Medicare for overseas retirees

As I mentioned in an earlier post about Social security for overseas retirees, US citizens who retire abroad are fully eligible for receiving Social security payments. The situation with Medicare, however, is quite different.

Just as in the case of Social security, the rules regarding Medicare eligibility and benefits are subject to change in the coming years. It is important to understand the current regulations, however.

First, some basics about Medicare:

  • Medicare is a Federal health insurance program for those people who are 65+ years of age, or have certain disabilities. You qualify for Medicare if you are 65 years of age and if you are eligible for Social Security retirement benefits.
  • Even if you opt for Social security payments later than age 65, you are still eligible for Medicare at 65. If you opt for early Social security benefits before the age of 65, you will not be eligible for Medicare benefits until you are 65.
  • To be eligible for Medicare, you must be a legal US resident. You do not have to be a US citizen.
  • Medicare comes in three parts:
    • Part A (Hospital Insurance) covers hospital stays.
    • Part B (Medical Insurance) covers doctor bills and outpatient care.
    • Part D (Prescription Drug Coverage) covers prescription drugs
  • Part A is free (i.e. you do not pay any premiums) if you have made at least 10 years of Medicare contributions during your working years.
  • Parts B and D are not free; the amount you pay for these depends on your income at the time, and the level of benefits you choose. It does not depend on how many years you have worked (assuming a minimum of 10). Nor does it depend on your assets.
  • You must enroll for Medicare coverage when you are eligible, i.e., at 65. If you decline Medicare during the initial enrollment period, your premiums for Part B may be increased by 10% for every 12 month period that you did not have Part B. If you have coverage through an employer, you may be eligible for delaying Medicare enrollment. There's a similar rule for Part D as well.
  • To stay enrolled in Medicare you need to continue making premium payments for Part B ($93.50 monthly for 2007, for most people). Normally, Medicare premiums are deducted from your social security payments.
  • In addition to Medicare, many retirees sign up for Medigap supplemental insurance. This is health insurance sold by private insurance companies to fill the “gaps” in Medicare Plan coverage.

Here are some specifics about Medicare for those who plan to live or travel outside the US:

  • Medicare benefits are available only if you live in the US. If you currently have Medicare and you move outside the US, medical expenses outside the US will not be covered by Medicare.
  • If and when you return to the US, Medicare Part A will be available to you. For Part B coverage, you have the option to continue paying your monthly premium while living outside the US. Since Medicare benefits are only available inside the US, it is strange to have to continue to pay a monthly premium for a service not available to you.
  • If you drop your Part B coverage, then return to the US, you will be required to re-enroll and pay a premium that is 10% higher for each 12-month period that you did not have coverage. This is just as if you had declined coverage when it was first available to you.
  • If you are re-enrolling for Part B, you may only do so from January through March each year. Coverage will not resume until July of that year.

So what other options are available for overseas retirees besides Medicare?

  • The Social Security Administration recommends that those on Medicare who wish to travel abroad consider getting short-term coverage designed for travelers. There are several companies that provide such coverage, but most companies will not cover pre-existing medical conditions. Such coverage will only help for short trips abroad, not for retirees.
  • For those who travel outside the US frequently, Medigap (Medicare Supplement) provides foreign coverage, with no extra cost for eligible treatments. These are reimbursement plans, so you have to pay the bill first and then submit it for compensation. They only cover the first 60 days you're outside the US. These plans usually also have a dollar cap per trip.
  • This leaves long-term retirees overseas with only three options: buy private coverage individually or through a group, pay into the government-sponsored system or buy a private policy in the country where you live, or go without coverage.
After years of paying Medicare taxes (1.45% of the paycheck for most workers), overseas retirees gain nothing from Medicare. Not surprisingly, the lack of access to Medicare is a hot-button issue for retirees abroad.

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Early retirement planning with FIRECalc

For those thinking about retiring early, two of the most frequently asked questions are the following:

  • If I retire today with my current savings, how much can I safely withdraw each year?
  • When can I retire with $40,000 yearly income (or another desired amount) if I continue to save at the current rate?
FIRECalc is a simple web calculator that can help you answer these questions. FIRECalc makes one key assumption to answer these questions, namely, that the future can't be all that different from the past.
According to the Wall Street Journal:
To gauge your strategy's likely success, [FIRECalc] looks at investment returns since 1871. But the calculator doesn't use average historical rates of return. Instead, it analyzes what would have happened if you retired in 1871, in 1872, in 1873 and so on. It then calculates how often your strategy would have panned out historically.
In other words, it uses historical data about the US stock and bond markets to calculate your odds of not running out of money during retirement. It also adjusts for inflation automatically, so you can enter figures in today's dollars.
I will use FIRECalc to answer the two key early retirement questions below, using my own data as posted in my last Net Worth update.
If I retire today with my current savings, how much can I safely withdraw each year?
There are two versions of FIRECalc: standard and advanced. You can answer this question using FIRECalc Standard.
I plugged the following figures into FIRECalc:
  • Retirement savings: $425,736 (the portion of our Net Worth intended for retirement)
  • Asset allocation: 75% equities, 25% fixed income (our target asset allocation)
  • Number of estimated years in retirement: 60 (this assumes that we will live for 60 more years from now)
  • Investing fees: 0.5% (a rough estimate of the average expense ratio for our investments)
You can select a desired success rate, which is the chance that you will not run out of money.
For 95% success rate, I get the following result:
A withdrawal of $14,589 (3.43% of your starting portfolio) provided a success rate of 96.1% (76 total cycles, of which 3 failed).
And for 99% success rate:
A withdrawal of $13,547 (3.18% of your starting portfolio) provided a success rate of 100.0% (76 total cycles, of which 0 failed).
FIRECalc also provides the following chart of my success rate for different yearly withdrawal amounts.

