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?
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
- 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?
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:
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.