budgeting for healthcare costs

[simple girl]

I've been getting great advice on my thread asking about budgeting for dental costs. I have similar healthcare budgeting questions, so starting a new thread for that.

Here is what I wrote in my other thread:
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What do you all think of budgeting for health care and dental expenses together - perhaps using a built-up HSA for the healthcare max out of pocket and large unpredictable dental expenses part?

Here's what I am thinking.

Budget yearly for:
- dental cleanings and at least one crown
- healthcare premiums
- fully funding HSA every year to keep a "bucket" of money for large dental expenses and deductible/max OOP on healthcare plan

We currently have $16,500 in our HSA. Still need to put in 2014 and 2015 contributions, so that will add $13,300 for a total of $29,800 in our HSA by Jan 2016 - our date for when we hope hubby will semi-retire.

If I budget for funding the HSA every year (~$6650 as of now) that will keep our yearly budget at a very manageable number for our portfolio to have 100% success according to FIREcalc.

If I budget for funding max OOP for healthcare (at worst $12K if hubby makes too much money in semi-retirement and we can't get a subsidy) plus worst-case scenario for large dental expenses every year (? $10K), this makes our overall yearly budget very high - and would fail according to FIREcalc.

It doesn't seem realistic to expect we will have worst case scenarios for both medical and dental for every single year of our retirement for ~ 40 years. Does it make sense to keep a "bucket" of $ in your HSA to handle the worst case scenarios, assuming you are going to continually fund it every year?

Having a hard time wrapping my head around this. I want to plan for worst case scenario given my health history (breast cancer). At the same time, it seems like if I do that, we will have to wait many more years to have that much in our portfolio. And what if one of us croaks by the time we build up that much money? My sense of urgency to retire and enjoy life more before something happens to one of us is heightened since my diagnosis (BTW, clear bill of health for now - 3 years out). But that fear of recurrence and early death is always lingering there, and makes me want to make our retirement happen soon rather than later...

 

[W2R]

It doesn't seem realistic to expect we will have worst case scenarios for both medical and dental for every single year of our retirement for ~ 40 years. Does it make sense to keep a "bucket" of $ in your HSA to handle the worst case scenarios, assuming you are going to continually fund it every year?

It does to me!

Having a hard time wrapping my head around this. I want to plan for worst case scenario given my health history (breast cancer). At the same time, it seems like if I do that, we will have to wait many more years to have that much in our portfolio. And what if one of us croaks by the time we build up that much money? My sense of urgency to retire and enjoy life more before something happens to one of us is heightened since my diagnosis (BTW, clear bill of health for now - 3 years out). But that fear of recurrence and early death is always lingering there, and makes me want to make our retirement happen soon rather than later...

I can sure understand that and I think that is a very sensible way to look at it.

I have had the good fortune (so far, knock on wood) to be pretty healthy in retirement, other than a $3450 dental implant in 2013. So anyway, I can't help with worst case costs but best case costs might be like mine. The following annual total costs include the cost of dental, medical (including prescriptions, copays, deductibles, federal retiree insurance, and also Medicare for half a year in 2014, and everything else), and eye exams/glasses:

2010, age 61, $2619
2011, age 62, $3242
2012, age 63, $3922
2013, age 64, $7936 ($4486 plus $3450 dental implant)
2014, age 65, $4972

(Sorry I don't have medical separated out). As you can see, the "best case" amounts are increasing a lot but still not that bad at all compared with the amounts you would have to consider for the worst case scenarios. Also you can see that the cost is increasing pretty rapidly each year.

I think that age has a huge effect on medical costs. You can't expect to be spending the same amount in your 60's as you did in your 50's. In 2008 I was 59 and just spent $143 plus the cost of insurance, for a total of $1616. I think I saw the doctor once and the dentist once and nothing was wrong with me. Ah, youth!

I expect to be spending more for medical costs in my 70's than I do now, and more in my 80's than in my 70's. So the increases of medical costs with age are something to consider, too.

