Health care: do we care?

We are all humans, and those who get sick need a health care. Health care in US is terribly expensive. One of the most expensive across the entire world. This is why health insurance is an important condition for doctor’s visit. Recently, there were plenty of discussions about Affordable Care Act (ACA, also known as ObamaCare) and American Health Care Act (AHCA or TrumpCare) which may replace ACA. It is important to know, that both initiatives are about money, not about insurance or health care itself. At this time, I would like to leave AHCA aside, since it is still under discussion by Congress. Meantime, ACA has been under severe scrutiny by republicans for a while. Does “repeal and replace” slogan sound familiar? I did not use any provisions from ACA, since I use employer’s insurance. But I wanted to build some opinion about ObamaCare, to share this info with those who need it now and to compare the upcoming ACA replacement with ObamaCare later.

In order to collect the data, I used Covered California for California state and for other states (in particular, Oregon and Nevada). I was looking for insurance premium as the most important metric, since these are money we pay every month for insurance, no matter what. There are two opposite sides: minimal insurance premium, which often comes with high deductible, and small (or non-existent) deductible which obviously comes with higher premium. Also, I consider Health Maintenance Organization or HMO insurance (it happens to be Kaiser in both California and Oregon along with Health Plan of Nevada and Prominence in Nevada), opposite to Preferred Provider Organization or PPO (which comes from insurance such as Blue Shield in California, Athem Blue Cross in Nevada, BridgeSpan and Moda in Oregon).

First of all, I reviewed the details about available health insurance at San Jose, CA. I considered the age of insured individual between 40 and 60, and the income varying from $30K to $40K per year. Why did I choose this range? Because if you are not super rich, and worked as an employee at corporation for extended period (opposite to your own business), then most likely you end up with this amount of income at the voluntary retirement event. But if your income fall below 138% of the Federal Poverty Level (FPL), then most likely you can qualify for traditional Medicaid program or its expanded version. Some states signed up for Medicaid expansion, which cover people too poor to buy insurance, but not eligible for traditional Medicaid. Currently, 31 states including AZ, CA, CO, MD, MA, NV, NY, OR, PA, WA as well as DC expanded Medicaid.

In California, in order to be eligible for Medical (State’s Medicaid program providing free or reduced cost health care), you have to be between 19 and 64 years old, with adjusted annual gross income at or below $16K for an individual and $22K for a couple. Also, people older than 65 can qualify, if they are blind or disable. In addition to that, the qualification includes asset test. Current income limit is $1188 per month for an individual and $1603 for a couple. Asset limit is $2000 for an individual, or $3000 for a couple. The following assets are excluded: a primary home, one vehicle, household items, belongings, life insurance policies and the balance of pension funds, IRA and certain annuities. One of the important ACA provisions is the expansion of Medical eligibility to pretty much all low income individuals with the income at or below 138% of FPL. Medical is covering pretty much all essential services, but pays doctors lower rates and by that reason not all doctors accept Medical. Apparently, those who does not qualify for Medical and too young to qualify for Medicare, must be either insured through the employer or buy ACA insurance at the market exchange.

No surprise, in most cases the premium price is rising with the age: the greatest increase appear to be for Blue Shield Gold plan with no deductible: about 3% each year, with total around 30% in ten years from 50 to 60, for person who earn $30K per year. There are fewer subsidies available for those earning $40K per year, and Blue Shield Gold premium increase is less significant: about 26% per ten years. Which clearly indicates, that subsidies are shrinking with the age, especially for those between 50 and 60 years old. Surprisingly, Kaiser insurance premium actually drops over the years with Bronze plan, and remain almost the same for Gold plan with no deductible. The premium increase with age for Bronze PPO plan and high deductible is almost invisible: a few percents over ten years.

It is clear from diagrams above, that annual income affects the amount of insurance premium. According to the current ACA rules, people with lower income receive more subsidies, than people with higher income. But how much is the difference? I found, that the premium cost from various providers is changing dramatically with the income, with the starting points and rising rates quite different across the plans and providers. Extremely sharp growth observed for Kaiser Bronze plan from $53/mo for $30K income to $169/mo for $40K income. Meantime, the cost of Kaiser Gold and both PPO plans with no deductible doing the opposite, i.e. rising sharply for lower income below $30K and less significant for income above $30K.

Another question I had in mind: how the state and metro area affects the insurance premium? For that purpose, I verified at least four different metro areas: San Jose, CA, San Diego, CA, Portland, OR, Reno, NV. Surprisingly, the cost of insurance does not always follow the cost of living, as the highest cost of living is obviously in San Jose, CA followed by San Diego, Portland and Reno. In fact, the highest cost of HMO Bronze plan is observed in San Diego and Reno, while the highest cost of HMO Gold plan appears to be in Reno, NV. The highest cost for all HMO plans is in Reno, NV, while the cost of PPO plans is higher in California. For three out of four plans, you can buy the least expensive insurance in Portland, OR.

We can see a very similar trend for the person with annual income $40K (compared to $30K) at the same age of 50, except may be HMO Bronze plan: with the annual income on the rise, the least expensive plans are clearly in Portland, OR, while the highest cost is split between San Jose, San Diego and Reno.

In this article, just four metro areas has been discussed. There are too many data to compare across the entire country. But another observation easy to make is that offerings on the ACA market exchange is dramatically different from one state to another. While in major metro areas of California and Oregon there is a choice of up to 30 different plans, the areas like Las Vegas, NV, Phoenix, AZ does not have much choice at all, beyond a few unattractive HMO plans. Even for some populated areas of California, for example San Luis Obispo the choice is still limited by 10 PPO plans, represented by Blue Shield of California and Anthem Blue Cross. It means that you really must live in a major metro area of selective states, in order to obtain reasonable coverage under ACA.

