are just jealous that they didn’t think of doing it themselves first.

    As FiRECracker likes to say, “Don’t work hard, work smart”.

    • I debated about where unemployment insurance benefits should go on this highly scientific “pole,” as you all have deemed it 😉 For me, it’s in the yellow zone for an early retiree to negotiate termination and then collect, for example — though to your point, it is the employer who ultimately foots the bill.

      Medi-Cal is atrocious in terms of reimbursement rates for providers (the lowest in the nation, even in a high-cost state), which creates access challenges. EMTALA laws require that you be seen for emergency services regardless of ability to pay, and 501(c)(3) health systems typically have to accept Medicare and Medicaid to maintain their tax status, but if you have specific care and care settings you’re looking for, it’s rarely a great option.

      I’m not familiar with the rules of group plans; how are you able to be on a family plan above age 26?

      • When I mentioned privilege, it really is a specific privilege that most others wouldn’t be able to duplicate. It’s not a family health plan, it’s a small business health plan. While i will no longer be collecting a paycheck as an employee of my family’s business, I’m still on the board of directors for the company and will continue to attend the annual meetings and share my honest opinions. The board of directors gets to vote on various things such as whether we have been profitable enough or not to award employee bonuses and how much of a bonus to give (generally for managers and supervisors). One of the things that the board has decided to do is to use our group buying power to provide healthcare at no-cost for those of us who are members on the board, even if we aren’t a salaried employee. Same with the cell phones and Costco membership, but that’s a much lower cost perk.

        Its a short term stop gap, but conveniently takes care of the “how do I get health insurance while taking a year off” thing. I think my income will definitely be above Medi-Cal levels because I’ll be working for almost 2 full months in 2017, but i feel like the plan I’ll be on is better than the plans on the California exchange anyway, even if I did have to pay the premium.

        But i also plan to go back to work after the year off. At that time, I could try to keep my current plan and try to negotiate higher pay to offset it or just go with whatever the next employer is offering at the time. A high level employee could absolutely negotiate this though.

        If you are particularly valued at a stable small business (aka not a startup) and have been there a while you might be able to negotiate a few years of continued health coverage. Probably not possible at a mega corp with shareholders to please and such.

        • Oh, wow, that’s a really nice setup! A no-cost (to you) employer plan is hard to beat. FWIW, I believe Medicaid coverage eligibility is determined by projected monthly income (unlike ACA subsidies, which are based on taxable income in the calendar year) — so you could go from a high income the first half of the year to no income in the second half and still qualify for Medicaid for that second period.

          • Fascinating! It kind of makes me sad that there are probably a lot of people in their 50’s-60’s who are burned out but continue to work solely for health insurance reasons, not knowing that they’d probably be able to get ACA subsidies or Medicaid if they structured their income in the right way.

          • That’s basically what happened to my parents; my mom worked at least 5 years longer than she wanted to in order to get retirement healthcare benefits from her employer before 65 — but with ACA, they would have easily qualified for Medicaid. Obviously they couldn’t have bet on Obamacare passing, but I suppose it now feels like it was all for naught.

  5. I love your graphic! To it you could add public education, FAFSA, and even merit based scholarships (beings that was someone’s generosity.) This is something we are confronted with a lot, even before we quite working due to a lower income and a billizon kids. It can be hard to figure out. But my two very non scientific tests are 1. Was it meant for us? 2. Would I be embarrassed to tell someone? So some things we gladly accept like, public education, child tax credit or the library (we hardly pay our fair share for the amount we use it!) and lots we qualify for but decline, like 40 programs. It’s not scientific but it works. There are also a lot of deductions we could take but don’t. So we also aren’t trying to ultra optimize our taxes. Although, really, with 5 kids, we don’t have to.

    • At this point, I sort of just throw it all in the tax software and see what it spits out. I’d be curious what sorts of programs and deductions you are leaving on the table. I imagine your taxes are already pretty low do to having a large family, and particularly so during a year off from gainful employment.

      I don’t think I would feel right applying for food stamps, but I’m pretty sure there’s an asset test for that one in my state.

    • Good points — the list of benefits keeps going! I like your decision-making framework; I imagine that with your large family and currently low taxable income, there’s plenty available, but I completely understand not wanting it.

      • One other qualifier that I remembered: If we can’t replicate the benefit some other way. We will often take those. For example. As a veteran, Mr. Mt can be put on a call list when deer meet untimely deaths. Fish and game calls folks on the list to see who is available to gut and process the deer. We always sign up for that and love getting an extra deer for the meat. A deer ran into a fence last year and snapped it’s neck, and we enjoyed that meet for months. But there is no way we could have access to that without signing up for the list. There is no income-asset test. Just show military id and sign up. So we are super happy to take part in that. =)

  6. Ha ha! I love that continuum of acceptability, with Donald Trump falling precisely where he deserves to be.
    We’ve been giving the ACA subsidies a lot of thought, and have enjoyed the perspectives offered by articles like this and those by ONL. Personally, I know for a fact that we have paid a YUGE (sorry, had to do that) amount in taxes over the course of our 18 years working in this country. I plan to figure what that dollar figure actually is. In many ways that leaves me feeling a lot better about taking subsidies for health care.

