Author Topic: I think I'm FIRED ... advice or ideas?  (Read 3344 times)

abliviax

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I think I'm FIRED ... advice or ideas?
« on: December 01, 2023, 05:38:56 PM »
Hello all - nice to meet you! -- 40yo former (male) engineer here.  DW is a 36yo former teacher.  I guess I'm here mainly to solicit advice on account draw-down and how to be early retired and still make friends :) .  Also happy to answer questions if I can provide any help.

I quit my medtech job in April because I didn't want to move back to the Bay Area (moved to Colorado during Covid), and because I was totally burned out after we had 3 children (now 5yo, 3yo, 3yo) during the Covid years without much support.  I'm really working on my mental and physical health now, which was somewhat sacrificed over my career.  We are volunteering now (schools), but may do work/businesses after a few years.

Over the last 15 years, we have saved 40-70% of income (depending upon the year) and invested fairly well and currently have about $4M net worth, mostly in stocks. 

I have mostly only kept track of things at a high level, and the details are not well enough understood by me ... partly why I'm here.

Account Breakdown is approximately:

$2.0M Brokerage Accounts - Stocks such as Costco, Amazon, Netflix, Chipotle, 30 others, and lots of ETFs, also Wealthfront account.
$550k former employer stock -- believe in company, but am slowly selling this off in tax-efficient manner.
$280k cash @ 5% rate
$1.0M 401/457/403b/Trad IRA -- mostly VSTAX or equivalent total market index.
$170k Roth IRA
$60k HSA

$400k home equity.

Income
$0 -- only volunteering at the moment, but might do other work or businesses that we are passionate about as soon as kids are older.

Expenses
$145k last year and $103k this year. 
But, I'd like to increase travel and kid spending.  So I need to be as efficient as possible (low taxes, etc). 
I'm not sure if I'm comfortable with 4% draw -- I expect 3.5% inflation and I think the US economy is at a debt inflection point -- we have less buyers of our debt already this year-- so that might effect long-term business results with much higher borrowing rates.  Maybe we can eek out 5.5-7% gains -- more like Japan and UK under massive debt.  I'd like some margin.  Maybe 3.5% draw down and adjust along the way to market volatility?

Largest 2023 Expenses
$3300/mo mortgage on $580k principal @ 2.75%
$1200/mo car @ 4%
$2000/mo COBRA (moving to open market now, looks like $1500 w/dental)

Here is my 2023 Mint.com breakdown
CATEGORY   Spending
Home   $41,666.85
Taxes   $21,398.01
Health & Fitness   $16,973.21
Auto & Transport   $6,089.41
Shopping   $4,587.05
Food & Dining   $3,669.92
Bills & Utilities   $3,464.29
Personal Care   $2,065.35
Fees & Charges   $1,255.18
Kids   $944.71
Uncategorized   $1500-ish
Total   $103,574.02

Planned Strategies moving forward:
1. Sell some brokerage stocks after using the cash.
2. Utilize $89,250/yr of 0% long-term capital gains per year to liberate company stock and move Traditional IRA money to Roth IRAs.
3. Use "laddering" to move more and more Roth IRA money into accounts that can then be cashed (after 5 year requirement) -- madfientist.com strategy
4. Cash out 457 accounts when needed
5. Cash out Traditional IRA once old enough.

Questions:

How can I efficiently draw-down these accounts?  Do you have tips I may not have thought of?
How should I adjust spending based on market fluctuations if I want to spend more like 3.5%? 
--I'm thining of making a budget every 3 months...0.875% per 3 months.  I find it overwhelming to account for taxes and one-time expenses and categorizing.
How can I better track expenses?  mint.com has been ok, but seems to be closing the site soon

What are my biggest risks?
What tax-advantaged accounts can I use when most of my income is long-term capital gains? (~$90k for now).  IRA and HSA only? (no 401k/backdoor I think)

Thanks for looking!
« Last Edit: December 03, 2023, 07:49:16 AM by abliviax »

MDM

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Re: I think I'm FIRED ... advice or ideas?
« Reply #1 on: December 02, 2023, 05:03:38 PM »
Planned Strategies moving forward:
1. Sell some brokerage stocks after using the cash.
2. Utilize $89,250/yr of "Free" capital gains to liberate company stock and move Traditional IRA money to Roth IRAs.
3. Use "laddering" to move more and more Roth IRA money into accounts that can then be cashed (after 5 year requirement) -- madfientist.com strategy
4. Cash out 457 accounts when needed
5. Cash out Traditional IRA once old enough.
From a quick glance, $100K/yr spending and $4 million invested puts you at a 2.5% withdrawal rate.  That's a safe withdrawal rate, so "keep up the good work" may be the best summary answer.

