Should Early Retirees Take Advantage of Gov't Benefits?

Question

So I've got a controversial topic to throw out to the BP community.

On many recent posts I've seen online, I see members of the Financial Independence Community (no BiggerPockets members that I've seen thus far) talk about ways that early retirees can take advantage of government benefits.

Take the following example:

Joe spends 10 years investing in real estate and index funds. He spends little. He builds up a net worth of over $1M and quits his job. After quitting his job, he and his family of four spend less than $30,000 per year. He arranges his portfolio such that it generates about $25,000 per year in Adjusted Gross-Income - he's able to do this with real estate tax advantages and by placing much of his earnings into tax-advantaged retirement accounts. Because he makes the intelligent decision of house-hacking, he's able to effectively generate zero income from his home, but also breaks even and spends $0 on housing. That ~$35,000 in free cash flow, $25,000 in AGI after his financial movements, and he lives a life of leisure.

Not coincidentally, Joe's AGI is less than $25,000. So what? ...

So, Joe is, technically, according to our government, below the poverty line.

Except he isn't. He is a millionaire and lives a middle to upper-middle-class lifestyle - he simply has no debt, no housing expense, and little transportation expense. He's able to travel the world on credit card points and hang out.

The point of all this is to bring up the following question:

Should Joe take advantage of low-income federal subsidies and benefits?

Specifically - should Joe enroll his family in Medicaid?

Should Joe enroll in SNAP (food stamps)?

Should Joe seek eligibility for section 8?

If the answer to all of the above is "no" - why do you think that?

If the answer to all of the above is "yes" - same question.

If there is a line, where is it?

Personally, I plan to design a portfolio that can't help but generating more income than would qualify me for these government subsidies, but I think I currently feel that it is wrong for citizens with net worth into the high six-figure or even seven-figure range to arrange their portfolio to take advantage of low-income government subsidies. If you can do that (although I'm sure there are exceptions), then generally speaking, I think that you can put in the extra year or two to support yourself independently of government assistance. Plus, why would you make your early retirement depend on government subsidies that might not be around during the course of your lifetime?

What do you think though?

JD Martin · Answer

While it may be legally permissible it is unethical. On the other hand, if we took health care out of the employment sphere (i.e. a national health care system), and means tested everything else, we wouldn't be having this discussion. Benefits that are designed to be a safety net shouldn't be used by those without need of a net. Resources are limited and therefore should go to those truly in need.

Thomas S. · Answer

My simple response is no.

Those that collect government assistance are being paid from taxing hard working, mostly middle class workers.

I personally despise welfare leaches.

Jason Powell · Answer

Great topic to bring up, and yes controversial I'm sure. As a financial planner, I've got to weigh this same question into advice I give clients. At the end of the day, I'm a fiduciary and have to tell my clients what's in their best interest, even if that means working the system in a way I may not agree with.

I personally think it's fair for everyone to play by the same set of rules and do whatever they can to maximize their own benefit. That's what we all do with taxes right? That being said, I do feel strongly that we should have an asset based qualification component and not just income, for the same reasons you've cited. That would eliminate scenarios you've brought up.

Kalyanii K. · Answer

I think scamming the system is never a good idea and takes away from people who truly need it. With that said, again this for people who have a true disease component and need services, I’m talking long term care like they can’t bath/feed/transfer themselves and need constant care family cannot provide, Medicaid has been so helpful. People are shocked at the true cost of health services for elderly individuals.

So I work in healthcare and am pretty familiar with long term care, assisted living, memory care costs. For a person who has dementia or Alzheimer’s and family cannot take care of them anymore, a memory care facility starts at $7000 per month and can go over $12000 a month if they have behavioral issues. Assisted living starts at $3600, Long term care can be over $4000 per month depending on their care needs. For elderly disabled persons who cannot care for themselves and do not have family who can care for them, they either have to be very wealthy and have planned out their assets according to pay for the care they need or will have to spend down their money and assets until they have less than $2000 in assets, then can qualify for Medicaid.