 

[simple girl]

As you can see, the "best case" amounts are increasing a lot but still not that bad at all compared with the amounts you would have to consider for the worst case scenarios. Also you can see that the cost is increasing pretty rapidly each year.

Thank you for sharing those details for an example of "best case" - all I have are "worst case" costs for the past 4 years, lol!

I think that age has a huge effect on medical costs. You can't expect to be spending the same amount in your 60's as you did in your 50's. In 2008 I was 59 and just spend $143 plus the cost of insurance, for a total of $1616. I think I saw the doctor once and the dentist once and nothing was wrong with me. Ah, youth!

I expect to be spending more for medical costs in my 70's than I do now, and more in my 80's than in my 70's. So the increases of medical costs with age are something to consider, too.

Excellent point. How do you factor that increasing cost into FIREcalc? Part of me is thinking well perhaps our travel costs will go down once we start having medical issues, and it will even out. I just don't know how to plan for it. I'm trying to project things as realistically as possible but wow what a challenge!

 

[W2R]

Thank you for sharing those details for an example of "best case" - all I have are "worst case" costs for the past 4 years, lol!

That's what I was thinking! It seems like your costs could be considered like a basic "best case" cost with a "worst case" surcharge on top of it maybe.

BTW, I am SO GLAD to hear that you are doing this well so far - - your breast cancer a few years ago was so grim and we are all hoping for the best for you.

Excellent point. How do you factor that increasing cost into FIREcalc? Part of me is thinking well perhaps our travel costs will go down once we start having medical issues, and it will even out. I just don't know how to plan for it. I'm trying to project things as realistically as possible but wow what a challenge!

I think that you are right; travel costs will go down, and so will many other costs, while health care increases. In fact, it seems like most studies show that older people don't need to spend as much (total, overall) as do younger retirees, in general.

It's a tremendous challenge to project, and I would think that one's own personal involvement and fears must make it a hundred times harder. But while I know you want to be well prepared, still personally I wouldn't delay retirement too much longer than you would have otherwise because you might not ever have any recurrence of breast cancer.

 

[W2R]

Afterthought: If you have any choices in insurance, maybe get the more expensive type that pays more and has smaller deductibles and better coverage in general, in case of a recurrence? That would cost more while you are cancer free, but also I am thinking it would smooth out your year-to-year medical spending a little if a recurrence should happen (at least somewhat).

 

[simple girl]

BTW, I am SO GLAD to hear that you are doing this well so far - - your breast cancer a few years ago was so grim and we are all hoping for the best for you.

Thank you! It definitely knocked me off my feet for a while and scared the cr*p out of me! I'm very grateful to be "NED" (no evidence of disease) at this time! My prognosis now is excellent. Fingers crossed!

Afterthought: If you have any choices in insurance, maybe get the more expensive type that pays more and has smaller deductibles and better coverage in general, in case of a recurrence? That would cost more while you are cancer free, but also I am thinking it would smooth out your year-to-year medical spending a little if a recurrence should happen (at least somewhat).

I'll look at the gold plans again, just to be sure, but for some reason I remember comparing it to the silver and thinking it wasn't much better. With the silver I can get subsidies on the rate and cost-sharing on the deductible and max-out-of pocket, which would save me way more money. So I am going to try to shoot for that and figure out how to not let our MAGI get too high. That's another thing on my long list of things to research and lay out before hubby semi-retires. So complicated!

 

[Alan]

Afterthought: If you have any choices in insurance, maybe get the more expensive type that pays more and has smaller deductibles and better coverage in general, in case of a recurrence? That would cost more while you are cancer free, but also I am thinking it would smooth out your year-to-year medical spending a little if a recurrence should happen (at least somewhat).

The other side of the coin is to buy the plans with the lowest monthly premiums while you are healthy, and when you do get a chronic issue then you have one year or part year of expensive co-pays and deductibles before you can switch to a lower deductible, lower co-pay plan. This is what I do with my company/retiree group insurance and I believe the ACA now allows everyone to do the same.

 

[Alan]

Someone once posted this as a useful tool to help compare plans.