Apparently, all discussed above is going to change as soon as next year in one way or other, because of the AHCA being discussed in Washington DC and various alternatives proposed at the states level: Healthy California Act, New York Medicare for All initiative, Nevada’s Medicaid for All healthcare model. While all these initiatives has a significant support in respective states, it is still unclear how to fund them, taking into account the plans of Trump’s administration to cut Medicaid funds and eliminate ObamaCare provisions (including Medicaid expansion). But it is clear that some healthcare system will be in place in US for coming years, and it would be interesting to compare the above data to the alternative solution, which suppose to be better than the previous one.

Finally, I wanted to share this excellent map, created by Health Care Cost Institute in 2015. Since that time, obviously the cost went up in most states, but according to my observations the health care cost distribution across different states remain the same. According to the map, the lowest state to national average price ratio is in the states of Nevada, Arizona, Florida and Tennessee, followed by California and Oregon (which is apparently one of the most expensive across all states). But please keep in mind, that these data account for the total cost across all insurance plans including those sponsored by employer (not just insurance premium for ACA), which explains the difference with the data published above.

How to survive without a job?

Loosing a job can be a frustrating experience. Especially in Unites States. There are plenty of useful (and not so useful) articles on Internet, how to deal with this difficult situation. But my mission here is different. In this article, I would like to focus on financial aspect of the problem. Did you ever ask yourself: how much would I need to survive without a job? For how long? And what do I need to do, in order to have these funds readily available? If you did, then you are not alone.

It may sound as a surprise, but yes it is always possible to put aside some money to feel more secure about loosing a job. However, there is no free ride: in order to prepare for this unfortunate event, we need to earn more money. More money is always better. The federal poverty level (FPL) is $11,880 for a single person and $16,020 for a couple in year 2017. I bet you will not be able to put aside much money, if you earn less than 4X FPL. But for everyone earning more than that, i.e. $47,550 as a single, or $64,100 for a couple the opportunity exists. More money is better, however those with higher income pay more tax.

In other article, I provided some numbers for minimum income required to live in different metro areas in US: specifically, you would need anywhere from $17K to $26K per year to barely survive as a single person. For a couple with 2 kids, the numbers are higher but the range is smaller: $41K to $54K. Basically, anyone can put aside the difference between after tax money earned during the year and the minimum income stated above, which depends on each family situation and location. But obviously, in a real life you would need more than bare minimum to live.

According to my observation, a low cost of living area (LCA) like Boise, ID gives an opportunity for a single person to live well on $30K per year, while $50K per year would be required for couple. But in a high cost of living area (HCA), such as Walnut Creek, CA for example, these numbers are obviously higher, reaching $40K (for single) and $64K (for couple). In a chart below, you can see how much money an average person can put aside, based on family size and the cost of living in his or her area. The numbers are calculated taking into account federal and state tax for Idaho and California respectively. As you can see, those living in a low cost area and earning $60K to $80K annually can save up to $30K each year. For people with higher income, the number grows linearly and may reach as much as $120K per year, even if they live in a high cost area.

These are after tax money. I intentionally use this simple example to demonstrate, what kind of numbers are reasonable here. But in a real life, most people contribute before tax money into 401K plan. In this case, $18K per year (or $24K per year if you are over 50) can be put aside immediately. This may add $6K to $8K additional savings per year for a single person, and $12K to $16K for a couple. However, 401K money will be available after 59.5 and a tax still must be paid when funds are withdrawn.

But how much money do we need, to live without a job for a while? The obvious answer would be just to combine the cost of living over the time. For example if you need $30K per year, then $150K must be readily available to live for 5 years. But this solution is too simple. First, there is an inflation which reduces the buying power of our money over the time. Second, we may not want just to run out of money at some time in the future. Actually, much better choice would be to invest money and live on interest or dividends. In this way, there is almost no risk to be left without money. Also, you may want to leave some heritage behind for the family members. Four percent rule is a great rule to follow in this case.

According to the rule, 4% of the total assets can be safely withdrawn each year, without significant damage to the principal. It is assumed, in any market condition 4% return on investment is possible. With this rule, it is easy to see that in a low cost area (LCA) where a single person need $30K and a couple need $50K per year, the total assets of $750K for single and $1250K for a couple are required. According to the chart below, the couple making greater than $120K annually may be able to put aside $1250K during 31 years. From the other side, for a single person the magic number of $750K can be reached after 26 years, even if the annual gross income is around $80K. With higher income, the number of years can be reduced by more than half in extreme cases at the high end of income range. Also, as you may noticed higher income does not directly translate into substantially shorter time for those making more than $140K per year.

In a high cost of living area (HCA), a couple need to earn at least $160K annually, in order to reduce the number of years to reasonable 29 years. For single person, there are better opportunities: even $100K of annual gross income would be enough to collect $1M in 31 years. Similar to the low cost area, further gross income increase would reduce the number of years by more than half. For example, those with a very high income around $200K can put aside $1M after just 10 years of career. Clearly, higher gross income is better. But as I already mentioned above, income higher than $180K would not cause a dramatic reduction in the number of years, required to save $1M for single or $1.6M for couple. The time is at least 2X longer for couples, which seems reasonable: it is much better when both family members are working, then the numbers will get closer or even outperform the numbers for single.

Investment choices: how to become homeless?

Investment is an extremely popular topic discussed by many bloggers. It is vitally important to manage financial assets efficiently, since any mistake is terribly expensive and may eventually lead to complete loss of money, loss of home and pretty much everything we have in our lives. In this article, I wanted to share my opinion based on the decades of experience I have managing personal investments for employer sponsored 401K plan. We will discuss different types of investment and how to combine them, to earn money and avoid poverty.