It differs by state but in Oregon, I believe they look back 5 years for asset distribution and if you own your own home, the state will place a lien on it and will reclaim it after you pass away. If you are married, they can redistribute assets so your spouse will not lose their home.

Many people don’t take the cost of care needs into consideration when thinking of their retirement years. Long term care insurance is cheaper when you get it younger and is very beneficial if you need it when you’re older. Also, Medicare only covers acute conditions and doesn’t cover caregivers, assisted living, memory care. Many people don’t know that and think Medicare will cover that. Medicare covers skilled nursing stays, so I think that’s where people get confused.

Since I work in a hospital as an RN case manager, you see how sickness can play out and can be devestating to patients and families until they have no choice but to go on Medicaid.

It’s hard for people to factor healthcare costs for retirement since it’s so variable. But I can say most people I work with in the hospital have some form of LTC insurance. There is an increasing gap between people who have enough foresight to plan for catastrophic healthcare needs and people who think their money in their 401k will be ok for retirement only to find out it won’t last that long.

Let’s do some math. Bob and Sue have 1 million in their 401k by age 65 and think they are doing good. Sue has a stroke, goes thru rehab but now cannot bathe or dress herself or transfer without help and Bob can help her sometimes but not all the time as he is forgetting how to do simple tasks. Kids live far away so Bob and Sue move to assisted living together.

Assisted living is rounded out at $5000 per month for both of them. So for 2 years this works. $5000 per month x12 months x2 years is 120,000.

Now Bobs memory is getting worse. He cannot remember how to do his own ADLs (activities of daily living like bathing or dressing) and needs cuing. Sue cannot do this because of her health so he needs to go to memory care. Memory care is $7000 a month and Sue’s care is $5000 because her care needs have increased.

So 7k x12is 84k plus 5kx12 is 60k so $144,000 per year.

At the end of year 5, total cost is $532,000. (120,000 for first 2 years, then $144,000 a year for 3 years).

Now Sue is diagnosed with Alzheimer’s and still has deficits from her stroke so she has to go to memory care, costing 7k per month. Bob has declined further and his dementia has changed his behavior and he has yelled at people, and even has hit staff and refused to take his medicine. He has to go to a memory care facility that can deal with his behavior and the facility will charge more so now he is charged $12,000 a month for his memory care and Sue is $7000 a month.

So for year 6: 12x12 is 144,000 per year for Bob and Sue 12x 7 is 84,000 per year so for both is 228,000.

Year 7: Total cost for this year is 228,000. Nothing has changed and they are still in memory care.

Their 401k is now 1 mil- 532,000 (first 5 years) is 468,000. Minus year 6 costing 228,000 is 240,000 now minus year 7 is 12,000.

At the end of year 7 when they are 72, their 401k is basically drained and they will need to be on Medicaid to continue to get the care they need.

So total disclaimer here: this doesn’t account for any additional interest earning in the 401k or other assets or SSI or if they have to hire someone else manage their money. I’m just trying to show how quickly medical expenses add up and what people may think is enough money may not be. That’s why it’s so important to have these programs. If again, you truly need it is the key I’m trying to get at. Not the I’m going to scam the government so I can have food stamps type of mentality.

Kalyanii K. · Answer

@Scott Trench Hello! So wanted to touch base with you about your reply on healthcare. Part of the problem I see is that it isn't the fear that an unforseen problem will come along that is not covered by insurance, it is that Medicare and all health insurances that I deal with at work do not cover the cost of care, only the cost of medical expenses. To put it another way, the biggest problem isn't their medical expenses-it was the actual cost of living in a place where people can have help with their Activities of Daily Living (ADLs).

In my previous post when I spoke about the fictional couple, they were covered under commercial health insurance-it was the cost of their care that was the problem-specifically memory care. So for example, health insurance will cover most of the cost of doctor visits, ER visits, hospital stays, minus deductible. But who will help the patient with care needs-help with bathing, getting dressed, transferring, and giving their medications? Private caregivers cost approx $25-30 per hour in my area and have to be paid out of pocket. Assisted living is costly but less than a private caregiver can average out to be. Long term care facilities are very expensive, about 3x the cost of assisted living.

