Healthcare Costs

To keep busy in retirement, I volunteer quite a bit.  For instance, I help in Fern's math class on Thursdays.  I really enjoy it.  It makes me feel smarter than those around me.  Also, taller.

A couple of months ago, the kids were learning fractions and the teacher handed out worksheets for them to practice.  After struggling with the concept for awhile, one student asked for help.

"What am I supposed to do?"

"Well, you are given two different fractions.  You are supposed to come up with a number that is greater than the smaller one, but less than the larger one."

"...?"

"It's a little different than most of the math problems you solve.  Don't worry about finding THE answer.  There is no single answer.  In fact, there are an infinite number of possible answers."

"Do I have to list all of them?"

I couldn't resist.

"Yes, so you'd better get started.  It will literally take you forever."

His eyes got big as saucers.

Determining how much money you need to retire is one of the first steps toward early retirement.  That requires you to make a lot of assumptions about costs, spending, rates of return, etc.  There is one assumption in particular I thought I would try to clear up so you don't end up working forever...forever...forever...forever...
 

The thing that scared me most about retiring, other than inadvertently repeating myself over and over, was healthcare costs.  In fact, healthcare costs was the scariest thing about retirement to me, except for saying things again and again without realizing it.

(By the way, my favorite super villain name of all time comes from a PBS show called Word Girl that Fern and Sprout used to watch.  The villain's name is, get this, "Lady Redundant Woman."  How inspired is that?)

At the time I was contemplating retirement, health insurance costs were going nuts.  I read articles that said things like "the biggest risk for early retirees is healthcare costs."  And "healthcare insurance costs will rob years off retirement."  And "Work forever or die, Deadwood."  Okay, so maybe not that last one, but that was the message I got.  Forever...forever...forever...forever...

One very prominent mutual fund company even hardwires a healthcare inflation rate of 7% into their online tool.  You can't change it.  I spoke to one of their representatives about that.

"7% is crazy high."

"Well, healthcare costs have been rising at that rate for several years now."

"But in perpetuity?"

"It may start to level off down the road, but we feel it is best to be on the conservative side, especially as we haven't seen any moderation yet."

Sounds reasonable, right?  Not.  Let's assume healthcare insurance alone costs your family $10K this year.  The following graph shows what those costs will do under a normal inflation rate versus the 7% rate that this investment firm assumes.

If you're in your late forties like me, by the time you approach 100 (which, with luck, you will someday), health insurance will cost over $350K under the 7% assumption.  That's not realistic.  That amounts to $85K in today's dollars.  Would you spend $85K on health insurance today?  I know I wouldn't.

(At the more normal 3% inflation rate, you would pay $53K for health insurance by the time you are 100, which still sounds like a lot, and it is.  But it is equivalent to $10 K today.)  (Of course it is.)  (Think about it...)

Nobody is going to spend $350K on health insurance in fifty years.  Something in the system will give.  People will stop buying insurance.  Or they will go to India for surgery.  Move to Canada.  Obamacare.  Something.

It's like China.  Remember when China's population was running rampant?  Everyone was thinking there would be a zillion Chinese by such and such at the current rate of expansion.  Well, the "current rate" broke.  The leaders saw to that.

Or Japan.  Back in the late 80s, everyone was panicking that Japan's economy was going to take over the world.  Japan, Inc. was buying up the U.S.  The Nikkei was unstoppable.  The rising sun was going to dominate the world at last.  Then the bubble burst.

Crazy trends don't last.

War, plague, runaway inflation.  Awful things eventually come to an end.  

(Even Justin Bieber.  Especially Justin Bieber.  Lord please, Justin Bieber.)

To my advisor's credit, he agreed that 7% didn't make sense and contacted his research department about it.  The analysts also agreed it was unrealistic long term and didn't make sense for me to use.  Unfortunately, because the 7% was hardwired into their system, I had to manually enter my annual cost assumptions as an override, rather than use my own rate.  Very messy.

The 7% assumption still had me pretty wigged out even after I made the adjustments.  So I discussed it with another major investment firm.  The consultant told me that when it comes to inflation, something inevitably spins out of control.  Healthcare, oil, wheat, whatever.  But something else will offset it.  In the long run, aggregate inflation runs at about 3% a year.  No need to assume 7% on this, that or the other.  Just go with the aggregate.

That was good insight.  I slept better after that.

"All of them?  Really?"

"Yes, but tell you what.  I'll speak with your teacher to see if he'd be okay with you listing just one.  But you owe me.  Deal?"

"Deal.  Thank you."

"Hey, that's what I'm here for."