 

[Bestwifeever]

Thank you! It definitely knocked me off my feet for a while and scared the cr*p out of me! I'm very grateful to be "NED" (no evidence of disease) at this time! My prognosis now is excellent. Fingers crossed!

....

Best news on these boards in a long time, SG. Fingers and toes crossed for you too!

 

[pb4uski]

I view funding and expenses separately. I view our HSAs only as another tax-free savings opportunity similar to a Roth IRA but without the income restrictions on contributions and with an additional constraint that any withdrawals be spent on health care.

When I was preparing for retirement I planned on 1) no dental insurance, 2) annual check-ups and cleanings, 3) health insurance at my COBRA cost and 4) 50% of our combined deductibles.

At the time, we were not paying much out of pocket for our HDHI plans because we were relatively healthy other than an accident my wife had that required several surgeries that crossed years.

It has turned out that I found health insurance for quite a bit less than my COBRA and even today, 3+ years later, our health insurance premiums for a catastrophic plan are about half what the COBRA was over 3 years ago and we have averaged less than half our deductible for services we have needed.

 

[Bamaman]

I was always fortunate to have the best of healthcare and dental insurance. Over the years, more and more costs have been moved over to our family, however.

Costs was something I never had control of. And because of that, we've done absolutely no budgeting for such things.

We just live every day of our lives frugally--almost living like we're poor. We limit ourselves to eating out once per week, and luckily my wife is as happy eating at Krystal as she is a nice restaurant. We buy gas at drive in markets, but we virtually never buy snacks or drinks when out. And of course, we save by drinking tap water--and would never buy a bottle of water.

When and if any health problems do appear, we have more than enough money in the bank to pay cash for any deductibles, premiums, prescriptions, etc.

I can live with $120 for tooth cleanings every 6 months. Those $850 root canals and $850 caps is what gets into your pocketbook--and gets on your nerves.

 

[simple girl]

I view funding and expenses separately. I view our HSAs only as another tax-free savings opportunity similar to a Roth IRA but without the income restrictions on contributions and with an additional constraint that any withdrawals be spent on health care.

When I was preparing for retirement I planned on 1) no dental insurance, 2) annual check-ups and cleanings, 3) health insurance at my COBRA cost and 4) 50% of our combined deductibles.

At the time, we were not paying much out of pocket for our HDHI plans because we were relatively healthy other than an accident my wife had that required several surgeries that crossed years.

It has turned out that I found health insurance for quite a bit less than my COBRA and even today, 3+ years later, our health insurance premiums for a catastrophic plan are about half what the COBRA was over 3 years ago and we have averaged less than half our deductible for services we have needed.

So you don't budget for reaching your max out of pocket in any way? I've hit my max OOP the last 4 years, so I guess I'm a bit gun shy. I want to have a plan for if one of us gets really ill, but I don't want to have to budget for reaching max OOP for each of the next 40 years...that would mean delaying retirement for who knows how long.

 

[MichaelB]

I'll look at the gold plans again, just to be sure, but for some reason I remember comparing it to the silver and thinking it wasn't much better. With the silver I can get subsidies on the rate and cost-sharing on the deductible and max-out-of pocket, which would save me way more money. So I am going to try to shoot for that and figure out how to not let our MAGI get too high. That's another thing on my long list of things to research and lay out before hubby semi-retires. So complicated!

It is complicated, and there's probably no one single best approach. The spreadsheet Alan referenced is an excellent tool, and shows pretty clearly that even when hitting the total deductible / OOP each year, the high deductible plan is still the lower total cost option.

The good news is you don't have to project and plan for one 40 years stretch. Better to look at it in two periods - pre-Medicare, and Medicare. Your options are much different in each, as is the total cost breakdown. For example, in our case, we can get a Medigap "F", with a deductible of $250, for 1/3 less than our current premium, which has a $6K deductible for each of us.

If you were to follow a similar approach, you would need to project, and fund, premium costs and deductibles to age 65. If you think you will be hitting the max deductible each year, then that is the amount you need to set aside or figure as part of the base budget. That is a lot of health care.

