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Modelling health care cost in early retirement?
Old 10-05-2007, 01:42 PM   #1
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Modelling health care cost in early retirement?

Can anyone suggest a rule of thumb for modeling health care expenses in early retirement?

As of now I am modeling ~$1k a month(in todays $'s) between the ages of 50 and 65 to cover 2 people(wife and myself).
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Old 10-05-2007, 01:47 PM   #2
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Hugely dependent on state of residence. As a lucky resident of "God's Country" (NJ) I can count on premiums of at least $1500 a month for me, DW and the two kids, assuming I buy today. Gawd knows what the price will be in 5 or 10 or 20 years.
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Old 10-05-2007, 01:48 PM   #3
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The inflation rate for increases in medical expenses have outpaced inflation for a number of years now, with growth rates from 6 to 11 percent. This cannot continue indefinitely because businesses and individuals we be priced out of the market.

So I have no idea how to project the costs. I don't try to predict, instead we spend far less than at a 4% withdrawal rate.
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Old 10-05-2007, 01:51 PM   #4
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If one can not some what accurately predict the health care cost for early retirement (which will be my single largest expense), how can you safely assume you can retire early?
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Old 10-05-2007, 01:53 PM   #5
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If one can not some what accurately predict the health care cost for early retirement (which will be my single largest expense), how can you safely assume you can retire early?
Dunno. I'll tell you when I get there. You'd be surprised how creative I can be when it comes to avoiding work.
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Old 10-05-2007, 02:02 PM   #6
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NCHC | Facts About Healthcare - Health Insurance Cost

Here are some numbers. The big increases started in about 2000. Employer costs for health insurance increased 7.7% last year, so it is still marching up.

Yes, there is risk. It is our largest single expense as well. But life is full of risks that you can't model. You could end up divorced--the divorce rate for the over 50 crowd is increasing. You die or become disabled before getting to enjoy retirement. We just keep a lot of room to spare in the budget, live in a state that historically provided a risk pool of subsidized insurance and try to live healthy.
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Old 10-05-2007, 02:04 PM   #7
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Quote:
Originally Posted by maldini View Post
If one can not some what accurately predict the health care cost for early retirement (which will be my single largest expense), how can you safely assume you can retire early?
I have done a worst case/Best case scenario using increases of 3% (best case) and 8% (worst case). To be honest with you, I don't think you can "safely assume" you can retire early if you have to pay for individual health insurance and do not have a pension. It is a crap shoot that requires a leap of faith that investments will do well and that inflation will not be a killer. I am hoping that a democrat will be elected in 2008 and that my health insurance costs will go down sometime before I am eligible for Medicare in 2017. Whether it happens this way, well I'll cross that bridge when(if) I get to it.
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Old 10-05-2007, 02:12 PM   #8
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Maybe a better question is how can we hedge health care inflation.

Seems to me that earnings in the health care sector should track health care inflation pretty well. My Vanguard Health Care fund is one of my best performing funds over the long term. So, allocate 25 * your current health care spending to the health care sector.
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Old 10-05-2007, 02:16 PM   #9
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Even if you have a pension, unless it is a government pension, you can't safely assume it or retiree health benefits will continue.

If you have to buy your own health insurance you better have some extra money in the budget, How much is a guess.

If health care inflation continued at 8% a year, health care costs would double in 9 years. As it is, health care expenses for employers have increased by 87% since 2000. There is a breaking point. The unknown is where is that point.

FWIW, my very rough mental budget for lifetime health expenses in today's dollars is about $750,000.
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Old 10-05-2007, 03:11 PM   #10
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I was feeling really good today until I read this thread. I guess I could reduce travel, work part-time at Starbucks, and work really hard at staying healthy.

