Inflation assumptions

[Peter]

First post here, although I've been lurking for some time!

FireCalc and similar tools use standard measures for inflation (e.g. CPI) but these don't necessarily reflect the actual inflation any individual might expect to see. In my own case, if I add up medical insurance, homeowners, earthquake, and property taxes, it comes to nearly $18k for this year. All other expenses are about $25k. (Single, 57, living in CA, comfortable but not extravagant lifestyle.)

While I can believe that CPI inflation figures might apply to the 'all other' category, they most certainly do not work for insurances or property taxes. To take one example, my medical insurance bill has more than doubled in the last 3 years!

Not sure if there's any way to have FireCalc take account of this?

 

[Bob_Smith]

Peter, you make a very good point, and your expenses are close to mine. This is my biggest ER concern. I can do just fine assuming health care doesn't continue to inflate at such staggering rates. I'm taking the plunge anyway, because:

1. I'm willing to believe that Medicare, or something like it, will be there when I'm 65. And I don't think it will cost as much as current individual policies.

2. Assuming that's true, I must fill a 13 year gap until Medicare. With 18 months of COBRA, I'm down to 11.5 years. My wife wants to continue working, and will likely get a part time job with insurance, so that narrows the gap a few years more.

3. I don't think medical costs can continue to rise at these rates, or that a system that shuts out millions can continue for that much longer.

4. New Medicare legislation opened the door for Health Savings Accounts, and I'm hanging some hope on that as a possible option at reasonable cost:
http://galen.org/ccbdocs.asp?docID=569

I don't know if any of my assumptions are true, but I'm taking the plunge anyway.

 

[wzd]

I'm in the same boat as Bob_smith. I don't think that medical costs can inflate this way forever or lots of us will be in trouble. Also note that the CPI does have a medical (and housing) component. However, it doesn't look as if their component increased as much as my insurance! Housing does include taxes according to the description, but again maybe not as much as yours have gone up.

This is a query from http://data.bls.gov/labjava/outside.jsp?survey=cu with the entire medical section selected.

Also look at http://data.bls.gov/cpi which has annual CPI for total, and for medical on it. It claims only +3.5% since Nov 2002. I wonder what they are measuring!

Wayne
-------------------------------------------------------------------------

Series Id: CUUR0000SAM,CUUS0000SAM
Not Seasonally Adjusted
Area: U.S. city average
Item: Medical care
Base Period: 1982-84=100

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual HALF1 HALF2
1993 196.4 198.0 198.6 199.4 200.5 201.1 202.2 202.9 203.3 204.4 204.9 205.2 201.4 199.0 203.8
1994 206.4 207.7 208.3 209.2 209.7 210.4 211.5 212.2 212.8 214.0 214.7 215.3 211.0 208.6 213.4
1995 216.6 217.9 218.4 218.9 219.3 219.8 220.8 221.6 222.1 222.9 223.5 223.8 220.5 218.5 222.5
1996 225.2 226.2 226.6 227.0 227.4 227.8 228.7 229.2 229.4 230.1 230.5 230.6 228.2 226.7 229.8
1997 231.8 232.7 233.4 233.8 234.2 234.4 234.8 235.2 235.4 235.8 236.4 237.1 234.6 233.4 235.8
1998 238.1 239.3 239.8 240.7 241.4 242.0 242.7 243.5 243.9 244.3 244.7 245.2 242.1 240.2 244.1
1999 246.6 247.7 248.3 249.1 249.5 250.2 251.1 251.9 252.3 252.8 253.3 254.2 250.6 248.6 252.6
2000 255.5 257.0 258.1 258.8 259.4 260.5 261.4 262.6 263.1 263.7 264.1 264.8 260.8 258.2 263.3
2001 267.1 268.9 270.0 270.8 271.4 272.5 273.1 274.4 275.0 275.9 276.7 277.3 272.8 270.1 275.4
2002 279.6 281.0 282.0 283.2 284.1 284.7 286.6 287.3 287.7 289.2 290.5 291.3 285.6 282.4 288.8
2003 292.6 293.7 294.2 294.6 295.5 296.3 297.6 298.4 299.2 299.9 300.8 ......... 294.5

 

[Ted]

While inflation is certainly real and an extremely important consideration for retirees, it is a parameter that not only affects everyone differently, but has an inherent paradox that creates disagreement as to how it should be measured for the overall economy.

Inflation is measured by tracking the cost of a "market basket" of goods and services that are intended to represent the purchases of a "typical" consumer. The paradox is that as the price of different items change relative to each other, consumers shift their consumption. For example, if the "market basket" includes 500 gallons of gasoline, and the price of gasoline rises, then consumption may drop to 450 gallons per year. So, should the change in the CPI be based on 500 gallons, 450 gallons, or a combination?

Retired people need to plan on their medical costs rising whether or not medical costs in general keep rising faster than overall inflation, for the obvious reason that people require more medical care as they age. In fact, the aging population is one factor in the rise in the cost of medical care. I think that it is reasonable to expect that Medicare will continue to cover older people, and will include increased drug benefits, but planning for the costs of medical care/medical insurance before Medicare kicks in is a legitimate concern.

In doing so, the uncertainties regarding a person's individual insurability are greater than the uncertainties regarding the overall rate of inflation in healthcare costs, and FIRECalc obviously can't resolve either. But to answer Peter's original question -- one way to modify FIRECalc to estimate the effect of an increase in overall inflation, would be to artificially increase the expense ratio on invested assets. In other words, if you expect your actual expense ratio to be 0.5, and you think that inflation will be higher than it has been historically by 1% per year, then run FIRECalc with an expense ratio of 1.5%.

 

[Peter]

Thanks for the comments. Those CPI figures on medical costs are mystifying - it seems pretty generally accepted that insurance premiums have increased by much more than shown in the table. For example:

http://money.cnn.com/2003/09/09/pf/insurance/employerhealthplans/

Let's hope Bob_Smith is right about some moderation in the rate of increase. Trouble is, people with employer-provided insurance are largely shielded from the actual cost of their coverage, so there's maybe less potential for the necessary political pressure to be applied.

And Ted, thanks for the suggestion on dealing with different levels of inflation. I'll give that a try.

 

[John Galt]

Well, I never gave the cost of health insurance a thought when I semiretired in 1993. Figured I was
healthy and would buy a high deductible policy.
I was blindsided but I am dealing with it.

John Galt