Stock is an ownership interest in corporation, which actually issue that stock. Individual investor can buy a stock of any public company, traded on the financial market. Stock has always been considered as a risky investment: it may cause a significant loss of money, as it tend to drop by various reasons. Even large corporations are not protected: for example, Bank of America’s stock (BAC) lost almost 100% of its value in 2009 during the recent recession, locked in a slow and painful recovery since that time. But lately, stock market gains were very impressive. Also, some companies pay dividends to their shareholder, which add a value to the stock. Therefore, it is better to buy stock market funds, rather than individual company’s stock. Total US stock market funds (such as VTI or VSAX) obviously experienced more than 50% drop during the economy downturns, but they never lost 100% of the value and always recovered in a few years. But it is not exactly applicable to international stock market funds like VEU or VXUS: this type of investment is difficult to manage, the fund may lose more than 50% of its value and historically does not yield performance similar to US stock market. Still, it can be a part of portfolio in order to mitigate risks associated with US market. It is attractive to own stock funds, if you are looking for 5-6 years term investment: during that time, the stock will likely recover even in the worst scenario. Typically, it is advised to have about 60% of the total assets in stock funds when you are younger than 35 and to bring stock portfolio down to 30% by retirement age.

By purchasing a bond, you lend a specific amount of money to the issuer of that bond. In return to your money, issuer will pay an interest to maturity and in addition to that will return a bond value by specific date. Bonds can be issued by corporations or government agencies. There are bond funds available on the marker, such as BND which hold primarily US Treasury and corporate bonds, IEI with a focus on US Treasury bonds only, and MUB managing various municipal bonds. The aggregate bond funds such as AGG for example, combine multiple types of bonds. Bonds are a safer investment as they never drop by 50% as stock do. But the return is low. Still, bonds can be an important part of conservative portfolio. It is typically advised to hold from 20% to 40% of the total assets in bonds. TIPS are also bonds, but considered as a different type of investment with even less risk than bonds, because they hold US Treasury issued inflation protected securities. The US Treasury notes has a fixed return, combined with a variable rate adjusted with the inflation. Lately, the variable part was almost non-existent because of the historically low interest rate. But it is changing now. To protect the portfolio from rapid changes in market conditions, it is better to include 10% to 20% of the TIP into the diversified portfolio.

The other type of investment is Real Estate Investment Trust (REIT). The trust represents the company, which own income producing real estate. Similar to stock funds, there are domestic (VNQ) or international (VNQI) funds. In fact, they both are ETF i.e. Exchange Transfer Funds. ETF manage assets like an index fund, which means it is traded on stock exchange similar to stock. ETF has lower fees, compared to funds. But with respect to real estate, the performance is variable and the value can drop not as much as individual stock, which is still less than most stock funds. For example, VNQ experienced 75% loss in year 2009 during one of the worst real estate crisis in history. By contrast, VNQI is more stable but does not produce much return since real estate market recovery. For portfolio diversification purpose, it is recommended to have at least 10% assets in REIT.

The remaining type of investment are commodities. These are the most volatile and expensive investments, and because of that reason it is normally recommended to hold no more than 5% for younger generation of investors, and eliminate it as you get closer to the retirement. DBC is one of the well known commodity tracking funds. Currently, it appears as an attractive low price entry point. However, return may not be great at least in the nearest future, due to the strong dollar and striving economy in US. There are funds for certain types of commodity, such as gold shares GLD or silver trust SLV. They are relatively expensive to hold, though less expensive than DBC. In addition to commodities, it is worth to mention foreign currencies as another investment choice. Although even more volatile than commodities, currency trading may provide a safe heaven for the times when US dollar is loosing its strength. There is a popular digital or virtual currency Bitcoin. Recently, it was doing very well: the value jumped more than 100 times during the recent few years. Eventually, virtual currency may replace US dollar in all domestic monetary transactions.

In order to have a well balanced portfolio, it is important that each type of investment is included as discussed above (may be except for commodities and foreign currencies). But actually there is one excellent Vanguard fund which successfully manage the entire portfolio for you: VWINX. This fund has an exceptional track record (even during the latest downturn, it lost no more than 30% of its value) and diversified by holding both US domestic and foreign stocks, bonds and some other investments. There are other total market funds available from Fidelity or Schwab for example, but Vanguard has the lowest fees.

Let us consider the typical portfolio for mid-age investor, assuming $10K has been initially invested in year 2007: 40% US Stock (VTI), 10% foreign stock (VEU), 40% bond (AGG), 5% REIT (VNQ), 5% commodities (GLD). The graph to demonstrate a portfolio change during the last 10 years is shown below (red curve). Apparently, investor lost some money during the recession years. But then it nicely recovered, grown up to $13478 by the beginning of year 2017 (with the total return more than 25%). Then, let us consider another portfolio with domestic and foreign stock completely eliminated. The remaining investments include 60% bond (AGG), 20% REIT (VNQ) and 20% commodities (GLD). The blue curve on the graph associated with this portfolio clearly show that investor did not lose much during the recession, and had a return well above the traditional portfolio (red curve) up to year 2014. Solid stock gain made traditional portfolio superior after that time. Still, the portfolio without stock end up with 18% total return by the year 2017.

The graph clearly show that stock missing within the portfolio is likely to diminish the return on investment over the long term. But from other side, stocks tend to lose their value more than other types of investments during certain events like a recession. I typically prefer to stay with bonds, REIT and commodities within the portfolio, combined with some individual stocks rather than total market fund (like VTI). Another important consideration is the entry point: how much is the fund or stock value at the time, when initial investment is made. While it does not make much difference for bonds, the stock value relative to the previous time may give some guidance. But the history does not always repeat itself. During the last year, my portfolio included 20% individual US stock (BAC, C), 20% foreign stock (VTRIX, VWO), 15% bond (BND), 20% global REIT (VNQI, WPS) and 25% commodities (GLDSLV).