Quote

Questions:

How can I efficiently draw-down these accounts?
What would be the most efficient cash-flow strategy?
Your strategy looks good, although it's not clear if you understand how capital gains are taxed.  More on that below.

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How should I adjust spending based on market fluctuations?
What are my biggest risks?
With a 2.5% withdrawal rate, don't worry about the market.
The biggest risks are probably things over which you have no control, e.g., Yellowstone volcano eruption, war within US borders, etc.

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What tax-advantaged accounts can I take advantage of going forwards? (not 401k, but probably IRAs, I think? assuming $90k/yr max selloff)
Depends what you mean by "take advantage of"...?

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How can I lower taxes?
That starts by understanding what your taxes will be if you "do nothing special".  Have you been doing your own taxes?  Do you have a good estimate of how your TY2023 return will look when you file next year?

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How do I explain my lifestyle to others?  Should I start a "consultancy"? :)
Who says you have to explain anything?


abliviax

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Re: I think I'm FIRED ... advice or ideas?
« Reply #2 on: December 03, 2023, 07:26:30 AM »
Thanks MDM.  Appreciate the read through.  I'm going to adjust the post a bit to reflect:

Expenses: I'm unsure if I'm comfortable with 4% spending, but I would like to increase travel spending and kid spending.  So, maybe I can get more efficient elsewhere... I must admit that my Mint.com spending tracking doesn't always seem clear to me ... and that's becoming "Credit Sesame" or whatever.  Obviously I need a better way to track, but I don't know what that it is without more work that I want to make for it...

Taking advantage of tax-advantaged accounts -- I guess I mostly mean what accounts can/should to be most tax efficient as possible I use when all my income is capital gains.

I think I understand capital gains taxes.  Long term capital gains, when married, I think its 0% up to $89250 total income, and 15% up to $500k-ish (long term).  Short term is just taxed like regular income brackets.

I'd like to explain personal things to people I'd like to be friends with.  I think being an enigma doesn't usually lend itself to friendship.

reeshau

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Re: I think I'm FIRED ... advice or ideas?
« Reply #3 on: December 03, 2023, 08:42:04 AM »
Do you actually have an annual budget at some level?  I don't see where your $2,000 / mo COBRA payment fits into your expense list.  Even if it is only YTD, May-Nov would be $14k just in insurance premiums; almost the whole of "health and fitness."  And it will be much more next year, with a whole year of ACA insurance.

To that end, it could be interesting to consider what that mortgage is really costing you.  On the surface, a 2.75% motgage is to kill for, and you want it as long as possible.  But spending $41k out of your $103k on it is killing your ACA subsidies.  And if you are looking to increase spending, you might lose them entirely if and when the 400% cliff returns in 2025.  Try running your ACA numbers with the mortgage paid off.  It probably doesn't make sense at the moment, but if it's costing you $1,000 a month in subsidies, there might be a point in the future where it's worth a payoff or refi to a smaller principle amount to balance those.

I am in a similar zone as you; currently 52, with just one kid.  My tax planning becomes an exercise during ACA open enrollment to do a pro forma tax return, and plan a partial Roth conversion that offsets my tax credits, plus any impact to the ACA subsidy.  You might also choose to go further, to fill a tax bracket--but then you will need to make estimated payments, too.  I just shoot for zero, and am happy when the check I write the following April is < $1,000.

I treat my HSA as an emergency fund.  I don't want a medical emergency to throw off the balance I've worked out, because it would require additional draws on my investment account.  At the point where I have full access to my Roth, it's redundant in that way, and less desirable as an inherited item, so I'll draw it down then.

abliviax

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Re: I think I'm FIRED ... advice or ideas?
« Reply #4 on: December 03, 2023, 10:52:04 AM »
@reeshau I haven't budgeted since kids 5 years ago - more spend carefully and adjust and not worry too much.  I think this is motivating me enough to start again.  I like the idea of budgetting 0.875% of nest egg per 3 months (3.5% per year).

