Factoring in Healthcare Cost Increases into "your number"

[ShortInSeattle]

Hey all,

I'm curious how you factored in "rising" healthcare expenses in your calculations.

I think it's assumed that a properly invested nest egg can keep pace with inflation, but healthcare costs seem to outpace inflation. I'm trying to plan for this...

So let's say that I can ER at age 40 with 33x expenses saved, and a 50k annual budget that has been tested and reflects reality. This budget includes ACA premiums for 40-year-old-me, and typical out-of-pocket expenses for 40-year old me. (same for spouse)

Here are some options I've considered:

1. Assume healthcare costs will rise more quickly than inflation, my portfolio won't keep pace, therefore continue to work until I have extra $$ (how much?) for health expenses in my 50s, 60s, and onward.

2. Because I'll be entitled to SS benefits at age 70 but have not factored that into my plans, assume that those dollars will cover any extra healthcare costs.

3. Retire as planned, knowing that the 15k in the budget for fun stuff (travel, eating out) can be used for healthcare if needed - down the road.

Curious how others have done this, or what you'd suggest.

Thanks!

SIS

 

[scrabbler1]

When I was working up my ER plan in 2007-2008, I factored inflation into my ER spreadsheet in this way: I split my aggregate expenses into 2 categories, one for health care including health insurance and the other for everything else. This way, I could run what-if scenarios with a much higher inflation factor for health expenses than for the rest of my budget. I eventually used 10% for health and 3% for everything else although in 2010 and 2011 my health insurance premiums rose 50% overall. (When I inputted 20% or 25% inflation for HI, it had me paying $100k per year before I turned 60 and that scared the crap out of me. Thank goodness for the ACA which has put that expense under control although my HI company filed for an 18% increase in 2015.)

 

[donheff]

I have never seen much value in estimating inflation. Far too unpredictable to be a productive exercise. I focused on SWR instead on the assumption that picking a rate of withdrawal a good deal below the historical failure rate would be about as safe as I could reasonably bother with. My guess about health insurance costs would have been way off the mark (too high) for the past several years. Now I would guess lower but who really knows? unproductive ruminations IMO although I can see why people who are cutting things close to the bone might want to try.

 

[pb4uski]

In Quicken Lifetime Planner, you can set up "special expenses" for items such as health insurance/care costs that have a different inflation rate than your normal living expenses. The inflation rate can be the general rate of inflation plus or minus an amount you designate or you can put in a custom inflation amount. You can also have the special expense start anytime in the projection period and last for a certain number of years so in the OP's case it could be included from retirement until Medicare kicks in if desired.

That said, I didn't apply a special inflation factor to health insurance/care in my retirement projection. As it is turning out my health insurance/care costs are much less than what I thought they would be, which was based on my COBRA premium. We are relatively healthy and have no prescriptions so our health care costs are mostly health insurance plus the negotiated cost of any doctor visits and hospitalizations.

 

[W2R]

I would suggest making sure your planned retirement budget has a lot of wiggle room in it and that should help with health care inflation. I am assuming that you plan to have some percentage invested in equities, which also can be expected to grow in the long run and help compensate for at least some inflation.

Also, remember that overall inflation, not just inflation of one part of your budget, is what you will be dealing with. So, if other expenses do not undergo much inflation, that will moderate the effects of health care inflation when you are retired.

Health care inflation disproportionately affects older Americans, so your overall inflation rate may be a little higher than the CPI. Still, if you can manage to have some excess left over to re-invest at the end of each year, that should help.

I like your option #2! Then if you don't need your SS for health care or other unexpected expenses, you can re-invest it or use it for FUN...

 

[ShortInSeattle]

Thanks everyone. The closer that we get to "our number" the more I begin to understand OMY syndrome. It's easy to get into a case of the what-ifs!

I think that having a budget with a lot of wiggle room (30%+ discretionary) plus unallocated SS dollars may be good enough for me to sleep at night.

Or I could build my ER budget based on ACA premiums for a 65 year old couple... even if I'm not there yet....

hmm.

Thanks for the perspective. Appreciate it!

 

[Live And Learn]

Or I could build my ER budget based on ACA premiums for a 65 year old couple... even if I'm not there yet....

That is exactly how I handled it. I also assumed that I would hit the Out of Pocket Maximum each year.
BUT -- I included 65% of my estimated social security in my plan.

Even as conservative as I am I would not do both (Premiums assuming you are 65 PLUS leaving out all Social Security).