Someone please blow a hole in this idea

[Pucky Freak]

Assuming that I do not change my career that I began in 2009, I can retire in 14 years at age 55 and collect a pension. Assuming the 6% cost increase per year in health insurance continues (non-compounding), a 22k annual health insurance "gold" plan in 2024 would rise to 42K by 2039, and 55k after another ten years, at which point Medicare would kick in.

Rather than pay well over 50% of my annual pension income towards health insurance premiums, opt for the lump sum payment in lieu of a pension and roll into a traditional IRA. Then, live off 457(b) and Roth distributions for a decade to have a MAGI of $0 and qualify for zero cost heath insurance.

With my current chronic health conditions I would pay the least total amount on healthcare under a gold plan vs. a silver or bronze plan with lower premiums. Health care sharing plans are an option too, with chronic health conditions being the most likely disqualifier.

 

[SAJ-99]

Rather than pay well over 50% of my annual pension income towards health insurance premiums, opt for the lump sum payment in lieu of a pension and roll into a traditional IRA. Then, live off 457(b) and Roth distributions for a decade to have a MAGI of $0 and qualify for zero cost heath insurance.

Not a horrible idea. Only issue is taking a lump sum transfers the investment risk from the employer/pension to you. Some can do it, some can't.

 

[SAJ-99]

Assuming that I do not change my career that I began in 2009, I can retire in 14 years at age 55 and collect a pension. Assuming the 6% cost increase per year in health insurance continues (non-compounding), a 22k annual health insurance "gold" plan in 2024 would rise to 42K by 2039, and 55k after another ten years, at which point Medicare would kick in.

Rather than pay well over 50% of my annual pension income towards health insurance premiums, opt for the lump sum payment in lieu of a pension and roll into a traditional IRA. Then, live off 457(b) and Roth distributions for a decade to have a MAGI of $0 and qualify for zero cost heath insurance.

With my current chronic health conditions I would pay the least total amount on healthcare under a gold plan vs. a silver or bronze plan with lower premiums. Health care sharing plans are an option too, with chronic health conditions being the most likely disqualifier.

Also, just thought about something. When I took out a lump sum pension payout, I rolled into my individual 401K. This isn't be able to be accesses penalty-free until 59 1/2. So when you get the check and try to put it into an individual IRA, make sure you don't get dinged on the taxes and the penalty. I'm not exactly sure how that works. If you find out, please share.

 

[TN2shot07]

Also, just thought about something. When I took out a lump sum pension payout, I rolled into my individual 401K. This isn't be able to be accesses penalty-free until 59 1/2. So when you get the check and try to put it into an individual IRA, make sure you don't get dinged on the taxes and the penalty. I'm not exactly sure how that works. If you find out, please share.

Is it possible it would work like a rollover 401k? You’d want to do a direct rollover transfer to an ira/401k and never have the money in your hands? They get funny about it if you get the money first

 

[schmalts]

Also, just thought about something. When I took out a lump sum pension payout, I rolled into my individual 401K. This isn't be able to be accesses penalty-free until 59 1/2. So when you get the check and try to put it into an individual IRA, make sure you don't get dinged on the taxes and the penalty. I'm not exactly sure how that works. If you find out, please share.

If it was rolled in, and you "retire" from the current company you are supposed to be penalty free at age 55. Called the "rule of 55" That is the way I read it. I just confirmed with a Fidelity advisor lest week. Not saying he was 100% correct but the subject came up. It was a good conversation as he also said I should do Roth conversions as well to avoid higher taxes when RMD would kick in. I really never even thought about that aspect of the retirement.

 

[TN2shot07]

If it was rolled in, and you "retire" from the current company you are supposed to be penalty free at age 55. Called the "rule of 55" That is the way I read it. I just confirmed with a Fidelity advisor lest week. Not saying he was 100% correct but the subject came up. It was a good conversation as he also said I should do Roth conversions as well to avoid higher taxes when RMD would kick in. I really never even thought about that aspect of the retirement.