Your calculation of $14k is correct for YTD - it is categorized under "Health and Fitness".  Thanks for pointing out budget gap for insurance.  I think it will be about $1400/mo or $16.8k/yr unless I consider your income/ACA tradeoff ...

Is this a thing?  Are other people taking less income to get better ACA subsidies ... probably makes sense in some situations ... I just can't quite picture it.  Going forward for me, I guess ACA subsidies depend upon how much capital gains I want to take.  At a guess, I have $1.5M past tax gates, $1.0M of long-term gains, and $1.50M in 401k.  It would be a good excercise for me actually find out how much capital gains I need to take TOTAL over time.

And ACA subsidies depend upon income correct?  Not spending, I think.  So, if I understand you, maybe I could pay off the mortgage, and then not take any income and get big ACA subsidies.  Hmmm.  I couldn't find a ACA subsidy calculator that looked correct, so I'll just look at the max possible saved -- Let's say I made $0 next year and lived off cash.  Maybe I would save the full $16.8k in ACA subsidies -- I don't know.  But the opportunity cost of not taking max 0% long term capital gains is already $89250* 15% = $13300 or so, and I feel I might be missing something else too ... like high taxes to liberate the money later at age 62 or something.  Thank you for making me think about this trade off ... I'm unsure if I understand all the factors here to know if it would be good.

@reeshau Interesting, so I'm imagining you balancing a Traditional to Roth IRA conversion against ACA subsidies ... interesting.  Can I ask you how much you ended up converting from Trad-> Roth last year?  What tax credits are you offseting?

I just realized that I was assuming that a Roth Conversion would be a "long-term capital gain" and thus taxed at 0% up to $89,250.  It's not, I now understand.  @reeshau If you only convert enough to offset tax credits is that enough to provide cash for you indefinitely? 
I think if I follow your income strategy, I would be out of cash in 10 years or something.



« Last Edit: December 03, 2023, 11:18:42 AM by abliviax »

reeshau

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Re: I think I'm FIRED ... advice or ideas?
« Reply #5 on: December 03, 2023, 12:29:42 PM »
If you have been saving while working, your income has already been disconnected from your spending.  But yes, now?  You have $280k cash.  Theoretically, you could live off that, and have $0 AGI for 2 years.  That would take you out of ACA, though, and put you into Medicaid.  Some people do that, but many people look to manage to a sweet spot.

One of the best places to start research is @seattlecyclone 's  blog:  https://seattlecyclone.com/

I also came into FIRE with a big cash pile.  I was repatriation, with a slug of home equity and a European severance.  So, I had a wide spectrum of possibilities.

There are many different ways to estimate. I actually buy tax software now on Nov. 1, as soon as they are out, and do a pro forma of the current year.  I use this to estimate a Roth conversion.  Yes, this is ordinary income, so tax will be generated.  Offsetting credits include child tax credit and potential further ACA credits, along with the standard deduction to take off that ordinary income.  I have generally plugged $85k into the ACA form; what I actually make is a little more complicated than most, because I invest in individual stocks, and may sell based on investing decisions, not just spending needs.  (That will get easier, of course, when withdrawing primarily from IRA's)  I have generally had space to convert about $40k per year.  I could go much harder, to the limit of the 12% bracket, but that could push some of my LTCG into 15% territory, and I'm not too worried about RMD's down the line.

After crunching the current year, I consider estimates for the following year, so I can plan adjustments, if needed.  I haven't changed my first guess my much, now going through a fourth annual cycle.

I am not maximizing my ACA subsidy.  If you play it aggressively, your monthly premium could be double digits.  Many say there is what you *could* do, and what you feel comfortable doing, since it is consuming a government subsidy.  Whether you view that as playing by the rules or taking unnecessary welfare is a personal matter.