    • I find some comfort in that too, even though I would never argue that people should only be eligible for ACA subsidies if they have paid “enough” in taxes. Hope you calculate that figure at some point; it would definitely be interesting to see!

  7. We don’t qualify for any form of health insurance due to the fact that we travel full-time. We currently belong to a health sharing ministry (this one doesn’t require us to be religious), and I see us doing this for quite some time.

    • I meant to say “Due to the fact that we travel full-time and the state we are domiciled in.” Although, there are not many states that cover RVers regardless, though.

    • Oh wow, that’s really surprising, Michelle. If being domiciled in a state isn’t sufficient, what more would you need to do? Have a physical residence there? (And is there any mechanism by which they would check on how much time you spend in your home state?) Glad you’re able to do the health sharing ministry; I know the ACA made some exemptions for those.

  8. Thanks for the insights Matt,

    As usual I found myself captivated by your writing. The question of medicaid is one I’ve been thinking about the last few months actually. I’ll be 26 next year and most likely attending college full-time, paying rent, hopefully with some sort of part-time job. I’m sure I’ll qualify for medicaid but for me it’s a question of the care I’ll be able to get. I have a chronic back pain issue and a lot of musculoskeletal pain in general that I get treatment for through my mom’s awesome nurse insurance.

    I think about how worth it it would be for me to try to pay for a private health plan with most plans being around $300 per month. I hear people talk about the universal health plans in other countries, saying that they’re awful because people have to wait a long time for care. What about someone like me? I’d happily wait for my physical therapy if it were free. I shouldn’t have to choose between buying my college books and my health care. Im beginning to understand why young girls end up with sugar daddies or as strippers! I guess for now I’ll have to take the medicaid.

  9. In some ways, I believe you are thinking about this the wrong way. America spends $1 Trillion–Yes, that’s Trillion with a “T”– on treating health issues that are largely preventable (diabetes, heart disease in particular are mostly preventable). The best thing we can do for our country is to keep those costs low by avoiding junk foods, getting a decent amount of exercise, and living an overall healthy lifestyle. If everyone did that we would all be in much better shape, financially and otherwise. Dan Buettner gave a great (non-political) talk about how to fix these issues in a holistic way (which our health care system simply has not been doing).

    • We definitely aspire to do all of those things, and our semi-retired lifestyle has helped us be much more active than when we were working. Still, even the healthiest, most active lifestyle can’t prevent all forms of disease — and actually probably makes us more likely to suffer from broken bones and other injuries — so insurance coverage is still an important consideration for us. Thanks for taking the time to comment!

  10. Have you actually checked into your state’s requirements? In my state, Missouri, there is an asset test in addition to income, so a person doesn’t qualify if they have more than $1000, aside from house/car. This prevents people from receiving aid if they have even modest savings/retirement/more than one house/stocks etc

    • Hi Debbie, yep, we’ve verified eligibility. Missouri is one of 19 states that did not expand Medicaid under the ACA, but we happen to live in one that did, and the ACA eliminated asset testing. So, however questionable it is, even a multimillionaire qualifies as long as taxable income is low. Of course, all of this will be up in the air again come January, so who knows what will happen!

  11. I cut back on work a couple years ago and discovered that my family and I qualified for ACA subsidies and signed up right away. I gleefully told one of my co-workers about it. Her response was that I was an able bodied worker who could afford a private plan so I should work more and not take government handouts. I was perplexed by this response until I considered our differing frames of reference. Having spent a lot of time in other countries with single player systems I see healthcare as a basic right, like education, and she sees it as a luxury or privilege. I pointed out to her that she could have afforded to send her kids to private school instead of taking the 100% government subsidy that is called public schooling, but the point was lost on her. This is also the same woman who told me once her accountant told her to buy a house (which she did) to take advantage of the mortgage interest deduction. Which is just wrong on so many levels!
    I say enjoy the Medicaid. You’re more than likely going to hardly use it.

    • That’s pretty fascinating. I can see both sides of that point.

      You can always work more, though. I think that probably is the source of much conflict that ends up mixed into politics.

      Someone who works PT and can “afford” health insurance should work more to pay for it.
      Someone who cannot afford basic essentials on one job should get two.
      Someone who cannot afford essentials on two jobs (for example, a family), should move in with more family, and get even more jobs.

      Someone who doesn’t have to work should quit so that someone else can have the job and feed their family.
      Or someone who makes a lot of money should donate it, or spend it on stuff, or private school, or vacations, or eating out – because they can afford it.

      Since taxes do good, someone who works PT should really work FT, and pay more taxes.

      You can actually work TOO MUCH.

      It’s a sliding scale, you get to decide, somewhat, where to be on it.

    • Yes, these are great examples of the point I was hoping to make here! We definitely view some of these programs differently, even if the net impact is the same. Appreciate your perspective on this!

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