Inflation and healthcare cost can go through the roof
Healthcare cost inflation is a genuine concern. Those of us approaching FIRE in the USA and not covered by a group plan need to be sure we've built in a safety margin for healthcare costs. I demonstrated how I did it in the "Stop worrying about the 4% rule" thread here:
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg1649407/#msg1649407
I'd be interested in hearing how others have done it or plan to do it.
I do not see a reasonable way to hedge against health care costs. The problem is as you approach medicare age the premiums are going up much higher than inflation, while at the same time you are statistically more likely to get serious medical problems which incur large out of pocket expenses. You can eat kale 3 times a day and ride your bike everywhere, but you still may get cancer or MS or need expensive surgery when you are in your 50s. It also may be difficult to go back to work when you are sick.
Having 10k out of pocket medical costs per year when you are living off 25k is a real problem for the 4% rule. You can either accept the risk or save more, only two options really.
Does investing in the healthcare sector would help hedging against health care costs?
Sure, older people have increased probability to spend higher % of their COL on healthcare. This is not directly related to retirement. In fact, if you are retired, there is more opportunity to stay in shape, get exercice everyday, cook and eat well etc. You can get struck by cancer or other serious health problem but on average, being retired or even just FI can help a lot.
Also, when forcasting future COL, we can factor in many aspects like travels, healthcare, having someone to take care of, selling the house, going out more or less, etc. Then, this is the spending that should be accounted for the 4% rule. Not our actual spending or the one at -1 day before retirement.
As an example, my actual stash x4% would be enough for me if no kids to support and a smaller place to live. This is not going to happen before 7-8 years. At this point, when kids go on their own and we move from our actual place, we could probably live by the Runewell rule (somewere between 3.25-3.75%) but who know where the CAPE will be then?