For 100% success, I can withdraw no more than $13,547 (inflation-adjusted) each year. Clearly, my chances of retiring with my current savings are pretty low.
Now for the second question:
When can I retire with $40,000 yearly income if I continue to save at the current rate?
To answer this question, you need FIRECalc Advanced, which provides more options than the standard version.
I used the following figures:
  • Desired yearly income: $40,000 (in current dollars)
  • Retirement savings: $425,736 (the portion of our Net Worth intended for retirement)
  • Asset allocation: 75% equities, 25% fixed income (our target asset allocation)
  • Number of estimated years in retirement: 60 (this assumes that we will live for 60 more years from when we retire)
  • Investing fees: 0.5% (a rough estimate of the average expense ratio for our investments)
  • Total yearly contributions to our retirement savings: $53,750 (based on last year's data)
I have ignored Social security for simplicity, but FIRECalc does allow you to enter estimates for social security payments and other expected sources of retirement money, such as an inheritance.
I selected the option: "What happens if you retire in any of several years between now and 10 years from now?"
FIRECalc produces the following charts. The first one shows my success rate for each target retirement year. The second chart shows three different curves showing my best-case, average and worst-case (from top to bottom) balance at the end of retirement, for each target retirement year.

Based on the above, if we continue to save at the current rates, we have a 100% chance of retiring in 2016 with a $40,000 annual income (in current dollars).
FIRECalc does have some limitations:
  • It ignores the tax status of your accounts, i.e. whether it is taxable or non-taxable. To be on the safe side, I assume that the expected income that I enter in FIRECalc is the pre-tax amount.
  • FIRECalc only includes data for the US market. Considering that global markets are increasingly interconnected, this does not appear to be a big limitation. The data for US markets include the great depression, two world wars and periods of severe inflation, so it represents a wide variety of investment environments.
FIRECalc (both standard and advanced versions) is free for use, but a small donation is recommended.
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Book review: Cashing in on the American Dream - How to retire at 35

Cashing in on the American Dream: How to Retire at 35 by Paul Terhorst is one of the most well-known books on early retirement. I have heard about this book many times, especially on the wonderful Early Retirement forums, but never had chance to read the book until now.

This book was written in 1988 and is out-of-print, so the best way to get a copy is at the library.

Terhorst is a former accountant who retired at 35 in 1985 with a modest amount in savings and still continues to stay retired. He and wife Vicki are probably the best-known early retirees, and maintain a website that they still keep up-to-date with their latest adventures.

Terhorst's book is in many ways reminiscent of the book Your Money or Your Life, published later in 1992, which I have mentioned before. Both books emphasize frugal living, and have a healthy disregard for the traditional corporate work ethic.

Of the two books, Cashing in on the American Dream is more readable and less preachy, and contains more practical advice. Keep in mind, however, that much of the financial advice in this book is quite unconventional, such as not owning a home or cars during retirement. Like Your Money of Your Life, which recommended treasury bonds, this book also advocates risk-free investments for retirement savings. The book recommends building a ladder of 1-year CDs. Terhorst's website says that they have now switched partly to low-cost index funds after CD yields dropped.

This book was especially interesting to me because of its emphasis on retiring abroad. Terhorst and wife initially retired to Argentina and later lived in many low-cost countries during their retirement, including Mexico, Brazil, Spain, Yugoslavia and Thailand.

A nice feature of this book is a summary given at the end of the book, which lists a series of short, memorable "rules" described in more detail in earlier chapters. I have listed some that appealed to me below, with some added commentary.

About work
  • Look for meaning in yourself, not in your job. This is probably the most important advice in this book.
  • Take the two-year test ("If you had only two more years to live, would you continue to work where you work?")
  • Enjoy your career and then move on (or, "Make a clean break" from work when you retire).
About finances
  • You need $400,000-$500,000 of net worth to retire, including home equity. You need more if you have kids, about $4000 per child per year. Note that these are 1988 figures. (According to the inflation calculator, prices have increased about 75% from 1988 to 2007).
  • Turn hard assets into Cash: Convert home equity and other assets to cash.
  • Live on $50 a day. This advice is repeated in the book many times. The $50 figure, originally from 1988, is still achievable, according to the website, in many places in the world.
  • Cut down your infrastructure: Move to a low-cost area, and sell your vehicles.
  • Spend on yourself, not on your assets.
About retiring in the US
  • Go south (where it is cheaper)
  • Live where the jobs aren't. This is based on the observation that places with lots of available jobs tend to be expensive to live in.
  • Live like a student. This advice will make sense to anyone who, like me, spent many years in grad school with little income.
About retiring abroad
  • Keep calm; you can always return to the United states.
  • Live like a resident, not like a tourist.
  • Rent, don't buy.
  • Choose hotels that offer what you need, and nothing more.
About initial retirement years
  • Manage the change: Avoid too many changes at once.
  • Make a to-do list before retiring.
  • Avoid major purchases for two years.
Overall, this book is a delightful, easy read. Terhorst's website says that he has no plans to update the book ("the market for this kind of book is still small"), which is a pity.