Our budget projections assume we will have some health care expenses every year, but nowhere near the total deductible of $12K. More like $3K or so. In addition we set aside in an emergency fund enough to cover unplanned expenses greater than, but it would only cover a few years of very high expenses. We replenish that fund when its' drawn down or the portfolio has a good year.

 

[GrayHare]

If I budget for funding max OOP for healthcare (at worst $12K if hubby makes too much money in semi-retirement and we can't get a subsidy) plus worst-case scenario for large dental expenses every year (? $10K), this makes our overall yearly budget very high - and would fail according to FIREcalc.

Keep in mind a "max OOP" is illusory since many medical costs are not covered by insurance, and thus do not count toward the OOP number.

 

[simple girl]

It is complicated, and there's probably no one single best approach. The spreadsheet Alan referenced is an excellent tool, and shows pretty clearly that even when hitting the total deductible / OOP each year, the high deductible plan is still the lower total cost option.

The good news is you don't have to project and plan for one 40 years stretch. Better to look at it in two periods - pre-Medicare, and Medicare. Your options are much different in each, as is the total cost breakdown. For example, in our case, we can get a Medigap "F", with a deductible of $250, for 1/3 less than our current premium, which has a $6K deductible for each of us.

If you were to follow a similar approach, you would need to project, and fund, premium costs and deductibles to age 65. If you think you will be hitting the max deductible each year, then that is the amount you need to set aside or figure as part of the base budget. That is a lot of health care.

Our budget projections assume we will have some health care expenses every year, but nowhere near the total deductible of $12K. More like $3K or so. In addition we set aside in an emergency fund enough to cover unplanned expenses greater than, but it would only cover a few years of very high expenses. We replenish that fund when its' drawn down or the portfolio has a good year.

Thank you, this is very helpful and gives me a lot to chew on. Wow, did you mean your max OOP for your Medicare plan is only $250? Or just your deductible?

So I need to figure out how to model what Medicare might cost us at age 65 - ie. figure out the inflation rate of Medicare. Obviously I know nothing about Medicare costs and need to get up to speed on this to model it properly.

Questions:

1) Once I figure out an adjusted budget starting at age 65, do I enter it as an "off the chart spending reduction" in FIREcalc?

2) I'm curious...are you using your HSA as an investment vehicle and not touching it til Medicare age, or are you withdrawing current medical expenses from it? What are your thoughts on either strategy?

 

[MichaelB]

Thank you, this is very helpful and gives me a lot to chew on. Wow, did you mean your max OOP for your Medicare plan is only $250? Or just your deductible?

I think it's the OOP.

So I need to figure out how to model what Medicare might cost us at age 65 - ie. figure out the inflation rate of Medicare. Obviously I know nothing about Medicare costs and need to get up to speed on this to model it properly.

Here's a link to the Medicare Supplemental (Medigap) page What's Medicare Supplement Insurance (Medigap)? | Medicare.gov and here's a brochure you may find helpful http://www.medicare.gov/Pubs/pdf/02110.pdf

1) Once I figure out an adjusted budget starting at age 65, do I enter it as an "off the chart spending reduction" in FIREcalc?

2) I'm curious...are you using your HSA as an investment vehicle and not touching it til Medicare age, or are you withdrawing current medical expenses from it? What are your thoughts on either strategy?

We use the HSA to accumulate right now and will do so until we reach age 65 when we can no longer contribute. I hope to put off using it as long as possible, keeping it for long term care needs.

Not sure about FIRECalc, need to look into this.

 

[simple girl]

Thanks so much Michael for the links and info!

So much to research before finally pulling the plug. I'm thankful I am not working and have the time to do this. It amazes me that so many on this forum found the time to plan all of this while working full-time before retiring.

 

[Live And Learn]

I hit my OOP max every year (macular degeneration), DH does not but I've included him hitting it also in my budget. Whatever we don't spend can go towards some other expense the next year. My theory is that we will spend 1/2 of the excess (more travel ?) and squirrel away the other half for other unforeseen or lumpy discretionary expenses which I don't have budgeted (home upgrades, dental). I also set aside 30k from my portfolio for dental which I do not include in my portfolio when calculating WR.