As for the market demand for the protection from this risk, the answer is to have long term care insurance. In fact, if you go to the government Medicare website, it will go over this and state how Medicare doesn't cover ADL assistance. Long term care (LTC) insurance covers the care needs of a person and fills in that gap. So depending on the LTC insurance you have, you could have more coverage and so more care options.

I love the Money podcast and am working on financial freedom myself, but I just think that people also need to become aware of the hidden costs in healthcare. So many are surprised when they find out their health insurance does not cover care needs, and it just drains them financially. That price that I put out there-$7,000 per month, was not for medical bills that insurance did not cover, but was the cost of living in a memory care facility where there are nurses who can make sure the person gets their medications, CNAs to make sure you are bathed, dressed, and you can transfer safely, and that you have a room to sleep in and meals. Some of these places don't even have private rooms, so if you do not have a spouse, you might have a roommate that you do not choose, which could be good or bad.

Check out the government Medicare website https://www.medicare.gov/coverage/long-term-care.html and it will also have links to another website, https://longtermcare.acl.gov/costs-how-to-pay/index.html that talk about this as well. Cheers!! Always love the thoughtful discussions on Bigger Pockets!

Paul Allen · Answer

@Michael Plante, that's a question for their lawyer. That's who got paid the $12,000. I know and recommend other lawyers locally who charge less than half that, but they went with someone else.

My client mentioned the lawyer also did some research to ensure if they moved the disabled sibling from another state to Virginia in the future the medicaid benefits would not be adversely impacted. Perhaps that increased the price, but I was not privy to an itemized bill.

Michael Plante · Answer

Why does it cost $12,000 to set up a trust?

Mindy Jensen · Answer

The healthcare issue would be much easier to answer if it weren't so expensive. I am financially independent, and do not wish to apply for Section 8 or foodstamps, because I don't deserve them, and do not wish to take them from someone else who needs them.

Before I started working here, I was paying $1600/month for my family to have basic level dental care and a high deductible, covers-nothing health care plan. I could afford it, and paid it because I have two young children and you just never know.

We're very healthy, and almost never see the doctor. Paying more for healthcare than I do for my mortgage is a bite, but I don't really have much choice.

Of course I'd like a discount, but even more, I'd like to see this issue fixed permanently for everyone. While I don't like paying $1600, I can afford to do so. Not everyone can, and I am extremely fortunate. But the healthcare system in our country needs to change drastically. It's a lot easier to rationalize it to yourself when you have to pay a lot of money.

Great question!

Scott Trench · Answer

This is a great discussion! It seems that the folks here seem to largely agree that Joe should not take advantage of low-income government subsidies and benefits - with the notable exception of healthcare. On healthcare, this thread seems divided.

It seems to me that the rationale for those who don't view it as unethical to apply for medicaid is that healthcare expenses are one of the few things that are difficult to insure against and which can entirely wipe out a lifetime of wealth accumulation in just a few short years. It seems that the big fear is that an unforeseeable future diagnosis is going to come along and either not be covered by insurance, or result in that individual no longer being able to qualify for relatively affordable premiums.

This is super interesting to me and I don't have the answer to this problem right now. It seems like there is a market demand for protection from this risk, and a lack of creative business, customer, and/or governmental solutions to that problem. Seems like an opportunity - a business could come up with a solution, consumers could pool together to purchase insurance in the same way that companies purchase insurance, or the government could step in with some sort of solution.

Also - regardless of the ethical dilemma, I'd simply prefer not to get insurance from a low-income subsidy from a practical standpoint. It seems to me that the intent of the law is not to provide a safety net for the fairly wealth (I'd consider an early retiree fairly wealthy), so I won't design my portfolio and long-term such that I'd ever depend on being able to qualify for medicaid to make it through. I perceive it as too great a risk for the legislature to change the law to make it more reflective of original intent.

Should Early Retirees Take Advantage of Gov't Benefits?

Should Early Retirees Take Advantage of Gov't Benefits?

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