Credit Cards: evil or not?

Cash is a king. I do hear these words all the time. I bet you too. What is so special about the cash? It is dirty, inconvenient. It takes a space in your wallet. Yes, at some gas station like Arco gas is a bit cheaper, if you pay cash. At farmers markets, you can use cash only by obvious reason. Anything else? Yes there is another important reason why so many people hate credit cards: they spend much more using the card. Simply because they do not see the actual money to spend. Moreover, plenty of people have never paid their balance on time. They end up paying outrageous interest fee, and blame the card not habits they developed. The truth is: if you are like me, never buying anything extra in supermarket and paying your entire balance regularly on time then there is not a single reason why cash is any better than credit card. In fact, many credit cards come with generous reward programs. Even debit cards are better than cash, because some of them can be linked to high interest checking account.

Most credit cards pay from 1% to 5% cash back at this time. These are the cards without annual fee: I never apply for a credit card with annual fee. Although cards with annual fee may have better rewards, you are always required to spend a lot of money to take advantage of those rewards. But in fact, 5% is not that small. How much money do you spend using credit card? For example, if you spend $500 each months then $25 come back into your wallet as a reward. And these are your money, no tax or other reduction applied. Unfortunately, 5% cash back cards are rare these days, likely for a specific type of purchase and may come with conditions. For example, Fort Knox Visa Platinum Card pay 5% cash back on gas purchases at the pump, but require credit union membership. PenFed Platinum Rewards Visa Signature is another excellent card, which earn 5X points on gas and 3X on grocery stores. But it still require a credit union membership. Also, the points for this card are not exactly percents of cash back: one point is equal 0.85%, to be precise. There are other cards like Chase Freedom which I use from time to time with rotating categories. In year 2017 this card return 5% cash back on gas during the first quarter, and 5% on groceries during the second quarter. It may be difficult to remember and sign up for these categories, but you get a reward.

With respect to grocery stores, credit cards are not that generous. There are still some cards which return 3% cash back on groceries. Amex Blue Cash claim to do that, but Amex acceptance is limited and rewards can be earned at selective supermarkets only. Visa Signature Cash Rebates Card from Consumers Credit Union, which has a flat 3% cash return for grocery or convenience stores is definitely a better choice. Another important category are travel expenses: airfare, hotels, rental cars may eat up more of your money than anything else. If you like me travel overseas, then it is important to understand the amount of foreign transaction fee the card charge when used abroad. For all travel expenses, I use Barclay Arrival World Mastercard with 2.1% reward rate and 5% redemption bonus. Since it is no longer offered to public, another good example of travel card is PenFed Premium Travel Reward Amex card with 5X points cash back on travel expenses. But again please remember that 5X points are equal to 4.24%. Still, it is a great deal. Also, it worth to mention two other excellent credit cards I have, which pay 2% cash back on each and every purchase: Fidelity Rewards Visa Signature and Citi Double Cash. I use these cards for all purchases, other than gas, groceries and travel. Finally, there is another card which may deserve your attention: BankAmericard Better Balance Rewards. It simply returns $25 per quarter, when you pay more than a minimum balance each month.

A great alternative to cash back rewards credit cards are high interest checking accounts. For a long time, I did have super reward checking account at Provident Credit Union. For up to $25K deposit, expect to receive a generous 2% dividend when the following conditions are satisfied: make purchase of at least $300 each month using the debit or credit card from the same credit union, have a monthly direct deposit or ACH transfer to the account and enroll into electronic documents. Not a bad deal, taking into account that their credit card return 1.5% cash back in addition to the dividend. Another great example is Consumers Credit Union rewards checking account. It is not exactly better, but on my opinion more convenient than Provident’s high interest account and it has a few tiers. You can earn up to 3.09% dividend on up to $10K deposit after completing at least 12 debit card transactions each month, have a direct deposit or ACH debit transaction, enrolled into electronic documents and access account online at least one time in a month. There are higher tiers of this account which can earn up to 4.59% on $20K deposit. It all depends how much money do you have available to leave in the checking account, and how much money do you actually spend: the highest tier require $1K to spend each month using the credit card, which does not work well in my case.

The remaining question you may have after reading this article: which one is better, credit card with cash back or high interest checking account? In fact, they complement each other with a right strategy. Let us assume, that you have a spare $10K and ideally earn 3.09% or $309 per year when all conditions are met. How would you earn the same money with credit card? You need to spend at least $6180 in order to earn cash back $309. To this extent, rewards checking is superior to credit card. But please do not forget: you still need to make certain number of transactions with debit card. The best strategy is to have 12 small transactions per month as required, leaving those of higher amount for credit card in order to accumulate more cash back. This is how credit card can be complimentary to the debit card transactions and high interest checking.

For the second tier with Consumers Credit Union checking account, you have to spend at least $500 each month using their credit card. As I mentioned before, it is a great card for groceries with 3% cash back reward and not so great for gas with 2% cash back reward. But ask yourself: do I spend that much on groceries every month? I do not. However, you earn 3% cash back combined with 3.59% on $15K deposit. What if you are like me, spending around $350 each month on groceries? The remaining $150 will earn 2% cash back for a gas, instead of 5% using other great cards I mentioned above. But according to the table below, it still worth the effort. The second column is a cash reward you can collect just using currently available cash rewards credit cards. The third column clearly demonstrates the advantage of high interest checking account combines with associated cash rewards credit card: in total, it is $43.1 per month compared to $18. In order to compute dividend from checking account, I use the highest tax bracket 34% for ordinary income: you may use lower whatever you have, then the advantage of checking account will be even greater.