MDM

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Re: I think I'm FIRED ... advice or ideas?
« Reply #6 on: December 03, 2023, 12:36:01 PM »
And ACA subsidies depend upon income correct?
Correct.  See Roth Conversion and Capital Gains On ACA Health Insurance.

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But the opportunity cost of not taking max 0% long term capital gains is already $89250* 15% = $13300 or so, and I feel I might be missing something else too ...
If you expect to incur a 22% or higher marginal rate in the future, Roth conversions at 12% (even if you do not have that rate if also using ACA) are often slightly better than taking long term capital gains at 0%.  See the '0% LTCG or t->R' tab in the case study spreadsheet.

seattlecyclone

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Re: I think I'm FIRED ... advice or ideas?
« Reply #7 on: December 03, 2023, 01:38:25 PM »
Is this a thing?  Are other people taking less income to get better ACA subsidies ... probably makes sense in some situations ... I just can't quite picture it.  Going forward for me, I guess ACA subsidies depend upon how much capital gains I want to take.  At a guess, I have $1.5M past tax gates, $1.0M of long-term gains, and $1.50M in 401k.  It would be a good excercise for me actually find out how much capital gains I need to take TOTAL over time.

Yes this is definitely a thing. Minimizing your tax rate over the long term can be a very complicated yet lucrative optimization problem. You've got a few different buckets of money, the cost to withdraw from each bucket can change over time based on your age and total other income, and there are definitely ways to schedule this income that will cost you significantly more or less in taxes and healthcare costs.

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And ACA subsidies depend upon income correct?  Not spending, I think.  So, if I understand you, maybe I could pay off the mortgage, and then not take any income and get big ACA subsidies.  Hmmm.  I couldn't find a ACA subsidy calculator that looked correct, so I'll just look at the max possible saved -- Let's say I made $0 next year and lived off cash.  Maybe I would save the full $16.8k in ACA subsidies -- I don't know.  But the opportunity cost of not taking max 0% long term capital gains is already $89250* 15% = $13300 or so, and I feel I might be missing something else too ... like high taxes to liberate the money later at age 62 or something.  Thank you for making me think about this trade off ... I'm unsure if I understand all the factors here to know if it would be good.

Be aware that the 0% capital gains rate isn't really 0% as long as you're buying ACA insurance. The phase-out of the subsidies acts as a separate tax on top of your normal tax brackets, and this "tax" can exceed 15% at certain income levels. There are some definite sweet spots/cliffs in there, such as 138% of the poverty level (for Medicaid) and 200% of the poverty level (where the silver plans magically get their out-of-pocket costs reduced to better than gold plans, for the regular silver premium). Looks like Colorado has a program for kids under 260% of the poverty level with no premium but co-pays for services. The kids would go on that instead of your private plan if you're under that line. As a family of five the poverty level is roughly $35k for next year. With your existing cash stash and positions in taxable accounts where some of your withdrawal (the cost basis) doesn't count as income, you may find it fairly easy to stay below one of these sweet spots for several years, if not until your kids leave your tax household.

abliviax

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Re: I think I'm FIRED ... advice or ideas?
« Reply #8 on: December 07, 2023, 07:29:20 PM »
Thanks @reeshau , @seattlecyclone , @MDM

Seems like some things to look into to set my desired income level ... 138% or 200% or 260% of $35k being a few possible points to target income.  Longterm tax planning seems like something to research...

lhamo

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Re: I think I'm FIRED ... advice or ideas?
« Reply #9 on: December 08, 2023, 12:19:41 PM »
One of the most useful tools I have found for planning Roth conversions is the Bogleheads Retiree Portfolio Model -- the spreadsheet is a bit complex/daunting, but once you figure out how it works and get most of your core data in it is pretty easy to see how conversions of different amounts will likely impact tax brackets and overall taxes paid over time.

Info and link to spreadsheet here:

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

abliviax

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Re: I think I'm FIRED ... advice or ideas?
« Reply #10 on: December 12, 2023, 02:58:56 PM »
@lhamo Thanks! - it does look like a lot to startup.  I will have to try soon.

