As of the time of this writing, Bryce and I have been retired and traveling for three years with no plans to stop. One of the most interesting parts of our journey has been the subtle reaction shift from friends and family back home.
In the first year, they thought we were “getting it out of our system.”
In the second year, they figured we’d realize our horrible mistake and come back.
But after the third year, their skepticism turned into genuine curiosity. We were traveling, we were happy, and we hadn’t run out of money. Instead, our net worth had gone up.
“What’s your secret?” they asked.
The answer was there the whole time (and we’d pretty much been shouting it from the rooftops): travel. In the last chapter, we showed how geographic arbitrage can help control your living costs during a market downturn. But we were shocked by how elegantly traveling fixes other major financial problems.
So in this chapter, I’d like to address three Very Scary ThingsTM people stress about that basically become nonissues when they retire and travel the world: inflation, insurance, and health care.
Inflation is a complicated beast and countless books have been written that explore all the technical aspects of how it works. Since I don’t want you to die of boredom, I’m not going to go through it here. Just know that inflation is, in a nutshell, how much your cost of living increases from year to year. You notice inflation when you go into Starbucks and grumble at the price of a cup of coffee—up $0.25 from a year ago—and when your grandparents show you an old department store catalog with lawn mowers on sale for $5.
Inflation is the bane of retirement planners everywhere. Traditional retirement planning means investing heavily in equities when a person is young, then shifting into fixed-income assets like bonds over time. Once the person hits sixty-five, the majority of their portfolio is in bonds, and the danger is a spike in inflation after retirement, in which case their fixed income won’t keep up with the cost of living.
My investing strategy avoids this situation entirely. I’ve achieved income stability not by shifting into fixed income but by using a combination of the Yield Shield, the Cash Cushion, and Buckets and Backups. My portfolio never flips into a majority-fixed-income allocation. And because I’ll stay invested in equities throughout retirement, my portfolio is naturally hedged against inflation. This is because companies sell goods to people, and when people pay more money for their goods (like that cup of coffee) because of inflation, that company is making more money. All else being equal, inflation is reflected in that company’s earnings, which are reflected in an increased share price, which is reflected in your portfolio. By investing in equities, your portfolio grows with inflation.
There’s another interesting thing I’ve noticed about inflation: it changes depending on where you are. The inflation reported by the United States only applies to the United States. It’s completely independent from the inflation experienced in Portugal, South Africa, Hong Kong, or Japan. This even happens from state to state. The inflation numbers the central bank reports are a national average, so some states have above-average inflation and some below. Just because the cost of living is rampaging in San Francisco doesn’t mean it’s happening in Des Moines.
This simple realization has a huge impact on retirement planning. Because you’re no longer tied to a particular city by your job, inflation doesn’t just happen to you based on factors beyond your control. Instead, inflation becomes something you can control. Your current city’s cost of living going up too fast for your liking? Spend the next year exploring Eastern Europe! Or if that’s too extreme, spend time in another city or state whose inflation is a fraction of yours.
It’s another facet of geographic arbitrage, and it has a profound impact on your finances. The 4 Percent Rule means that taking out 4 percent of your portfolio, inflation-adjusted each year, for a thirty-year period will result in a 95 percent success rate. It assumes you increase your spending with the inflation rate. If you can sidestep that adjustment, your likelihood of success goes up dramatically. In fact, since we started traveling, our personal inflation rate has been flat or slightly negative each year. As we’ve gotten the hang of it, we’re spending less money each year in retirement than the year before.
By using the Yield Shield and Cash Cushion to avoid selling in a down market, and traveling to control inflation, three years later, our retirement health has grown from a 95 percent success rate . . . to 100 percent.
Insurance is another thing that scares the pants off people, and I completely understand why. The entire industry is based on fear, with the most pessimistic sales pitch you could ever craft: “You’d better buy this insurance, because who knows? Some unfortunate thing could happen, and if you don’t have this coverage you’ll be screwed.”
These people must be fun at parties.
In this section, I’ll discuss the three most common types of insurance: homeowner’s, car, and life. Health insurance is its own monster that we will discuss in the next section.
If you own a home, you need homeowner’s insurance. Since a house is the largest part of many people’s net worth, one electrical fire, flood, or tornado could decimate your wealth, so not insuring it is asking for the universe to school your ass.