I’m also not 100% on it but I think it’s a one time withdrawal, not that you will have access to the 401k the same as if you were 59 1/2. If you were leaving at 55 and you needed to fund a “bridge” account to tide you over to full retirement age it could work. You can get it penalty free but will still get a nice tax bill

 

[SAJ-99]

Is it possible it would work like a rollover 401k? You’d want to do a direct rollover transfer to an ira/401k and never have the money in your hands? They get funny about it if you get the money first

When I took the buyout they just sent me a check. Then I sent the check to the broker and deposited to the 401k. There was no issue because it was sent to the IRS as a rollover by both sender and receiver. If the amounts didn’t match they would have dinged me.

My question was more about the age difference between plans, and I think the rule of 55 answers it.

 

[Treeshark]

No experience with employer pensions, but I wonder if you could roll some of it over directly to a brokerage account? You’d have to pay capital gains tax upon withdrawal but it would offer you max flexibility.

I don’t believe long term capital gains would show up as earned income but I am not certain of that- if not, it’s another way to keep the healthcare plan cost low with no early withdrawal age or RMD restrictions.

 

[Pucky Freak]

Pension lump sum is penalty free at 55, but it is earned income if it is cashed or moved to brokerage. That would bump me way up on the income tax bracket. The lump sum can be rolled into another tax deferred retirement account (traditional IRA) which would postpone tax from earned income. The account would sit untouched for 10 years (between age 55 and 65), so it wouldn’t matter that I moved it from penalty free at 55 to penalty free at 59 1/2.

457(b) is also penalty free at 55. My thought is to load up my after tax 457(b) for the next 14 years rather than load up the Roth IRA’s of me and my wife. That’s why I am thinking this through so far in advance, as I’d need a big pile of cash to live on between 55 and 59 1/2.

My biggest concern is that the government will change the rules about MAGI and subsidized health insurance. I’m thinking that if enough people have the same strategy as me, they will close the loophole.

Imagine me at 55 with a couple million in the bank and 100k annual income, but it is all after tax distributions. As far as ACA is concerned, I’m indigent, and so I don’t pay for healthcare. I’m thinking that somehow this isn’t going to stand the test of time, but who knows.

 

[Treeshark]

Imagine me at 55 with a couple million in the bank and 100k annual income, but it is all after tax distributions. As far as ACA is concerned, I’m indigent, and so I don’t pay for healthcare. I’m thinking that somehow this isn’t going to stand the test of time, but who knows.

That really is the million dollar question- what will the healthcare insurance landscape look like when we get to that stage of life?

I think we are roughly the same age- we are on a different path to a similar destination from the sounds of it. My strategy is to have a mix of Roth, Traditional IRA, SEP/401k and brokerage. My point above regarding the flexibility of brokerage was a nod to the unknown you brought up. Also, that money seems more nimble for use towards things like helping your kid with college (in addition to 529), land purchase etc. Good points on the tax penalty now though- like I said, employer penaions are a bit of a foreign language to me.

I feel it is as likely that we wind up with some sort of a single-pay/nationalized health care system as it is they just find a way to close that loophole- my opinion is that the smart play may be to hedge bets and try to cover both scenarios and everything in between as well a guy can.

@schmalts was one of the first people I can remember discussing this strategy, and you guys are right. But in reality, looking at stats of the average American in their late 50s-early 60s, how common is this scenario ? It is also a relatively recent phenomenon- the ACA passage was not really that long ago and that has magnified the value of Roth. Time will tell if it gets closed or remains I suppose- it is an interesting point though for sure.

 

[Fire_9]

I'm not a money guy and can't answer your question but have you exhausted all avenues to get rid of your chronic health issues?

 

[BigHornRam]

My biggest concern is that the government will change the rules about MAGI and subsidized health insurance. I’m thinking that if enough people have the same strategy as me, they will close the loophole.

No one else needs to blow a hole in your "strategy". You know the answer right here.