I think 10k per year for Dental is crazy worst case. My MIL had her entire mouth done in implants for 50k.

 

[easysurfer]

I use my HSA to pay for my medical expenses. I don't do so with an HSA debit card, but pay my bills on my credit card (love that cash back bonus), then reimburse myself for the previous year's expenses in January when I also do my asset rebalancing.

As for the actual health insurance, I choose one that have a yearly max (6K this year), then the rest is 100%. As, I don't want to chance, for example, having to pay 10% out of pocket on major medical event no matter how healthy I am.

 

[simple girl]

I use my HSA to pay for my medical expenses. I don't do so with an HSA debit card, but pay my bills on my credit card (love that cash back bonus), then reimburse myself for the previous year's expenses in January when I also do my asset rebalancing.

Could you please tell me your thought process behind your decision to reimburse yourself yearly from your HSA (as opposed to the other option of using it an investment tool/allowing it to grow for reimbursement of expenses after age 65)?

I initially thought I would use it to reimburse ourselves like you are every year, but now after reading about the "triple tax savings" I'm considering the other option.

 

[audreyh1]

It's complicated, but you could do both things. Designate X in the HSA to cover a year's deductible, so invest it very conservatively, and then anything above X gets put towards a longer term investment. If the portion designated to cover the deductible gets drawn down, then replenish it before adding more to the longer term investment.

Or, you could keep your fund for paying the deductible outside the HSA, and use the HSA only for long-term investing.

It comes down to that "fungible" thing about money.

 

[pb4uski]

I hit my OOP max every year (macular degeneration), DH does not but I've included him hitting it also in my budget. ....

Do you have stacked deductibles or separate policies or one policy and an aggregate deductible? If not the latter, the former might be beneficial to you.

 

[Live And Learn]

Do you have stacked deductibles or separate policies or one policy and an aggregate deductible? If not the latter, the former might be beneficial to you.

Thanks for that. You are absolutely correct. We will have have separate policies once we are both retired. He works PT and gets medical benefits so right now we use his plan which is very good and less expensive than my ER budget.

 

[easysurfer]

Could you please tell me your thought process behind your decision to reimburse yourself yearly from your HSA (as opposed to the other option of using it an investment tool/allowing it to grow for reimbursement of expenses after age 65)?

I initially thought I would use it to reimburse ourselves like you are every year, but now after reading about the "triple tax savings" I'm considering the other option.

For me, when having a HSA, it's important to know in your own mind what you want to HSA as. In other words, an HSA is kinda like an IRA, and kinda like a FSA.

At first, I was going to use my HSA an an investment tool. But in retirement and no longer getting a real paycheck, I didn't want to dip into my other savings and investments to pay for healthcare.

So, I decided to treat my HSA like a FSA. But of course, a HSA is better as there is no spend it or lose it and no need to send it receipts.

Another way to put it, is the S in HSA for Saving and investing or Spending on qualified medical expenses. The choice is up to you, but I think trying to do both gets difficult to manage.

For me, I consider my HSA as a bridge to pay for medical expenses until I reach medicare age. By that time, anything remaining in the account, if any, is just gravy. I'm happy to just reimburse for qualified expenses year by year, take the contribution deduction each year.

Plus, it is nice too to use the HSA for dental expenses and that can get costly since I self-insure with that.

I think most folks use a HSA as another investment tool. For me, I use it more as a bridge until medicare.

Hope this helps.

 

[simple girl]

At first, I was going to use my HSA an an investment tool. But in retirement and no longer getting a real paycheck, I didn't want to dip into my other savings and investments to pay for healthcare.

...........

I think most folks use a HSA as another investment tool. For me, I use it more as a bridge until medicare.

Hope this helps.

Yes, this helps, thank you. It is nice to see someone else consider using it like an FSA instead of as an investment tool. I'm still waffling as to how we want to do it. Financially it feels safer to me to use it like a FSA b/c we will be following a close budget in order to FIRE. I'm running scenarios both ways in FireCalc.