As we mentioned in chapter 9, homeowner’s insurance, on average, costs 0.5 percent of your home’s value each year. When your policy renews annually, be sure to shop around to get the best possible deal, but aside from that the only two ways to eliminate this cost are to go uninsured (don’t recommend) or to not own an expensive home in the first place and rent instead (do recommend).
Renting makes home insurance a moot point.
Car insurance is even more mandatory, since it’s illegal to drive without insurance. So, you can’t avoid it. There are tricks to lower the cost, though. Getting an antitheft device in your car can lower premiums. Dropping comprehensive coverage for older cars that have already depreciated can also make sense. Getting your insurance through your employer or alumni association is also a good idea. However, the best way to reduce your car insurance cost is to not own a car. Again, travel makes this decision easy, because if you’re jet-setting around Europe you don’t need one.
That being said, sometimes a car really is essential for survival, especially in small towns where public transportation isn’t great. The good news is that small towns also tend to have low housing costs. So, I like to tell people who write to me that if you’re finding yourself drowning because of high homeownership costs and high car expenses, you’re doing it wrong. Either own a home that’s cheaper and farther from work or get rid of the car and spend more to be close to everything. Don’t do both!
Another solution is to use car-sharing services. You reserve a car for a certain time slot, go to a predesignated lot near your house, grab the keys, and you’ve got yourself a ride! This gives you access to a car to haul groceries without the cost of buying it, maintaining it, filling it with gas, and insuring it. The one we used while we were working saved us $8,000 a year because our costs averaged only $40 a month. Zipcar is the biggest car-sharing service in North America, but there are dozens popping up all over the place.
Life insurance is another expense people get confused about. I don’t blame them. Term life, whole life, universal life—there are so many policy types and complicated riders it makes you want to jump off a cliff. (But if you did that, your family would be screwed, since, you know, you don’t have life insurance.) The worst thing to do if you’re trying to clarify your needs is to ask an insurance salesman. Just like when I went to the bank to ask about investment accounts, the answer to “Which life insurance should I buy?” will be “The most expensive one I can sell you.” But not buying life insurance seems irresponsible, especially if you have kids and you’re the primary breadwinner. So, what most folks do is procrastinate, sigh heavily, and finally trundle into their closest bank branch and get saddled with an incomprehensible policy costing them hundreds of dollars a month. My readers do this all the time.
Here’s the industry’s big secret they don’t want you to know: If you retire early, you don’t need life insurance.
The purpose of buying life insurance is to make sure your family is taken care of in case you get run over by an ice-cream truck, by providing them with enough money that they can survive without you. In other words, it’s supposed to cover their living expenses if something were to happen to you.
You know what else does that? Your portfolio. Becoming financially independent means you’ve built up sufficient assets and invested them properly to passively generate enough income so that you don’t have to work anymore. That does the exact same job as life insurance. Your portfolio is the breadwinner, whether you’re there or not.
This insight breaks down the entire life insurance industry into a simple math problem.
Using the 4 Percent Rule, figure out how much you need to retire. Then, count up how much money you have.
How Much You Need − How Much You Have = Your Life Insurance Benefit
Say my current living expenses are $40,000. According to the 4 Percent Rule, I need $40,000 × 25 = $1,000,000 to retire. I currently have $100,000. So, the life insurance benefit I need to buy is $1,000,000 − $100,000 = $900,000.
This is how much your family will need to become financially independent if you unexpectedly kick the bucket. And because you’ve calculated a point in the future at which you won’t need life insurance anymore, most of those policies become unnecessary. The only thing you’ll need is term life insurance—a policy you buy for a specific amount of time (the “term”), say, five years. If you buy a five-year term life policy, it covers you for exactly five years. After that, you have to renew or purchase a new one. And how much coverage you need is determined by the formula above. Term life insurance is the cheapest type of life insurance you can buy. This is because the insurance company is calculating the odds of your dying within the term of the policy, which are typically low. The other policy types are designed to cover your whole life, so by definition, they assume you will die at some point in the contract. In other words, under a whole life or universal life policy, the insurance company will pay out eventually. For a term life policy, probably not. That’s why it’s less expensive. As of the time of this writing, a term life policy for $900,000 can be purchased for between $15 and $30 a month. Compare that to the hundreds of dollars a month for the other types of life insurance.