But thinking about the healthcare cost growth rate, I find it unsustainable. Something has got to give. What is the current percentage of uninsured? What will it be in five years? Short of a gov'ment takeover, and gov'ment can't even afford medicare much longer, some health care sub-system will emerge and cut the feet out from under the present crooks providers (think hospitals & insurance groups all dressed up with no one to dance with). It may not be the same coverage, but something will fill the need, it always does. When only the top 5% net worth people can pay the toll, the providers will not be the same either, maybe boutique medical care for the very well healed 5%. The game rules of Adam Smith will decide ultimately.
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Old 10-05-2007, 04:45 PM   #11
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I agree that the increases are unsustainable. All I can say is that it will be interesting to see how things look 10 years from now.
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Old 10-05-2007, 05:36 PM   #12
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I'm not sure you can model future health care expenses, or that anyone claimed they they realistically can. And reaching Medicare age is not the end of the rainbow - copays, uncovered services, long-term care all remain major expenses after that.

What you do is what you'd do anyway: save as much as you can and retire when the advantages outweigh the disadvantages. It's a moving target. I'm budgeting for insurance, and figure that out of pockets expenses from a major illnesses will just have to be made up by decreasing expenses for as long as it takes. Insurance = catastrophic loss protection only.
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Old 10-07-2007, 07:13 PM   #13
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Just got my yearly premium increase. Last year my premiums went up 15%. This year they went up 18%.

The cost of health insurance is starting to eat away at me. There's no one to complain to that cares, you don't have many options to reduce the cost, you can't go without it, and you keep hoping it's an expense you never use.

A few more increases like this and I will be priced out of the market for sure.
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Old 10-07-2007, 08:58 PM   #14
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My attempt to sum up recent discussions. To be safe prospective ERs should set aside a bit less than 1M per person for medical expenses, and anything over that can be used to live on. Much less than that, and insurance will be such a large percentage of the budget that annual increases in the 15-20% range may break the budget. If you don't have that much, don't ER unless you have no choice. There is no real political chance that free market competition will ever be allowed to lower costs by forcing adoption of an efficient business model. With corporations dropping medical benefits, eventually most Americans will be forced by rapidly rising prices to lobby to join the federal plans. This will take an unknown amount of time to play out, so plan for enormous annual increases for some time to come. If you don't like the situation, your only option is to go overseas because politicians don't care about ERs. Is this an accurate summary?
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Old 10-07-2007, 09:25 PM   #15
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Not in my mind. Even with the big increases of the past 8 years, I think budgeting one million per person is going overboard.

The political summation is subject to plenty of dispute.
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Old 10-07-2007, 09:49 PM   #16
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Thanks Martha. I guess seeing the 15% and 18% increases retire@40 reported made me a bit too pessimistic.
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Old 10-07-2007, 10:02 PM   #17
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Quote:
Originally Posted by twaddle View Post
Maybe a better question is how can we hedge health care inflation.

Seems to me that earnings in the health care sector should track health care inflation pretty well. My Vanguard Health Care fund is one of my best performing funds over the long term. So, allocate 25 * your current health care spending to the health care sector.
But would this work? The cost of health care may go up, but does that mean the profits must go up also?

Would buying GM stock be a hedge against the cost of a new Chevy? I think you would need to buy futures contracts tied to some 'cost of health care' index (which I assume does not exist).

I also think the cost rises are not sustainable. 20 years from now some problem we could not envision today will be threatening us and health care may be lost in the sea of new issues. It does take a leap of faith to ER, no question in my mind about that.

-ERD50
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Old 10-07-2007, 10:35 PM   #18
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The 10 year annualized return of VGHCX is 14.63% That would have come pretty close to keeping up with past medical insurance inflation, but future return numbers are not available yet.
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Old 10-07-2007, 11:31 PM   #19
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Vghcx

Closed to new investors.
<sigh>
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Old 10-08-2007, 12:42 AM   #20
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But would this work? The cost of health care may go up, but does that mean the profits must go up also?
I think so. If you buy a broad spectrum of health care holdings, I believe both their revenue and earnings will keep pace with inflation. Even if they maintain constant margins, earnings grow as health care inflation grows.

Anyway, it's worked for me for the past 20 years or so. I do the same thing with energy stocks. I figure I have no control over energy prices, but if prices take off, energy company earnings should keep pace. It's another bet that has paid off so far.
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