How much to budget for health insurance/expenses in early retirement?

[VagabondMD]

This is a question for early retirees and aspiring early retirees. Health insurance is a turbulent marketplace with ever-changing rules and ever-rising prices. How much are you budgeting for health insurance (and, more generally, health expenses, like deductibles and copays, dental work, vision, etc.), how did you arrive at this number, and how confident are you in your projections?

Edit: Planners, feel free to contribute to this, too.

[jpa]

I don't know how much to budget, but I think one way to spread your budget further is to look into a Direct Primary Care Physician (DPC) in your area and see if they've established relationships with labs, imaging centers, etc for cash discounts if you go through them.  Here in KC, there are several DPC physicians (although not all of them have as many extra perks) who will give you unlimited office visits, telephone calls, etc as well as labs and prescriptions at cost for a monthly fee--usually $50/month for a healthy young adult and $100/month for a retiree.  The cost savings on these labs are often 80% cheaper than what even insurances have negotiated, and routine generic medications are often under $1.  Many have started relationships with imaging centers as well for X-rays, CT scans, including the reads by a radiologist. Cash-flow is king to these negotiations.  I think this combined with a high-deductible plan is a great way for early-retirees to transition to Medicare.

Of course, many Medicare participants elect to stay with the DPC physicians at age 65, because if they're on 5+ medications, often the savings on prescriptions at cost nearly pays for their monthly enrollment fee.

Hopefully this will all be HSA eligible expenses soon as well.  It's being lobbied for at both state and federal levels

[q-school]

Excellent question. Healthcare and college funds seem to be the sticking points.

For myself, both my wife and my employer guarantee access to healthcare at their market rate if you work a certain number of years for the organization. For my wife if she hits the number, her health care would be paid for by organization until she dies, and I can at least purchase healthcare at their group rate until I die.
My group doesn't pay for mine but allows me to purchase for me and my wife at their rate.

The amount is not fixed but at least provides some likely upper limit.

I think the direct primary care is wonderful but probably the less concerning component of the early retiree puzzle. We are concerned with bypass surgery costs and chemotherapy costs and orthopedic surgery costs as we contemplate options.

So basically I have nothing solid for you vagabond. And I'm not confident at all in my lack of information. Therefore we have not allocated a specific number at this time. However we are confident that if we can't afford it, very few people will be able to. May need to sell house, may need worse cars, may not take vacations but can likely make the numbers work to afford health care.

[jfoxcpacfp]

As with all financial predictions, you have to make your best guess based on the facts and resources you have at hand in the present, knowing that they will change with time and we'll need to adjust the plan. Because the health insurance industry is in such flux, it is difficult to pin down any number that we will feel comfortable with when creating a plan with a client. The nearer s/he is to retirement, the easier it is to have a modest degree of assurance that we are not grossly over- or under-estimating. Of course, I try to err on the side of caution and overestimate costs.

For health insurance, the biggest need is for early retirees until Medicare and a supplemental policy come into play. We typically get an estimate of current plan costs in the vicinity of where the client plans to live at retirement and inflate it at 5%.

Healthcare expenses? It's just a shot in the dark, especially when you try to figure in the cost of LTC. The client and I are going to discuss and come up with a figure they feel comfortable with. Whether or not they buy LTCI is based upon a variety of factors and not necessarily a one-size-fits-all recommendation.

[CM]

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[Hatton]

Giant unknown!!!!  I am basically healthy thank God.  I have been surprised with charges on the EOBs from some recent lab work and physical therapy.  Does anyone actually pay this amount.  If I am having trouble figuring out what my insurance coverage pays for I feel very sorry for the non-medical people. It is very confusing this reimbursement system that is currently not working.  So in answer to the question I don't think it is possible to budget for this with any precision at all.  I have said this several times.  This is a big reason that I keep working.

[VagabondMD]

So far, two respondents who keep working in large part due to concerns over the uncertainty of health-related costs. Ugh!

I am fortunate that we expect to have retiree coverage from my wife's job (which is unusual in this day and age), so long as she retires at or beyond age 55. Those who retire at 40 or 45 without such a plan, barring any major reforms in our current system, could be in for a rude awakening. If you believe that you can live on $50-60k per year and learn that health insurance costs $20k for basic coverage, and then throw in a root canal or heaven forbid, an actual serious illness, the early retirement can quickly go off the rails.

[TheHappyPhilosopher]

The question you ask is a good one, and almost unanswerable. There is no real model for predicting health care costs. For the early retiree, health insurance and health care costs will most certainly increase much more than inflation. Outlier events will absolutely destroy a retirement plan, even in some cases with decent insurance. If you retire at 45 or 50 it is a long way to 65, and a lot of things can go wrong.