Also, if you’re going to make a run for FI, it makes sense to get as short a term as you can from your insurance company and renew each year. Even though life insurance costs increase as you get older, the amount of coverage you need actually gets smaller as you get closer and closer to your FI target. The gap of $900,000 becomes $800,000, which becomes $700,000, and so on. As your benefit needs shrink, your already-cheap life insurance premiums also shrink, until eventually you become financially independent and retire. At which point you can safely wave good-bye to the life insurance industry and never have to deal with those sharks again.
Hoo boy. Buckle in and watch as I demolish the idea that paying for health care is necessarily scary. First of all, if you’re reading this and thinking, Health care? Why would that be scary? then you’re probably not American. Health care (or, more specifically, health insurance) in the United States is expensive. Americans spend nearly twice as much as other high-income nations, despite having shorter average life-spans, higher infant mortality, and higher obesity rates.1 And the risks of going uninsured are massive. In fact, the number one cause of personal bankruptcy in America is medical debt. Finally, since most Americans get their health insurance through their job, the natural question is, “If I leave my job, won’t I lose my health insurance?”
The answer is no. You can still have health insurance, and you’ll probably be able to get it far cheaper than when you were working. Here are all the different ways you can reduce your health insurance costs after you retire.
Obamacare, or the Patient Protection and Affordable Care Act, is your first and best line of defense against rising health care costs in retirement. This is because Obamacare ties the amount you pay for insurance to your income. The less you make, the less you pay. And it does this through federal subsidies. Every year the federal government publishes a number it determines as the federal poverty level, or FPL. Based on your income as a percentage of the FPL, you may qualify for a federal subsidy that helps pay for part or all of your health insurance premium.
While working, you likely don’t qualify for assistance since your income is too high (400 percent of the FPL is the maximum you can earn and still receive subsidies) or your employer already offers health insurance benefits, but after you retire, your employment income drops to zero. And because of that, you may be surprised to see your health care costs shrink to almost nothing!
Note that the ACA determines your subsidy based on your MAGI (modified adjusted gross income), which includes Roth IRA conversions, qualified dividends, and harvested long-term capital gains. To order to qualify for ACA subsidies, pay special attention to avoid exceeding 400 percent of the FPL while combining the strategies mentioned earlier to minimize taxes.
One big caveat to Obamacare is that you need to live in the right state. When the ACA became law in 2010, part of it relied on expanding funding to Medicaid, the health insurance program covering low-income families administered by each state. The idea was that the Obamacare-related subsidies would take care of people from 138 percent to 400 percent of the FPL, while Medicaid would take care of the 0 percent to 137 percent range. Under this system, everybody would have access to health insurance regardless of income.
Unfortunately, not all states cooperated. Some states chose not to expand Medicaid, which created a very dangerous situation known as the “Medicaid gap.” In states where Medicaid was not expanded, it’s possible for your income to be too high for Medicaid but too low for Obamacare subsidies to kick in, leaving you to pay the whole premium yourself. Out of fifty states (plus the District of Columbia), thirty-three have expanded Medicaid while eighteen haven’t. Check your state’s Medicaid site to see which type of state you’re in. If you live in the latter, I would recommend moving to one that did expand Medicaid. You don’t want to run into a situation where a health problem completely destroys your retirement plan. Wherever you decide to retire, if it’s within the United States, make sure Medicaid was expanded there.
You may also consider relocating to take advantage of the wide range of health insurance costs from state to state. As of 2016, the cost of health insurance premiums in a low-cost state like New Mexico was half the price of premiums in a high-cost state like New York!2
Now, as much as I’d like to say, “Just rely on Obamacare,” and be done with it, the current political climate has not been friendly toward the ACA. So, while I hope that it sticks around in some shape or form, it’s a good idea to review what early retirees did pre-ACA, in case America’s health care system reverts.
Before 2010, the health insurance market was much less regulated. Limitations on coverage for preexisting conditions meant that if you got sick and the insurance auditor found so much as a yeast infection in your past you hadn’t reported, you could get thrown off the policy and risk bankruptcy. Yikes!