How about the highest tier, which require spending $1000 per month using credit card? I bet you never earn $918 per year, even if all other cards return 5% cash back (which is not a case, as discussed above). According to the table below, advantage of checking account with a highest tier is greater than in previous case: $69 per month, compared with $28. The only problem is that not everyone can spend $1K per month using credit card. At least, I find it very problematic for myself. But fortunately there is another strategy, which does not require you to spend that much money but still provide benefit greater than this tier.

The strategy is to use Provident Credit Union high interest checking in combination with Consumers Credit Union high interest checking. In order to earn 2% dividend on $25K deposit at Provident, $300 must be spend using debit or credit card. I would recommend a cash reward credit card from Provident, because it returns 1.5% cash back for all purchases and does not have foreign transaction fee. In this case, you have to use Consumers credit card for groceries and gas to satisfy the second tier requirements, and Provident credit card for all other purchases up to $300. Combined with dividends from both checking accounts, this strategy return $75 per month compared to $24 with just credit card rewards and $69 with the highest tier from Consumers credit union.

The conclusion is simple: cash back credit cards, combined with high interest checking accounts from two credit unions is by far the best combination. Of course, if you have a spare $40K cash to deposit into checking accounts and you can afford to spend $800 each month using credit cards. But if you do, then it would be very difficult to beat this strategy.

Phone for free: why not?

Tired paying big bucks to cellular provider? Have minutes left on your plan every month? You are not alone. Large providers such as Verizon, AT&T are trying to earn money, no matter what do you think. The cost of voice and data plans in US is extremely high, compared to other countries. Fortunately, there are other smaller companies called Mobile Virtual Network Providers (MVNO). They basically resell cellular service provided by big four (Verizon, AT&T, T-Mobile and Sprint) in packages more attractive for someone who does not want to pay outrageous price for tiny usage. But these companies may not stay in business for long, you may not be allowed to use your favorite phone or they can have a customer service virtually non-existent. It is important to know how to navigate this world, quite different from expensive but familiar world of major cellular providers. In this article, I would like to share my personal experience how I end up paying almost nothing for the phone service.

First, it is important to realize what kind of usage you are looking for. Do you spend long time on phone while outside of home or work? How much voice minutes and data traffic do you normally use? Most companies in cellular business want you to talk and browse mobile internet a lot, so they can boost a profit by charging you for unlimited minutes and gigabytes of data. But is this really your habit? I am an active Internet user, but most of the time I spend either at home or work office. And I do not talk much on cell phone either. There is an office or home phone readily available for long talks. By that reason, I decided to look for inexpensive home phone service first. Since the days of land line are almost over, most providers offer VOIP (Voice Over Internet Protocol) phone service in one bundle with cable Internet and TV. I use AT&T UVerse for home Internet connection. Currently, AT&T offer local phone service for $24.95 per month in California. And it does not even include long distance calls. Obviously, I had to look for alternatives. There are plenty of VOIP providers on the market, for example PowerPhone, Lingo. They may offer phone service much less expensive than AT&T, but after a closer look I also discovered disadvantages:

  • VOIP companies still charge a regular fee for their service
  • it takes some effort to install the hardware, if you want to have a traditional home phone
  • smartphone apps are easy to use, but the ability to answer incoming calls may be a challenge for apps with poor smartphone operating system integration
  • ability to call traditional land line or cellular phones typically costs more or not present at all
  • call quality may vary significantly

There are also companies on the market, which use their own proprietary communication protocols and by that reason does not exactly belong to VOIP family (but may be still referred as VOIP because they still use Internet for voice communication): Nettalk, Ooma and Skype are among the most famous. The first two providers offer an adapter, which can be used with normal phone devices and completely eliminates the problem of incoming calls. While Nettalk is charging around $40 per year for unlimited calls in US and Canada, you can use Ooma for free (some tax is still collected). On the downside, initial cost of Ooma hardware is higher than competitors. Although the prices went down and currently you can buy Ooma Telo for less than $100. As regarding Skype, it is quite popular for free Skype-to-Skype video communication, but hard to use to answer incoming calls and on my opinion can not be considered as a home phone alternative. Also, there is an additional cost to call the land line number using Skype.

Besides alternatives I already mentioned, there is another provider: Google Voice. In fact, after doing some research I found that it is much superior to others, by the following reasons:

  • all calls in US and Canada are free, including calls to traditional land line and cellular phones
  • Hangouts app, closely integrated into Android OS, accepts incoming calls in the same way as with traditional cellular providers
  • relatively cheap international calls, just in case if you need it
  • work with one phone number also provided by Google: it can be forwarded to any other phone number
  • supported by large company with virtually unlimited resource
  • Obi phone adapter is available for easy integration with Google Voice (as well other VOIP service): it can work with any traditional phone replacing the land line

Apparently, I found what I was looking for. And I use the setup (Obi + Google Voice) for more than six years. It is a reliable and high quality service, and it costs nothing except the initial one time cost of Obi adapter (which is less than $50). Also, I am using Hangouts app from my smartphone when I am not at home. There is Obi app available from Android and iOS stores, but its functionality is very limited and it is not stable. But I still use it when calling from iPad.

All above is about the home phone service. But what about cellular service? The home phone setup I use allows me to handle the most part of my calls. But for occasional calls and emergency, I also have Lycamobile service. This virtual network operator uses T-Mobile as a cellular service. By that reason, any phone which can work on T-Mobile is good for Lycamobile. They have a few reasonably priced plans available on their web site, however the best and cheapest plan is the one they offer by default: you just need to add money to your balance and this pay-as-you-go service will work automatically. The rates are available at international plan page: basically it is 5 cents per minute for all calls within US. This plan is ideal for very low usage like I have. Again it is possible because of the free home phone setup I have. In total, I pay less than $1 per month for the phone service. Which I consider as a free service. Of course, there are completely free cellular providers currently available on the marker: FreedomPop, RingPlus. But they all have hidden fees and other tricks to charge you: remember, this is a business for profit. So far, I found that setup I use does not have much competition.

