Assumptions I am making about FIRE

[daylatedollarshort]

I agree with others that it is okay to budget for some bad things to happen but for us we are not planning on the the likelihood that every bad thing that could possibly happen will happen and last for years. We had four friends die this past year so we are trying to make it a point to enjoy life while we can. We don't want to save up enough money so that we have only a .000001 chance of a financial failure rate but a 2% chance of dying each year before we actually retire.

The things we plan to do for our semi-ER are live very simply with low expenses, continue to work part time with lap top jobs for extra income and to keep our brains active, and most likely retire to a warm and sunny scenic EU member country with a large ex-pat population and lower health and long term care costs.

U.S. health care costs are many times higher than other countries with higher rated health care systems, so reducing those costs takes away a huge reason for many retirement failure stories in the U.S.
It isn't like the U.S. is even twice as much as other countries for common medical costs. For many procedures and operations the costs are 1/6 or less of U.S. costs:

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/26/21-graphs-that-show-americas-health-care-prices-are-ludicrous/

Plus the higher rated health care systems seems like a plus the older we get and the more things start going wrong.

 

[haha]

. Hear your assumptions could help me calibrate my assumptions.

ja, shure, you betcha!

 

[obgyn65]

1. I use inflation rate about 1%
2. Medicare at 67
3. Return on investment 2-3%
4. social sec benefits fully taxed, will start collecting at FRA
5. 401k plan increasing 1% per year (money market)
6. Since i have a pension both in the UK and Europe, i plan for USD EURO GBP constant exchange rate, although I think the USD will depreciate against the Euro within 10-20 years.

I turn 49 this year.

1) Long term inflation is 3.5% versus the 2%-2.5% over the last couple of decades
2) Medicare does not kick in until we are 67 and not 65 as today.
3) Medicare premiums twice as expensive in 2014 dollars as today.
4) Social Security benefits ... will be fully taxed as opposed to 85% taxed as today.
8) All investments including IRAs return 1% beyond inflation every year. Likely allocation being 50/45/5.

I want to be pessimistic but not unreasonably pessimistic as I could then miss out on doing something fun or great for fear of lack of funds. Hear your assumptions could help me calibrate my assumptions.

 

[kmt1972]

I did do a more rigorous look at inflation. Best place to look are the TIPS break-evens and the inflation swap market. Getting that info and then stripping the curve. One gets the implied inflation of the next 30 years by year.

2014 1.63
2015 1.99
2016 2.31
2017 2.42
2018 2.84
2019 2.82
2020 2.88
2021 2.94
2022 3.00
2023 3.07
2024 3.10
2025 3.13
2026 3.14
2027 3.14
2028 3.15
2029 3.14
2030 3.13
2031 3.12
2032 3.11
2033 3.10
2034 3.05
2035 2.99
2036 2.94
2037 2.89
2038 2.84
2039 2.85
2040 2.87
2041 2.88
2042 2.89
2043 2.90

On the long run (after 2021) this seems to indicate that the market feels long term inflation is around 3%. I did a look at the history of 30 year inflation expectations since 2004 and found that the SD is around .3%. I like using 1 SD more pessimistic assumptions from the expected value. So will use 3.3% for long term inflation although fro the 2013-2016 period I will go with what the market expects.

 

[kmt1972]

Here are the assumptions I have been using:

45 year plan (live till 95)
Inflation = 2.5% and 7.5% for medical costs
Average annual return on investments = 6% with a AA of 65/20/15
Annual expenses: Essential = 65% and Discretionary = 35%
Decrease annual expenses by 12% at age 75.
Assume no SS or Medicare benefits.
Medical costs (% of expenses) = 18% at age 65, 25% at age 75 and 35% at 85.
Tax rate on taxable accounts is ~12% and slowly decreases to ~3% at age 70.
Tax rate on tax-deferred accounts (RMD) starting at 70 is ~13%.
Purchase car every 7 years (only if it cost more to maintain vs. buying).

I think my overall plan is conservative. The 2.5% inflation rate is probably on the low side, but if you add in the 7.5% inflation rate for medical cost it ends up being around 3.5% inflation rate.... Big unknowns are "real" medical costs and how taxes will changes over time. I know assuming "no" SS or Medicare is very conservative. If I do account for in in my planning I only use 75% of what I would get in benefits. I'm not counting on the clowns in Washington to fix this any time soon....

Thanks so much. What you wrote also reminded me of other assumptions I am making. Namely a) Assume I will live to 95. b) Health Care costs (Cost of Platinum plan + Max OOP) rises 1% greater than inflation.

You make a good point that perhaps my assumption that the slower rate of
health care costs in the last few years might will continue perhaps might be too optimistic. I think I will use inflation+2% for health care cost.

I do feel that Medicare and SS will be around when I retire put at a reduced benefits since there will be a lot more means testing. Of course simultaneous pessimistic assumptions now hedge each other. Because I have pessimistic assumptions on the rate of return, my AGI will not be so large as to trigger very significant means testing reductions. Of course if my rate of return is more "normal" then for sure I can even assume that SS and Medicare will be gone but it will be a non-issue since the large AGI will carry me.