@reeshau OR Anyone else:    I'm trying to use the Colorado market calculator, and it seems wrong.  More cost for lower income in many cases.  This doesn't seem to match the subsidies that I've researched:
https://planfinder.connectforhealthco.com/

Estimated Income   Estimated Monthly   Estimated Annual CostCheapest Plan Name
$100,000.00     $0.01     $14,200.00    Elevate Health Plans Bronze HDHP
$90,000.00     $611.83$21,542.00Elevate Health Plans Bronze HDHP
$34,000.00     $1,243.02     $17,116.00    Elevate Health Plans Colorado Option Silver Enhanced Off Exchange
$1,000.00     $1,121.83     $27,662.00    Elevate Health Plans Bronze HDHP
$200,000.00     $959.83     $25,718.00    

I totally don't understand this, and unsure about "optimizing" income level vs ACA subsidy.  This "official" calculator seems bogus....


@reeshau Do you often end up aiming for a particular "cliff" - i.e. 260% of povery income or anything like that?
« Last Edit: December 12, 2023, 03:28:55 PM by abliviax »

reeshau

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Re: I think I'm FIRED ... advice or ideas?
« Reply #11 on: December 12, 2023, 03:54:24 PM »

@reeshau Do you often end up aiming for a particular "cliff" - i.e. 260% of povery income or anything like that?

My first year (2020) I did.  But since the cliff has been temporarily suspended, I literally just look to balance my taxes to be $0, given some amount of Roth conversion.  My income is pretty high from a multiples of poverty standpoint, while my tax bill is low because it is almost all LTCG.

Be aware that there is a special case with pricing a silver plan.  I see a bronze plan priced in your example, and a silver. (And, off exchange, as well!)  I have generally picked gold plans, but that's particular to our circumstances.  We definitely have some health care usage.

Even given a particular plan, you can have various configurations of it, balancing deductible, co-pays, out of pocket, and monthly premium.

abliviax

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Re: I think I'm FIRED ... advice or ideas?
« Reply #12 on: December 12, 2023, 11:22:39 PM »
@reeshau Gotcha.  I might end up with a somewhat similar situation.  Thanks for the answers, I'm in over my head at the moment.

I have seen the special pricing for silver.  The silver are still more expensive ... I'm mostly trying to get past understanding the apparent lack of a subsidy according to their official calculator ... more income lower cost in most cases ... totally puzzled.

https://planfinder.connectforhealthco.com/ I just don't understand.

seattlecyclone

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Re: I think I'm FIRED ... advice or ideas?
« Reply #13 on: December 13, 2023, 02:48:57 PM »
@lhamo Thanks! - it does look like a lot to startup.  I will have to try soon.

@reeshau OR Anyone else:    I'm trying to use the Colorado market calculator, and it seems wrong.  More cost for lower income in many cases.  This doesn't seem to match the subsidies that I've researched:
https://planfinder.connectforhealthco.com/

Estimated Income   Estimated Monthly   Estimated Annual CostCheapest Plan Name
$100,000.00     $0.01     $14,200.00    Elevate Health Plans Bronze HDHP
$90,000.00     $611.83$21,542.00Elevate Health Plans Bronze HDHP
$34,000.00     $1,243.02     $17,116.00    Elevate Health Plans Colorado Option Silver Enhanced Off Exchange
$1,000.00     $1,121.83     $27,662.00    Elevate Health Plans Bronze HDHP
$200,000.00     $959.83     $25,718.00    

I totally don't understand this, and unsure about "optimizing" income level vs ACA subsidy.  This "official" calculator seems bogus....


@reeshau Do you often end up aiming for a particular "cliff" - i.e. 260% of povery income or anything like that?


I think I can take a stab at this.

Your state has a program for kids up to 260% of the poverty level. That amount is between your $90k and $100k lines. So at $100k your whole family would be covered by the private plan through the exchange, while at $90k only you and your spouse would be on that coverage.

The way the subsidies work is by comparing the cost of the second-cheapest silver plan in your area to a percentage of your income. The difference between these two numbers is your subsidy that you can then apply to any plan. At $100k the formula looks at the cost to cover five people on the second-cheapest silver plan, while at $90k it only looks at the cost to cover two people. Your after-subsidy cost for that plan would be slightly higher at $100k, but the actual subsidy is higher too since it has to cover more people. However you're not looking at the second-cheapest silver plan. You're looking at an even cheaper bronze plan. What you're seeing is that the five-person subsidy at $100k is higher than the cost to put your whole family on that bronze plan, but the two-person subsidy at $90k isn't high enough to cover that bronze plan for you and your spouse.