Unfortunately, there is still a problem with Lycamobile: it relies on T-Mobile cellular coverage. I found this coverage insufficient in the area where I live. In fact I have very limited T-Mobile coverage at my office. By that reason, in addition to Lycamobile I currently use Verizon prepaid plan. This is a data only plan designed specifically for tablets: you must have a Verizon tablet for the initial setup. Then you can insert Verizon SIM card into any phone working with Verizon and it will cost $20 per month for 2GB of data, which is far from free but still much less than other plans from Verizon or AT&T. And the coverage is excellent. I can turn it off any time I want, and turn it on again.

Happy retirement? Location, location, location …

Thinking about early retirement? There is no way you can afford the cost of living in your area? You are not alone. I live at one of the most expensive areas in the world: San Francisco Bay Area. Although my home is smaller than most homes around and the schools are not that great, I paid enormous amount of money for the mortgage and there is also a property tax attached which I have to pay until I die or move. Property tax is rising, together with home price on the market. Zillow is a great source of data, if you want to see an estimated market price for particular home year after year. Currently, my home price is estimated at $1,169K and in June 2009 it was just $619K. Great news, isn’t it? Yes if I want to sell it. However, if I want to live in this home for a long time, property tax will be growing: I already have to pay around $12K for this year. For comparison, my property tax was $8,380 in year 2009. It is easy to see, that property tax has not grown proportionally to the market home price. Thanks to California’s Proposition 13, assessed value for any home not being sold can not grow more than 2% annually. Therefore, currently market value is $1,169K (according to Zillow, you never know the real market price until you sell it) and county assessed value is $881K. As a result, the property tax is still high enough because I bought this home in year 2007 when selling price was almost $800K.

Can anyone retire in a home with annual property tax $12K which will most likely on a rise in future? It depends on the available liquid assets. The home price can be high, but you can not count on it while living in this home. Using 4 percent rule, it is easy to have a rough estimate how much money you actually need to afford this home based on projected cost of living. Also there is a great calculator available. It is true that most people with ordinary engineering income can not afford it and I am not an exception. What do I do then? Work until the age of 70? Another option is to move to other area with lower cost of living. How to determine which exactly area is the best fit? Well, it depends on your personal preference. For me, these are the most important factors I consider to make an educated choice:

  • where you feel comfortable and enjoy a social life, presence of relatives and friends, favorite activities and shopping
  • climate (I personally enjoy warm weather but not as hot as for example in Arizona)
  • insurance cost (health, home, car)
  • cost of living, including home or rent price
  • property tax, sales tax, income tax

While feeling comfortable is a personal feeling, we can discuss other factors here. There is an excellent living wage calculator, provided by MIT for major metro areas in United States. I found it useful to compare not just absolute cost of living, but the ratio between maximum salary and minimum income required to live for single or married couple in the particular area. The ratio clearly show the areas where you will have the best bang for the buck, while continue to work. But if you are looking for a place to retire, then minimum income is the most important number to consider. Although not guaranteed, the areas with lower ratio and relatively high minimum income may also indicate the future home price increase. It may be good for investment home, but you do not want property tax to be on a steep rise when you retired.  I combined the data for some areas into the table.

Actually I found this table quite interesting. Metro areas are sorted according to the maximum salary. According to the data, living in San Jose may give you better income stream if you manage to get higher compensation. But places like Houston provide even better standard of living for single person. From the other side, areas with minimum income $20K or less are great candidates for retirement location. But I would not completely rely on these numbers: you may need greater than that to live a quality life. But these numbers provide some guidance where to look.

After carefully comparing different states and metro areas, I included a few places into my short list: California, Nevada, Texas and Florida. Is there anything common between these states? Of course, they enjoy warm climate around the year and there is no state income tax in all of them except California. But they are actually quite different in many other aspects. For tax purpose, I found this article quite useful. You can sort the table for property, sales or income tax, as well as for the total tax burden. Obviously, California is #11 in total tax burden, followed by Nevada #34, Texas #41, and Florida #44. However, not all taxes are equal in a retirement. If you are like me, income tax will not be a big deal during the retirement because of low tax bracket. Sales tax is definitely more important, but you always can live a frugal life by limiting the number of items you purchase. We all have to pay property tax, no matter what we do. Even those who rent are paying a property tax indirectly, through the rent. According to the table, the highest property tax burden is in Texas, followed by Florida, California and Nevada.

Another important factor is insurance, in particular health insurance. There is another great article on this subject. Apparently, California has the lowest health insurance rates in my list, followed by Texas, Nevada and Florida. In fact, health insurance cost in Nevada and Florida is quite high, compared to California and Texas. Home insurance is another important criteria for comparison. In Florida, home insurance can be as high as $5K annually in some counties (see the data) due to the potential hurricane damage, and it does not even include flooding insurance cost. In Texas the average cost is running about $1K per year, but can be higher at places like Galveston. I pay $512 annually for home insurance in California, which is apparently the lowest across all states of my choice. The home prices and income tax are terribly high in California, however home prices are quite different across metro areas. In this table, I summarized all findings.

Carefully considering all factors, I vote for metro areas in California with reasonable home prices. In addition to all these factors, I personally like climate in California more than anywhere else in United States. But I know other people may have different opinions. Home prices are sky high in San Francisco Bay Area and surrounding cities only. Around Los Angeles for example, you can find a descent home for half the price in Bay Area. Sacramento enjoy even lower prices. This is not just my opinion: prices in lower cost areas across California are rising, which means more people from high cost areas are moving there. Still, at this time I do see California as the most viable option for retirement.

