What impact would no health care costs make on SWR?

[accountingsucks]

Living in Canada we are fortunate to not have to worry about health care costs. Just curious, but for the Americans on the board, what impact would this have on your SWR? Would it go from 3 to 4%. 4 to 5% etc or is a 1% difference excessive?

 

[bbbamI]

Our WR is now 3%. If we had no medical expenses whatsoever, our WR could drop to 2.5%.

 

[teejayevans]

In the individual market, for someone 50+ with some pre-conditions: could be $10k or 0 if you can't get insurance. You do that math.
TJ

 

[youbet]

No impact at all. SWR = Safe Withdrawal Rate. It's the amount you can withdraw from your portfolio with little chance (frequently assumed 5%) of running out of money for a stated number of years. Paying for health insurance is one of the things you might do with some of that money. But that doesn't impact how much you can safely withdraw.

You folks in Canada must have funny accounting standards if "what you spend the money on" impacts how much you can safely withdraw!

Hypothetically, if I had "free" health care, I'd have about $8k/yr I could reallocate to other expenses, likely discretionary spending. My SWR wouldn't change, but I sure would have more fun money.

 

[Rustic23]

For me no effect. My health care was covered when I retired. I suspect there are others that may be the same.

I think your question over simplifies the situation.

While I could not find a quick article as to what a family pays for Canadian health care, one could reverse this question, and say 'if you and your employer did not have to pay the increased taxes for the Canadian health care system how much sooner could you have retired?'

 

[brewer12345]

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.

 

[bbbamI]

Hypothetically, if I had "free" health care, I'd have about $8k/yr I could reallocate to other expenses, likely discretionary spending. My SWR wouldn't change, but I sure would have more fun money.

In my post I said we could drop to 2.5%, but I'm sure we wouldn't as we like to have fun too!

 

[Alan]

Living in Canada we are fortunate to not have to worry about health care costs. Just curious, but for the Americans on the board, what impact would this have on your SWR? Would it go from 3 to 4%. 4 to 5% etc or is a 1% difference excessive?

For us it has an insignificant affect on the SWR. We are covered by retiree health insurance from the company I retired from, the cost of which is included in our budget.

 

[W2R]

Living in Canada we are fortunate to not have to worry about health care costs. Just curious, but for the Americans on the board, what impact would this have on your SWR? Would it go from 3 to 4%. 4 to 5% etc or is a 1% difference excessive?

Like some others here, I have subsidized lifetime health insurance as part of my retirement benefits. Right now, the plan I selected costs me only $175/month. I also pay various fees such as co-pays, deductible, and drug costs which right now total about $45/month for me.

However, I had to work for several years after I was otherwise financially independent until I qualified for this benefit.

 

[plex]

For those who don't have subsidized health insurance of sort though (or don't expect to at least), it makes a huge difference. For me, it would decrease my SWR from 4% to 3%, or, would allow me to retire about 20% earlier with a 4% withdrawal rate. That would be in a situation where health care is fully subsidized, which is not the case, even in Canada, for many types of operations.

 

[daloanboy]

Its fully subsidised and completely free here in the UK. As a result demand is as infinite as possible, so queues and facilities are sometimes real problems. (You do have to pay for prescriptions - unless you have a chronic illness in which case they're free.)

We (couple aged 55) have private insurance which covers hospital type needs for $150 per month.

 

[Maurice]

For me it wouldn't be the cost so much as security of coverage that would make such a difference. I would have retired already if I had security of coverage, even at a hefty price.

 

[audreyh1]

Basically, it means you need a much bigger "war chest" to retire financially secure - at least before you are 65. Once we reach 65 we have a much bigger safety net to help deal with health issues.

So - basically it increases our expenses in terms of paying for insurance, and it increases potential expenses in terms of what is paid out of pocket still after insurance for care, and that overall raises the size of the portfolio needed to retire before age 65.

You also have to make a decision about long-term care needs and whether or not to self-insure or purchase insurance. Another potential cost that requires a larger portfolio.

Audrey

 

[Rich_by_the_Bay]

About $17,000 in premiums per year for our household of 2, and we're healthy. That's over $21,000 in earnings per year.

For perspective, to generate that kind of cash flow, it would take about a $300,000 investment in a SPIA at age 61 or so.

 

[Rustic23]

Rich,
$21,000 a year for 4 years is $84,000. If you retire at 61 you come under medicare at 65, and don't need $300,000. You still need savings to pay for a supplemental, and medicare cost, but that should not be anywhere near $300,000.

