is my FIRE healthcare budget reasonable?

[eyeonFI]

As I get closer to committing to RE next summer, I am going over (and over, and over) my numbers. I’d love any thoughts on whether folks here think my planning for healthcare costs is reasonable, and if not, what else I should take into consideration. Thanks!


Basic Facts:
I am single, 43, with 2 kids (ages 4 and 6), all of us are currently healthy with no need for medical treatment beyond annual check-ups. Family health history leads me to hope I will be in reasonably good shape at least into my 80s. For planning purposes, I assume I will live to 100.

We will be living off after-tax savings for the next 20+ years (then 403b/457/IRAs). I qualify for SS (~$20k/yr maybe), but I don’t count on it in my planning. I can do Roth conversions to manage income (I’ll need to model tax vs. ACA subsidy to figure out what income I want).

What I expect for healthcare costs:
Kids will qualify for free insurance through the state Children’s Health Insurance Plan. I will generate enough income to avoid qualifying for Medicaid, but qualify for a large subsidy on ACA insurance, so pay <$1k per year with ~$6k OOP max, which I am unlikely to touch most years. Kids will eventually become responsible for their own insurance in 20 years or so.

What I budget for healthcare costs:
$1841/yr = subsidized premium for me to stay on my employer plan as a retiree (0 deductible, 1500 OOP max, my kids cannot stay on this plan). I could get an unsubsidized Bronze plan for ~$1740/yr.

$1416/yr = unsubsidized cost for catastrophic plan for my kids (~$6350k deductible/OOP each kid)

$3243/yr = annual OOP cost (makes a nice round total, allows for a few prescriptions here or there, a “catastrophe” for one of us every few years)

$6500/yr total, increasing at the same rate of inflation as all other expenses til I’m 100

My extra hedge is that I have $7k/yr in my budget for “extra” discretionary stuff (vacation, kids’ activities/lessons/sports, etc, above what I currently spend on this kind of thing). If one of us is incurring significant medical costs, I figure this “fun” stuff can be scaled back. I also assume all my current costs go on inflation adjusted til age 100 (i.e. my kids keep costing me what they do now, never start buying their own electricity, food, insurance, etc. Hopefully that won't be the case and $ can be switched from supporting them to increased medical bills for me if needed).

Does this seem reasonable? Any input appreciated.

 

[Fermion]

Curious why you would depend on the ACA subsidies but discount the significant SS annuity in your retirement plans?

 

[eyeonFI]

Thanks for the reply, sorry if I was not clear. For budgeting, I assume no SS and I assume no ACA subsidy (hence I budget the unsubsidized cost of insurance for myself/kids). So I budget $6500 for health insurance, but I expect to really pay <$1k.

In reality, I expect I will get both SS and ACA subsidy. I budget without them just to try to be "safe" given my long horizon and 2 young kids.

 

[Senator]

I qualify for SS (~$20k/yr maybe), but I don’t count on it in my planning.

SS will be there, but do not count on it being $20K. If you do not have 35 years in, and take early SS at 62, it will likely be a much smaller amount. Unless that is future dollars.

When you take a 35 year average, and have 0's for the last 15-20 years, you wind up with a pretty small number. Then, you take a ~30% hit for collecting at 62 rather than FRA.

My own SS is projected to be ~$25K annually at FRA, and I have earned 35+ years, many at a high number. Some years maxed out, many years close to the max.

There is a maximum benefit amount set in 2012 at $2,513, ~$30K annually, for a worker retiring at age 66. No matter how much that worker has earned over his lifetime.

 

[Big_Hitter]

don't forget that the bend points and twb get projected each year at cpi/cpw - if you want a more accurate estimate of your SS benefit you should get a calculator and project it out with the COLAs and $0 future earnings.

 

[Fermion]

SS will be there, but do not count on it being $20K. If you do not have 35 years in, and take early SS at 62, it will likely be a much smaller amount. Unless that is future dollars.

When you take a 35 year average, and have 0's for the last 15-20 years, you wind up with a pretty small number. Then, you take a ~30% hit for collecting at 62 rather than FRA.

One might think this but it is not true. After you put in about 20 years, the next 15 years don't do much. SS is skewed toward larger payments for lower income folks, so 20 years of high pay gets you a large portion of what 35 years of contributions give.

I don't have the exact numbers in front of me, but it was something like $1600 a month for 20 years of contributions and $1950 a month for 35 years.

 

[eyeonFI]

I think my initial post was too long and unclear - sorry about that.

To try to clarify: When I run projections/calculators (i.e. firecalc), I assume I will get $0 in SS. I do this just to be conservative in my planning even though I expect to get SS.

I mentioned the ~$20k in my initial post (roughly the estimate I got from the SS web calculator, putting in 0 for my future earnings) because I think of it as a possible counterbalance if I have grossly underestimated my expenses. I'm most nervous about my healthcare estimates, so my thinking is basically if I have made a terrible mistake about how much healthcare will cost, hopefully the SS will balance that out... not sure if I am being any clearer

 

[Senator]

It's hard to predict healthcare. $6,500 might seem reasonable, but I budget for my premiums and always having to pay 100% of the deductible., Worst case.

I would be more concerned with your entire budget. Kids are expensive, and if you are budgeting less than $50K a year in total, it's probably light.

If you are eligible for ACA subsidy, be sure to look at other assistance, EITC, AFDC, etc.