 

[Pucky Freak]

That really is the million dollar question- what will the healthcare insurance landscape look like when we get to that stage of life?

I think we are roughly the same age- we are on a different path to a similar destination from the sounds of it. My strategy is to have a mix of Roth, Traditional IRA, SEP/401k and brokerage. My point above regarding the flexibility of brokerage was a nod to the unknown you brought up. Also, that money seems more nimble for use towards things like helping your kid with college (in addition to 529), land purchase etc. Good points on the tax penalty now though- like I said, employer penaions are a bit of a foreign language to me.

I feel it is as likely that we wind up with some sort of a single-pay/nationalized health care system as it is they just find a way to close that loophole- my opinion is that the smart play may be to hedge bets and try to cover both scenarios and everything in between as well a guy can.

@schmalts was one of the first people I can remember discussing this strategy, and you guys are right. But in reality, looking at stats of the average American in their late 50s-early 60s, how common is this scenario ? It is also a relatively recent phenomenon- the ACA passage was not really that long ago and that has magnified the value of Roth. Time will tell if it gets closed or remains I suppose- it is an interesting point though for sure.

Thanks for the perspective - I could not agree more. If there is a take home lesson here it is having tax strategy nimbleness to mitigate “policy change risk”. My combination of money buckets is different from yours on account of working for the government, but the general idea is the same - maximizing access and growth of principal, while minimizing taxes and penalties.

 

[mevertsen]

Can't help much with the numbers.

But I had to take early retirement at 40 years old in December of 2023.

I was lucky to be able to stay employed until my retirement date, and with that got a subsidy from my employer which was part of my oringal contract.

Good luck in your endeavor.

Living with chronic health conditions sucks, but I just couldn't work anymore after battling it my whole life.

Keep in mind when you retire, you will have less controvutions as well.

Not sure what to say beyond that.

Good luck.

 

[Pucky Freak]

I'm not a money guy and can't answer your question but have you exhausted all avenues to get rid of your chronic health issues?

Good question. The answer is yes, I have. I do not drink, smoke, or do drugs. I eat well, work out regularly, and have a normal BMI. I have bipolar disorder and other mental health problems that I take meds for.

Lifetime stats on bipolar are pretty abysmal:
-40% will attempt suicide
-20% will complete suicide
-90% will be divorced
-60% will have drug or alcohol addiction
-Lifetime earnings (on avg) peak at age 40, and then decline.

I am beating all those odds now - I have an intact marriage and career. But on an actuarial stat line I do not look good at all.

 

[Fire_9]

Good on you for making the lifestyle changes. All too often you hear of people having issues and they don't make any changes. Keep up the good fight man!

 

[Treeshark]

If there is a take home lesson here it is having tax strategy nimbleness to mitigate “policy change risk”.

Do you work with an advisor? If not, I would recommend you consider it.

My takeaway would be this is the type of situation in which they really earn their money. This would actually be a great interview question for them: if their answer is “I honestly don’t know but we work with an awesome accountant, let me check” they might be a keeper.

 

[Bob-WY]

Strongly recommend a qualifies advisor, one that is also good at the tax implications. I've been retired since 58, now about to turn 61. Uses ACA for "free" due to taking advantage of IRAs and building a large cash bucket to bridge us to 65. Now with the hopes ofSS becoming tax free, the ACA bucket looks even better.

On ACA, check your states marketplace if you haven't. It will vary a ton state to state on what available

 

[WildWill]

My biggest concern is that the government will change the rules about MAGI and subsidized health insurance. I’m thinking that if enough people have the same strategy as me, they will close the loophole.

A valid concern.

 

[SAJ-99]

457(b) is also penalty free at 55. My thought is to load up my after tax 457(b) for the next 14 years rather than load up the Roth IRA’s of me and my wife. That’s why I am thinking this through so far in advance, as I’d need a big pile of cash to live on between 55 and 59 1/2.

Also, when you convert to a Roth, I think you have a 5yr rule that would make it untouchable without penalties.