 

[Danmar]

We have subsidized retirement coverage but it still costs about $250/month. It covers dental, drugs, orthotics, out of country, etc. We budget another $500/month for other medical expenses including massages, chiropractor, not otherwise covered, etc. This is living in Canada. Come to think of it we are pretty big consumers of health care services.

 

[Rich_by_the_Bay]

$21,000 a year for 4 years is $84,000. If you retire at 61 you come under medicare at 65, and don't need $300,000. You still need savings to pay for a supplemental, and medicare cost, but that should not be anywhere near $300,000.

Yes, a different perspective. If you are just looking at a 4 year interval I agree.

I thought the OP was referring to the impact on your SWR (or distributions) with vs. without lifelong coverage. In that case you need to figure in Medicare, indirect costs for state medicaid expenses, and the opportunity cost of Medicare or health insurance premiums redirected into the portfolio for most of your adult life. My admittedly oversimplified SPIA analogy was for the present value of lifelong expenditures moving forward.

It's too complicated a question to answer, for me. Canadians pay hefty taxes to support that national health care system, so it's the "delta" we're really after, all other things considered.

 

[Bestwifeever]

You would still have to pay for medical care, just not directly via insurance, fee for service, etc. There is still no free lunch. You would surely have a higher tax bite.

 

[LOL!]

Q&A - A Guide to Navigating the Shifting Tax Landscape in 2010 - NYTimes.com is an article discussing tax implications of many things but in particular health care. Here is one scary section (I have bolded the bold items myself):

MEDICARE A retired couple can easily spend and be taxed more for their health care than what it costs an employer to provide health insurance for one worker and a spouse.

One couple — a husband and wife who both worked as professionals and delayed retirement past age 70 — will spend about $21,100 out of pocket this year under Medicare, before counting co-pays.

[...]

For starters, the Medicare Part B premium for all retirees is deducted from Social Security checks. The cost this year is $2,652 for a married couple, up almost 17 percent from the $2,270 cost last year. Congress makes higher-income couples pay an extra premium if their income is more than $170,000. This couple’s extra charge this year is $5,834.

The retired executive and his wife then pay more than $3,300 for a Medicare supplement, ....

Then there is the Medicare Part D drug plan, with its so-called doughnut hole. The plan covers some drugs, then makes people pay a large amount (the hole) and then picks up all drug costs. The executive and his wife said that they would spend the $9,000 maximum this year.

All that comes to about $21,100 for the year, in addition to deductibles and co-pays for medical care and lab tests.

 

[ziggy29]

Hard to say. At least some of the cost savings would be offset by higher taxes. And depending on your income level and what eventual reforms take hold (if any), that could actually increase your pre-tax income needs rather than reduce it.

In other words, it's hard to say because the devil's in the details.

 

[eridanus]

It wouldn't change the fact that America pays more for less health care. That has to be solved first. In other words, it might be easier to ER in Canada due to their lower per capita costs for health care.

"In 2006, per-capita spending for health care in Canada was US$3,678; in the U.S., US$6,714. The U.S. spent 15.3% of GDP on health care in that year; Canada spent 10.0%"

http://www.oecd.org/dataoecd/46/33/38979719.pdf

 

[Bikerdude]

Q&A - A Guide to Navigating the Shifting Tax Landscape in 2010 - NYTimes.com is an article discussing tax implications of many things but in particular health care. Here is one scary section (I have bolded the bold items myself):

12% of taxable income spent for health care doesn't seem all that bad. And with a medicare supplement plan their co-pays and deductibles should be minimal.

 

[Gone4Good]

No impact at all. SWR = Safe Withdrawal Rate. It's the amount you can withdraw from your portfolio with little chance (frequently assumed 5%) of running out of money for a stated number of years. Paying for health insurance is one of the things you might do with some of that money. But that doesn't impact how much you can safely withdraw.

You folks in Canada must have funny accounting standards if "what you spend the money on" impacts how much you can safely withdraw!

Hypothetically, if I had "free" health care, I'd have about $8k/yr I could reallocate to other expenses, likely discretionary spending. My SWR wouldn't change, but I sure would have more fun money.

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.

 

[kumquat]

It wouldn't change the fact that America pays more for less health care. That has to be solved first. In other words, it might be easier to ER in Canada due to their lower per capita costs for health care.

"In 2006, per-capita spending for health care in Canada was US$3,678; in the U.S., US$6,714. The U.S. spent 15.3% of GDP on health care in that year; Canada spent 10.0%"

http://www.oecd.org/dataoecd/46/33/38979719.pdf

Isn't this the answer? What is the question?

 

[Bikerdude]

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.

From past polls, many on this board are living on $40,000 or less in retirement. 6.5% x $40,000 = $2,600 total health care expense. I would say all are in trouble.