Homeowner? Pay no tax for 401K


Retirement saving plans such as 401K or IRA are increasingly popular, because they allow contributing money before tax. Especially for those who are in high tax bracket. Also, some employers are matching a part of 401K contribution, which makes it even more attractive while we are at work. However, disappointment comes later at the age of 59.5 when it is a time to withdraw money. At that time, we have to pay tax. The greater amount we save, the greater tax will be. For those like me who live in a state with income tax, the state tax will be added. Is there a way to collect money completely tax free?

There is a great article written by MadFientist, who give some idea how to do that. The idea is to contribute into 401K or traditional IRA during the working years, but after retirement convert small portions of savings from 401K or traditional IRA into Roth IRA each year. The converted amount needs to be carefully calculated, to offset personal exemptions and deductions. In this way, conversion will be tax free. This is in assumption that you retire before the age of 59.5 and you can not withdraw money from 401K or traditional IRA directly without penalty. Money are available tax free from Roth IRA at the age of 59.5.

In a reality, this excellent idea works for married couples rather than singles. I combined all 2016 exemptions and deductions any person can always claim in a typical situation in the table. I assume the person lives in California: other states may have different numbers and some states does not have income tax at all. Also, I added Health Savings Account, which become more and more popular these days and can add up into deductions. It works pretty much in the same way as 401K or traditional IRA, but permits withdrawals for medical expenses.


Also, let us take a look at tax brackets, both federal and California. I intentionally included three lowest brackets only, because I assume most people with limited lifetime savings will most likely fall into 10% or 15% federal brackets after the retirement.


How to collect money from 401K tax free? The idea discussed by MadFientist is to deduct certain amount of money from the total income before tax, and take the same amount of money out of 401K or traditional IRA into Roth IRA. For example, combined personal exemption $4,050 and standard deduction for married couple $12,600 deducted from the income can be replaced with $16,650 collected from 401K plan. As a result, the taxable income and tax will not change because of 401K money transfer. In other words, $16,650 comes with no tax. Obviously, there may be other income which can not be deducted and the tax must be paid for that income. But the good news is that no federal tax will be withheld from long term capital gain in federal tax bracket 10% or 15%. By replacing ordinary income with long term capital gain, it is possible to avoid federal taxes completely. Some states do not have income tax, but others like California does. However, California tax rates are much lower than federal rates. There are other types of investment such as California issued municipal bonds, which are exempt from both federal and state tax.

The deductions for married couple are twice as large as for single and tax brackets are also doubled. As pointed out in another great article by Curry Cracker, married couple can deduct up to $19,500 from income (which comes to $23,400 for those who file tax return for year 2016 and contribute into HSA). What does it mean? It means that anyone who is married can offset $23,400 income by annual withdrawal of the same amount from 401K or traditional IRA into Roth IRA. For example if someone has $250K in 401K plan, then it would require 10 and half years to collect all money from 401K without paying tax. Which is probably a reasonable time, even for those retired after 50. However, if we take a closer look at deductions for single person, then we have $13,700 only to deduct. For the same amount of savings, it would require almost 20 years to withdraw all money. It is a long time. Moreover, we need to reduce $13,700 by annual taxable income (I assume it still exists in some form), which raises withdrawal time to 25-30 years. Not every person live that long after retirement.

There is actually a way to attack this problem for single people. But single person must be a homeowner. Because property tax is the important deduction, which may have substantial impact to overall numbers. The property taxes in US for single family homes vary from $3K to $20K in most cases. It depends on home size and area. In areas with high cost of real estate, property tax can be higher than federal or state standard deduction. For example, I pay around $12K property tax annually and obviously use itemized deductions to reduce taxable income. It helps to offset taxable income when you have high wages, but may have opposite effect once you retire. Suddenly you realize that your income is so small that this deduction does not make sense anymore. But actually it does, when you want to withdraw money from 401K tax free. Property tax must be paid anyway, because we need a place to live. Let us use it for our own favor.

This approach works better when property tax is high, and its effectiveness degrade with amount of tax approaching standard deduction which is $6,300 for single. For California, you will end up paying more than that because of the high home prices (property tax is relatively low), but in Texas it is also achievable because of the high property tax up to 5% in some counties. But the real question is: can you afford this house during retirement? People tend to move to lower cost areas and live in cheap apartment, when amount of savings is limited. Can you afford the house with property tax high enough to offset income tax? It is easy to estimate, using 4% rule. The rule definition can be found for example here. The rule say that in a retirement, we can safely withdraw 4% of the total assets to make sure some money will be still available until the end of life.

The maximum home price and associated property tax depends on two factors: total amount of assets available and projected cost of living. I am single and I can not see myself spending more than $3K per month, unless some emergency happens. I can probably live on $2.5K, by taking special care about daily expenses. It would be a challenge to survive with $2K per month at expensive place such as San Francisco Bay Area, but someone else living in Texas for example most likely can live on $2K. Therefore, I prepared a chart about the impact of property tax and cost of living on the maximum home price retired person can afford. I use the ratio of annual property tax to cost of living from 10% to 50%, as I do not believe it is reasonable to spend more than 50% on property tax. I used Santa Clara county property tax rate 1.36% to calculate the home price. 401K conversion tax can be offset by property tax within a green area: homes priced above $463K are well within the range for many metro areas now. At least 20% to 30%  of annual expenses are required to spend on property tax in order to collect tax free money from 401K plan, which seems reasonable to me.


You can determine where you are in this chart with the help of 4% rule, using the total amount of assets you have as follows: [home price] = [total asset] – [cost of living] x 12 / 0.04. Then you can see if you are within the green area or not, and determine the optimal property tax to cost of living ratio to eliminate tax. For example, with $1M in assets and cost of living $2500 per month the home price would be: $1M – $2500 x 12 / 0.04 = $250K and the goal can not be achieved. However, with $1.5M in assets and cost of living $3000 per month the maximum home price would be $750K. It means that you can buy a home within $463K to $750K price range and achieve the goal by spending 20% to 30% of annual expenses on property tax. But most likely property tax is higher than 1.36% in a county where you live. In this case, the lower bound for home price to achieve tax free 401K goal will come down to $252K for property tax 2.5% and it can be as low as $126K for property tax 5%.