In an environment like that, what is a young, healthy early retiree we’ll call Pete to do? Like everyone else, Pete wants to insure away the risk of bankruptcy for the minimum cost, but he also has the advantage of having a large net worth. Because Pete can afford to pay for doctors’ visits out of pocket, and even cover the occasional emergency, his policy should have the following features:
Coverage only for catastrophic emergencies with a high coverage limit ($500,000–$1,000,000)
A defined maximum out-of-pocket expense limit ($10,000–$20,000)
A high deductible
Compatibility with a Health Savings Account (or HSA)
This is known as a high-deductible health plan, or HDHP. This means that Pete pays for his health care most of the time and the insurance kicks in only if he (or someone in his family) suffers an unforeseen, catastrophic medical expense that could potentially bankrupt him. And because of how unlikely this is, the premium for such a policy is affordable (e.g., the one that blogger Mr. Money Mustache used is $237 USD per month with a $10,000 deductible for a family of three).
An HSA is a type of investment account that’s used for health expenses. Unlike a 401(k), it’s not tied to your employer, so you can open one at any bank or brokerage account. Here’s how an HSA works (as of 2019):
To be eligible, your health insurance plan must have a deductible of at least $1,350, or $2,700 for a family.
You can contribute up to $3,500 per year, or $7,000 for a family.
Your contributions are pretax, similar to a 401(k) or a traditional IRA, meaning that you will get a tax deduction.
Investment growth is tax-free.
You can withdraw your money tax-free for qualified medical expenses.
So an HSA combines the best of the 401(k) and the Roth IRA, in that it allows tax-deductible contributions, tax-free growth, and tax-free withdrawals, but only for medical expenses.
HDHP + HSA plans existed before the ACA, and still exist today under Obamacare. This gives us reasonable certainty that even if the ACA were repealed, the HDHP + HSA solution that early retirees used before Obamacare existed would still be a viable solution. We’re only including this policy in case America reverts to its pre-Obamacare health care system.
But now I’d like to talk about my solution. Meaning, this is what we do for health insurance. It may surprise many readers that we have to do anything at all. After all, we are Canadian. Aren’t we supposed to have a gold-plated government-run single-payer health care system at our disposal?
Surprisingly, no! Canadians are only eligible for our gold-plated government-run single-payer health care system if they live in Canada. Once we left Ontario for more than two years, we lost our health insurance. That’s right. We were faced with the same flop-sweat-inducing terror of being uninsured as our American friends.
So what did I do? The same thing you would have done. I Googled. Turns out, there’s a whole world of insurance for people like us. It’s called expat insurance, and it provides policies for people who leave their home country and aren’t eligible for their new country’s health care system. Because health care costs differ by country, there are two geographical zones when it comes to expat insurance coverage: the USA, and everywhere else. Seriously. These are your choices. “The USA,” and “the world except the USA.” There’s one price for Americans and another for everyone else. And that second price is significantly lower.
We recently purchased a year’s worth of expat insurance from IMGlobal, up to $1,000,000 in coverage with a deductible of $2,500. The cost was $156 a month. For the two of us. I don’t know what you’re paying for health insurance if you’re currently living in the United States, but I’m guessing it’s more than that.
If you’re American, this fact may fill you with rage, as it should. But a far more interesting question is: what if I retire outside my country? Because if you did that, you wouldn’t have to worry about health care costs anymore. Here’s a snippet from the policy I have:
“As part of that commitment, our company offers a Medical Concierge program, an unparalleled service that saves you on out-of-pocket medical expenses. We also offer a cash incentive and to waive 50% of your deductible for choosing to receive treatment from some of the best medical facilities outside the U.S.” (emphasis added).
That’s right. This insurance company will pay you to receive treatment outside the United States.
Turns out, health care isn’t that scary after all. And the solution to that annoying problem is—you guessed it—geographic arbitrage.
However, if you want to retire in the United States (for family reasons, for example), you still have the option of using the ACA. Even if that goes away, you can use a high-deductible catastrophic plan and money in your HSA.
CHAPTER 18 SUMMARY
Inflation doesn’t affect you when you travel because inflation is a per-country effect. By switching countries you sidestep inflation.
Insurance is also not a major factor after retirement.
Homeowner’s and car insurance are not necessary if you don’t own a home or a car.
Life insurance is no longer necessary after you retire since your portfolio will take care of your family’s living expenses without you.
Health insurance is handled by the ACA. Once you retire, your income will drop and you’ll become eligible for federal subsidies (but be careful not to exceed 400 percent of the FPL when combining tax-minimization strategies).
If you’re American and retire abroad, expat insurance is less expensive than domestic insurance plans.