 

[eyeonFI]

I would be more concerned with your entire budget. Kids are expensive, and if you are budgeting less than $50K a year in total, it's probably light.

If you are eligible for ACA subsidy, be sure to look at other assistance, EITC, AFDC, etc.

Thanks. Total budget is about $56k/year, not including college (already saved in 529s). The $56k is based on my actual expenses for the last 4 years with some adjustments (minus daycare, plus healthcare, minus big "infrequent" expenses such as recent car purchase, plus $6600/year to cover those kinds of expenses in the future).

 

[W2R]

Bear in mind that as we grow older, especially past 60, our health care costs generally do seem to increase.

Also one wonders whether or not insurance premium increases will be over-the-top or reasonable in the future.

I agree with Senator that it's very difficult to predict what to budget for healthcare. One way to approach this near-impossible task is to have a little built in "slop" in your budget just in case you need a few thousand more than expected. Then if you don't need it, great!

 

[pb4uski]

Are you sure about the $1,841 and $1,416 a year for health insurance? That seems really low for unsubsidized health insurance coverage.

I use a higher inflation rate for health insurance and health care expenses, but the overall logic of your approach seems sound.

 

[eyeonFI]

Are you sure about the $1,841 and $1,416 a year for health insurance? That seems really low for unsubsidized health insurance coverage.

I use a higher inflation rate for health insurance and health care expenses, but the overall logic of your approach seems sound.

The $1841 is subsidized by my employer (I can stay on my employer plan as a retiree). The $1416 is the online estimate I got for my kids by looking at my state health insurance exchange. So I'm reasonably confident those are prices I could pay next year.

 

[fisherman]

It's hard to predict healthcare. $6,500 might seem reasonable, but I budget for my premiums and always having to pay 100% of the deductible., Worst case.

I would be more concerned with your entire budget. Kids are expensive, and if you are budgeting less than $50K a year in total, it's probably light.

If you are eligible for ACA subsidy, be sure to look at other assistance, EITC, AFDC, etc.

Kids are definitely expensive. The real cost occur for most early on and then in High School and College. Most sports, band, etc are around $1K a year per kid or more. Then there is their car and its expenses and insurance. They will always be wanting money for dates and spending with their friends and the team spring trip for another $1K. Of course they have to have the latest tablet and phone to fit in also. You can cut back on some of this and make them work some which are good ideas but it adds up more than you might think.

Talk to your friends that have older kids and ask what the normal expenses are in your area. Also drive through the high school parking lot and look at the cars and what kind of cloths the kids are wearing. If the cars are all late model and the cloths are designer then you will need to have a plan to deal with that.

After high school the room and board expenses likely will continue to some degree plus other support so something else to consider.

You can certainly ER with young kids. Mine were 9 and 2 when I did. So far no budget surprises by factoring in the above and after much advice from older parents first.

 

[Senator]

The $1841 is subsidized by my employer (I can stay on my employer plan as a retiree).

Can you stay on as a retiree, even at 43/44 years old? I am not 100% sure, but I think most plans require you to be 55+.

 

[eyeonFI]

Can you stay on as a retiree, even at 43/44 years old? I am not 100% sure, but I think most plans require you to be 55+.

Yes, I checked this with the head HR guy to make sure. I just have to "retire" instead of "quit," which basically means I have to take a $10k annuity from my 403b.

 

[ERhoosier]

In early 40's with 2 young kids, your cone of uncertainty for ALL financial matters over 30+ years is huge. And health care costs may present the most uncertainty. Particularly as gov't and employer budgets are under increasing pressure to control their shares of those costs.
You don't provide much background financial info, like maybe having a future inheritance from Bill Gates or Warren Buffett . Discounting that, IMHO your long-term budgeting for HC costs is not adequate- at least not adequate to stay off Medicaid as you would prefer.
1. Longer term HC inflation has been much higher than overall inflation, and most independent experts do not see this changing as more expensive drugs/treatments continue coming on line.
2. ACA is new and may be changed over time, particularly as overall cost rises. Those subsidies may be cut, eligibility criteria tightened, etc., etc. Record high fed deficits usu don't make Uncle Sam more generous regardless of which political party is in power.
3. Employer retiree health plans can be cut or eliminated, and more companies/municipalities are doing so every year.
4. CHIP plans and eligibilities are subject to change. No assurance that holds for another 15yrs (until kids reach 18+).
5. Your HI premium costs will rise significantly with age, even discounting HC inflation. HI premiums on ACA Exchange are over twice as high for adult (non-smoker) in early 60's vs mid 40's. Private HI premiums are also priced much higher with increasing age.
6. OOP max is, in practice, a very soft cost ceiling. With any serious illness there are typically additional costs for services not covered, OON, etc.
7. Deductibles & OOP max's are rising.
8. HC costs are already EXPENSIVE, even discounting future inflation. You are only budgeting 1 OOPmax expense every 6 years (0.5 OOPmax/yr for 3 people). A single 'minor' OON ER visit or one hi-cost drug not covered under your HI plan could cost that much. Drug networks seem to be getting more restrictive all the time. One of you developing a common chronic illness could mean being hit with your OOP max (or more) every single year -even if you are careful (and lucky enough) to stay fully in-network. And that $7k discretionary budget item really does not provide much of a buffer in the face of today's absurdly high HC costs.

IMHO your HC cost budget depends on a positive scenario. But if the future upsets your assumptions just a bit you could easily be looking at 2-3X your annual budgeted HC costs- or much more.