 

I modeled almost every possible disaster that could derail an early retirement (because that is just what my brain does) and came to the conclusion that I could hedge risk or handle almost anything...other than a medical disaster.

 

I came to the conclusion that a 4% withdrawal rate is just not adequate for someone who is risk averse and wants stay retired no matter what happens in their life. I use the 3% rule. Being moderately frugal at our income level adds a couple years. I can handle working part-time for a couple more years in order to sleep better at night knowing my health care is covered.

 

If you figure this out let me know and I will re-write my article

[PhysicianOnFIRE]

I'm factoring in up to $20k per year for healthcare costs in our budget (family of 4, parents in mid thirties to early forties). It might be less (healthcare sharing ministries) and it might be more. Like @TheHappyPhilosopher, I'm targeting a withdrawal rate closer to 3%.

I know this is a topic on everyone's mind, so I'll be posting on our options when the time comes.

Mr. Firestation (Eric) wrote a three-part series on it as he prepared for early retirement 2 weeks shy of his 50th birthday.

1. https://mrfirestation.com/2016/10/24/7206/


2. https://mrfirestation.com/2016/11/14/7433/


3. https://mrfirestation.com/2017/01/30/8414/

 

 

 

[jfoxcpacfp]

Crixus wrote:

Perhaps the greatest human frailty is the inability to comprehend exponential functions.

Click to expand...

Call me crazy, but the inability to comprehend exponential functions wouldn't be anywhere near the top of my list of human frailties.

[AZdoc68]

This is the most vexing question for me as I consider my options going forward.  In about 3 1/2 years I have to decide whether I want to keep working or renew my current contract for another 3 years guaranteed.  At the latest I was planning to be fully retired no later than the 2nd end point which is about 6 1/2 years away.  That contract option would expire just a few days after my 55th birthday.  So, I am looking at 10 years minimum before Medicare eligibility and maybe as much as 13.

My options seem to be:

1. My wife going from currently part-time to full-time (adjunct faculty to regular faculty), becoming eligible for employer-sponsored insurance.  She's 10 years younger than me and is finishing up her PhD program and wants to do this as soon as the kids are able to drive themselves.  Obviously, this is the best option by far financially.


2. Buying coverage on the individual market.  This used to be a viable option but the ACA has pretty much destroyed it by in effect forcing relatively healthy people to subsidize guaranteed issue to sick people ("pre-existing coverage at no extra charge") and the previously uninsured.  Unless this mess gets fixed, and I doubt it will, the costs here will drain all but the biggest HSAs in fairly short order.


3. Keep working past my desired date at a much reduced FTE/heavily "part-time".  I'm currently 90% but can cut down to 60% and keep my current insurance plan.  Who knows if that option will still be there for me later on.

The above makes me really wonder when I read about people who plan to FIRE on $60k/yr or something.  Unless you have a working spouse with family coverage or a huge HSA built up, I don't see how any doc retires way early on that amount of spending.  You're gonna be living a very spartan lifestyle after paying for medical insurance and other healthcare costs.

[jfoxcpacfp]

A lot can happen in 3-1/2 years - I think you are causing yourself unnecessary stress by vexing out this soon, especially since it appears you already have a very reasonable option (#1). A Financial Checkup would give you the clarity you're lacking, though.

[Zaphod]

Agree that healthcare costs cannot go up as they have been, it is unsustainable and if continued at this pace will be more than 100% of our economy, and a time after, greater than the world gdp. This is what Crixus is talking about, since humans think linearly we have big problems with seeing these kinds of things.

It simply cannot go on and believe it will be more reasonable in the future than it is today, we will try everything else first and have some sort of crisis of course.

[Kamban]

hatton1 wrote:

So in answer to the question I don’t think it is possible to budget for this with any precision at all. I have said this several times. This is a big reason that I keep working.

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Same here.

There is no way to know what the health care costs will be next year. Only $20K per year for 4 people is wildly optimistic. Getting affordable plans in open market is not easy ( if you can get it at all). Then there is the $5000 per person deductible and $15K per family max deductible. There are copays in addition to that for medical visits and prescriptions. In a bad year one is looking at $40K-50K in health care costs. We are close to spending $25K for 2 person medical cost in 2017 and it not yet July so who knows what else might show up.

I plan to work till I am eligible for Medicare.

[PhysicianOnFIRE]

Kamban wrote:

Only $20K per year for 4 people is wildly optimistic

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Depends on age. That's about what our good HDHP plus out of pocket expenses (with kids' surgeries) has been in recent years. We've also got some HSA money set aside to cover expenses in early retirement.

While not for everyone, with the most expensive healthcare sharing plan option, costs for a healthy family could be under $10,000.