What impact would no health care costs make on SWR?

[Midpack]

Its not that it would change the amount you could withdraw. More importantly, it would cut off a lot of tail risks that anyone dealing with the individual health insurance market has too bear.

There's my answer, stated better than I could have (thanks). If there was more certainty in future health care expenses for me, I would have retired several years ago.

 

[ziggy29]

There's my answer, stated better than I could have (thanks). If there was more certainty in future health care expenses for me, I would have retired several years ago.

Once upon a time, I thought solving the ER health insurance issue would result in a massive giveaway to those who can afford to consider early retirement.

But these days I'm more likely to see it as a "jobs bill" -- something that unlocks the golden handcuffs, convinces a lot of folks to retire and creates new job openings for the unemployed.

 

[Midpack]

Once upon a time, I thought solving the ER health insurance issue would result in a massive giveaway to those who can afford to consider early retirement.

But these days I'm more likely to see it as a "jobs bill" -- something that unlocks the golden handcuffs, convinces a lot of folks to retire and creates new job openings for the unemployed.

I assume from the smilie you'd agree the only workable solution is somewhere in between. The answer is going to require sacrifices from all concerned. Just transferring more cost to the employed isn't workable. The best we can hope for is more universal and predictable health care costs for all concerned, IOW less uncertainty. Whether it's cheaper or more expensive is another matter.

 

[scrabbler1]

My medical+dental costs (mostly HI) are about 3/4 of one percent of my SWR. For 2010, these costs (up 20% from 2009) will barely surpass my co-op maintenance costs as my #1 expense (about 25% of my retirement income) in retirement.

In contrast, my income taxes (state + federal) are about 7% of my total expenses. So even if they were to double as a result of having a single-payer system, I'd still come out way ahead.

Finding a reasonably affordable individual HI policy in 2008 (for 2009) was a key piece of being able to retire early. Had this retirement expense not existed, I would have been able to retire much earlier.

 

[youbet]

A potential fly in the ointment is that health care costs are expected to grow much faster than inflation. CPI (on which FIRECalc and similar simulations are based) currently has a 6.5% weighting for "medical care" expenditures. If your starting budget spends more than 6.5% on health care, you may have an issue in trying to limit overall spending growth to CPI. Over time health care will consume an increasing share of your budget, crowding out other spending and leading to a declining standard of living.

Unless your health care spending is 6.5% or less of your starting budget, I'd plan on a higher than CPI rate of inflation. You may want a lower SWR to compensate.

Actually, I'd lower my actual WR to be less than the calculated SWR. But I see your point and it's a good one. If your budget, driven by some of your spending categories rising faster than CPI, rises faster than inflation, your annual CPI increases will not keep up.

Whether CPI = your personal rate of inflation or not is certainly a big risk in determing FIRE status. And, as you say, medical care is an area where this could certainly happen. There are others, such as food and energy, also being pointed out.

I'm a big believer in the threat of inflation to FIRE status. I'm less concerned about so-called hyper-inflation and more about a creep to 4% -5% -6% sustained inflation which "boils the frog" over a decade or two.

 

[scrabbler1]

Actually, I'd lower my actual WR to be less than the calculated SWR. But I see your point and it's a good one. If your budget, driven by some of your spending categories rising faster than CPI, rises faster than inflation, your annual CPI increases will not keep up.

Whether CPI = your personal rate of inflation or not is certainly a big risk in determing FIRE status. And, as you say, medical care is an area where this could certainly happen. There are others, such as food and energy, also being pointed out.

In my long-term retirement spreadsheet, I split my separately calculated expenses into two parts - health care and everything else. I did this so I could assign a different (read: much higher) inflation rate to health care/insurance than to everything else.

 

[youbet]

In my long-term retirement spreadsheet, I split my separately calculated expenses into two parts - health care and everything else. I did this so I could assign a different (read: much higher) inflation rate to health care/insurance than to everything else.

Good idea.

Are you also accounting for "order?" That is, being able to vary inflation levels over time to show how much more impactful early inflation is as opposed to later inflation. I've found using some average number to be useless and highly unrealistic. That's why I like FireCalc.

 

[golfnut]

A potential fly in the ointment is that health care costs are expected to grow much faster than inflation. CPI (on which FIRECalc and similar simulations are based) currently has a 6.5% weighting for "medical care" expenditures. If your starting budget spends more than 6.5% on health care, you may have an issue in trying to limit overall spending growth to CPI. Over time health care will consume an increasing share of your budget, crowding out other spending and leading to a declining standard of living.

Unless your health care spending is 6.5% or less of your starting budget, I'd plan on a higher than CPI rate of inflation. You may want a lower SWR to compensate.

Based on the above, if your HC costs are $6,500 in retirement, are you saying one needs enough to withdraw a $100,000 per year? Gee, I hope not!

 

[scrabbler1]

Good idea.

Are you also accounting for "order?" That is, being able to vary inflation levels over time to show how much more impactful early inflation is as opposed to later inflation. I've found using some average number to be useless and highly unrealistic. That's why I like FireCalc.

I do not have a separate inflation # by year, only by type of expense. I do recognize that inflation in the earlier years is more meaningful than that in the later years.

 

[Gone4Good]

Based on the above, if your HC costs are $6,500 in retirement, are you saying one needs enough to withdraw a $100,000 per year? Gee, I hope not!

No. All I'm saying is that if your health care costs are $6,5000 and your "safe" withdrawal rate is less than $100K (based on CPI) you should expect your actual inflation rate to be higher than CPI and your "safe" withdrawal rate to be somewhat lower.

 

[golfnut]

No. All I'm saying is that if your health care costs are $6,5000 and your "safe" withdrawal rate is less than $100K (based on CPI) you should expect your actual inflation rate to be higher than CPI and your "safe" withdrawal rate to be somewhat lower.

Thanks for the explanation.