Finally, a few words about Health Savings Account (HSA). It definitely can help to offset 401K tax, when included into deductions. It is not required to have earned income to contribute into HSA, therefore it can be done even during retirement. After the age of 55 the contribution limit increases by $1000, which makes it even more attractive for tax purpose. But the advantages of each individual plan compared with ordinary health care plans must be carefully reviewed for an educated choice. The advantage of HSA can be combined with the advantage of some 401K plans, which allow withdrawing money without penalty if employee left job at the age of 55 or later. Then the most effective strategy can be, assuming enough financial assets are available at the time of termination:

  • quit your job at the age of 55
  • contribute into HSA and withdraw money tax free and penalty free from 401K directly to personal account between the age of 55 and 65
  • withdraw money whatever left on HSA tax free and penalty free between the age of 65 and 70
  • apply for social security benefits at the age of 70

Social Security: what to expect?


Social security system in US provides you and your family with benefits, in case you retired, become disable or die. We will focus on retirement benefits here. It works like a federal fund. During our entire career, we contribute some amount of money into the fund as Social Security tax. If you have earned income then in a paycheck, it comes as a separate tax category. Currently the tax is 12.4%, and half of it is paid by employer. Self-employed are responsible for the entire tax. In year 2016, this tax is applied to the first $118,500 of annual earnings, which is Maximum Taxable Earnings. By that reason, if you happen to make more than $118,500 annually then the tax is still the same.  Maximum Taxable Earnings are adjusted with inflation, for example in year 2000 it was $76,200. The money we contribute are managed by federal government (Department of Treasury), and invested in Treasury securities only. When retirement age comes, anyone who contributed into the system for at least 10 years can apply for the benefits. Money will be paid back. Most states does not impose tax on social security benefits, but some does: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.

When you decide to apply for social security benefits, there are a couple of important points to remember. First, there is a full retirement age when we can apply for the benefit based on year of birth. Also, there is a minimum retirement age. I can apply at 62 and the full retirement age is 67. Second, the amount of benefit is increasing with age when we apply. It does not increase anymore if you apply after 70. The exact amount the person can receive when applied at particular age can be found at Social Security Administration site using online account. Also, there are multiple calculators available on the web for benefits estimation. I found that this excellent online calculator provide more insight than others. Actually it is even possible to estimate the amount of benefits when you stop working before the minimum retirement age. But unfortunately it does not provide the flexibility to simulate the situation when you stop working early but apply for the benefits later after 62. I tried more advanced detailed social security calculator but it required installation and its report is difficult to read. Also, there is a very good article written by Joe at retireby40 how early retirement affect benefits. But it did not address my specific need either. By that reason, I decided to learn more how benefits are exactly calculated and share the findings in this blog.

The social security benefits are calculated using an average of 35 years when the highest amount of money contributed into the system. Actually, you may not need the exact numbers if the earnings were greater than Maximum Taxable Earning defined for particular year. The earnings are indexed with year specific coefficient, defined according to the inflation. In other words, indexed earning are earnings in current dollars. inflation index for each year while at work provided at the document published by Social Security Administration. I combined the numbers into the table starting from 1999 (when I started career), and computed indexed earnings for each year.


Using this table, I calculated the total number in the right column. I use Maximum Taxable Earnings, because my actual annual income was greater than that. If your annual income is less, then you need to substitute actual annual income for each year. The final number divided by 35 and by 12 provides average earnings over 35 years adjusted for current dollar. Obviously, I do not have 35 years career yet and missing years are represented as 0. For future years, I use the same index number and Maximum Taxable Earnings as for 2016. The benefit at full retirement age (which is 67 for me) is calculated using the average number as 90% of the first $856, combined with 32% between $856 and $5157 and finally combined with 15% of the remaining part. You can clearly see that higher earnings contribute less into the benefit. This will be the benefit at full age. I compared the number computed using this method with the results of online calculator and the difference is just a few dollars. I may be missing some details, but method is working correctly. What if you decided to apply earlier at 62 for example, or later? In this case, full benefit reduction (or gain) coefficients are applied. Coefficients currently in use are available for example at bankrate survey. I compiled a table with coefficients, which provide a clear picture how application delay affects the benefit.


This is a very important table. Logically, you may assume that the benefit does not increase when you stop working and no contributions made to the system. But in fact the benefit increases in any case. It is designed to encourage people to delay their application. With all these data, I decided to figure out what would be the impact of early retirement combined with late application? Again, I use year 1999 as a reference and count 18, 23 and 30 years of career starting from that year. This graph clearly show that the time when I actually apply for benefit is much more important than the time when I stop working. Even if I apply at 70, the difference between terminating job after 18 and 30 years is around 30%. The difference between 18 and 30 years is less if I apply at 62. However, application at 62 and 70 yield a difference of almost 50% (if retired after 30 years). Please remember these numbers are calculated in assumption that index numbers, benefit reduction coefficients and Maximum Taxable Earnings stay the same for future years. But in reality they will increase with inflation sooner or later, and the final numbers will raise as well.


What conclusion would you draw? I believe the correct strategy is to delay application for benefits as long as possible, up to the age of 70. But collecting enough savings to live is even more important. It is not clear what will happen with social security in 20 years ahead. I am sure it will be around in some shape. But it may become private. Inflation coefficients may not grow as fast as in the past. Minimum retirement age can be increased. Or after all we may not live that long. This is why it is important to rely more on savings rather than the benefits, and decide on retirement solely based on your life style and spending counted against savings.