Meanwhile at $1,000 income you're below the poverty level and thus ineligible for premium tax credits, so you're seeing the full sticker price of that bronze plan. That's what you'd pay if you have that low of an income and turn down Medicaid for whatever reason.

Now for the silver plan you need to purchase an on-exchange plan to get any subsidies at all, but I believe $34k is just a hair under the five-person poverty level for next year anyway so you're probably seeing the full price of that plan as well.

abliviax

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Re: I think I'm FIRED ... advice or ideas?
« Reply #14 on: December 14, 2023, 12:23:27 PM »
Thanks a lot @seattlecyclone , I was guessing it might be something like this, but I didn't yet understand the cutoffs and programs well enough and couldn't put it into intelligible words like you @seattlecyclone have.

--------

Update:  After a surprise, I now have a plan.

Since last post, I received in the mail Child Health Care memberships in the state CHP+ plan!!?! 

I thought I had only applied to see what I was eligible for and then I would have to select which health plans, providers, and premiums, etc. NOPE!  My kid(s) are already enrolled in Kaiser Permanente CHP+ (pending some bureaucracy for 2 of them -- that I don't understand) and they sent one of the kids medical insurance cards already!?! ...

CHP+ is the state health program for kids that don't qualify for medicare.  I called to ask what the premiums were because the website says costs vary based on income and couldn't find any information.  Income only affects co-pays.  The premiums are covered.  Also, my kids are not eligible for coverage through the normal CO health market-place or maybe its at least not at a reduced price -- I do think I could cancel and go completely private obviously.

So, if I keep income under 260% * FPL (=$91364 for fam of 5) then I can get CHP+ for 3 kids for no premiums (only copays) and insurance for myself and wife for around $4000/yr.

I'm surprised.  I'm feeling a bit guilty even ... but I had intended to take about $80-90k in income anyways and I'm not inclined to turn down this government program when so few others have benefitted me.  In self-justification, I even went to look up how much I've contributed to social security over the last 25 years -- as I'm not planning on getting anything from that.

I'm slightly unsure about CHP+ through the Kasier P HMO, but I think it will be ok.  It is what I had for years.

So, that's the plan at least for 2024.
« Last Edit: December 14, 2023, 12:27:05 PM by abliviax »

seattlecyclone

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Re: I think I'm FIRED ... advice or ideas?
« Reply #15 on: December 14, 2023, 12:46:31 PM »

CHP+ is the state health program for kids that don't qualify for medicare.  I called to ask what the premiums were because the website says costs vary based on income and couldn't find any information.  Income only affects co-pays.  The premiums are covered.  Also, my kids are not eligible for coverage through the normal CO health market-place or maybe its at least not at a reduced price -- I do think I could cancel and go completely private obviously.

Right. The premium tax credits for Marketplace coverage are meant as sort of a "last resort" thing. If you have other suitable coverage offered through an employer/Medicaid/CHP+/etc. the federal government isn't going to subsidize your decision to turn that coverage down and go with a Marketplace plan instead.

If you do for whatever reason want to skip the CHP+ coverage the only way to get subsidies for your kids would be to convince the state you're no longer eligible for that program. Only once the CHP+ coverage is no longer offered to your kids will premium tax credits be available to offset the cost of their private coverage.

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I'm surprised.  I'm feeling a bit guilty even ... but I had intended to take about $80-90k in income anyways and I'm not inclined to turn down this government program when so few others have benefitted me.  In self-justification, I even went to look up how much I've contributed to social security over the last 25 years -- as I'm not planning on getting anything from that.

Yeah there's a lot of second-guessing as to whether such programs are really "meant for" FIRE-type folks who have high assets but low incomes. We probably weren't who they had in mind with the program, no. At the same time they could have added an asset test and decided not to. Furthermore if you don't have ethical qualms with the income-based premium tax credits when you have higher assets, it seems illogical to assume that the designers of this program would have expected you to turn it down and pay significantly more for health insurance at your lower income than you would owe at a slightly higher income.