Author Topic: Healthcare is outpacing inflation, how are you accounting for that?  (Read 1947 times)

ReadytoLearn

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My apologies if you've seen a similar post on the interwebs, but I posted a similar thread on another forum and didn't quite get what I was looking for.

I can plan for increasing gas prices, the price of rent, even giving my parents $200/month with increases for inflation all while applying the 4% rule or some variation, but with the ACA or not, healthcare costs seem to be outpacing inflation (pls. don't make this political). 

One particular response to my question on the other forum caught my attention:
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It's important to note that Healthcare is part of inflation. It's one of the fastest growing parts of the basket, but the gist of it is that while costs associated with healthcare are rising, costs associated with consumer goods, entertainment, clothing, etc. are falling. If you keep your spending in-line with the CPI's basket of goods, you should see your spending in total follow pretty closely along with CPI.
TL;DR: It's already accounted for in your inflation adjustments, don't sweat it.

This was my response, to which I received no reply:
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Good post, it got me thinking... so much so that I forgot to respond (:p), my apologies.
Here is the CPI yearly % increase since 1982: http://i.imgur.com/PSXdHo0.png - I'd say it's trending from ~3.75% down towards 2% over the time period.
But here is the same times series for medical care yearly % increase since 1982: http://i.imgur.com/ADKppzR.png - I'd say it's trending from ~7.5% down towards 3% over the time period.
So in one sense I agree, "It's already accounted for in your inflation adjustments, don't sweat it." But on the other hand, this is a representation of all urban consumers and their consumption, not older folks in retirement who's healthcare spending in an ever-increasing % of their overall spending as they age. So if older/retired folks need more healthcare vs. all other consumers over time, and medical care inflation is outpacing the CPI's inflation, then those two factors combined still have me worried that my spending post-retirement will outpace regular inflation as I get older and thus my 4% rule won't work so well.
As to why the overall CPI inflation is not following healthcare spending trends, I would venture a guess that the housing market and price of gasoline post 2009 recession are helping to offset the medical care costs for the average consumer, and I'm not sure it will always be like that.

So how are you accounting for this in your planning? What makes you sleep well at night?  Do you just save up an extra $100k over your goals for FI and call it a day or is there something I'm missing in this equation?  Many thanks!

tonysemail

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Re: Healthcare is outpacing inflation, how are you accounting for that?
« Reply #1 on: September 01, 2016, 06:35:10 PM »
posting to follow

I'm not doing anything special to account for healthcare inflation.
If a medical catastrophe hits, then you'll probably need to be flexible and exercise one of your mitigation plans.

Have you thought about the general strategy of hedging against inflation by using fixed interest rate loans?

ReadytoLearn

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Re: Healthcare is outpacing inflation, how are you accounting for that?
« Reply #2 on: September 01, 2016, 08:44:30 PM »
Mitigation plans? Err... spend less?  What sort of mitigation plans were you thinking of?  Perhaps go back to work, but if I'm in poor health, that's probably not an option. hrmmm...

As for using fixed interest rate loans as a hedge, I'm not sure how that would work.  My portfolio is 100% VTSAX/VTIAX.  Can you explain further?

Thanks!

posting to follow

I'm not doing anything special to account for healthcare inflation.
If a medical catastrophe hits, then you'll probably need to be flexible and exercise one of your mitigation plans.

Have you thought about the general strategy of hedging against inflation by using fixed interest rate loans?

FIRE me

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Re: Healthcare is outpacing inflation, how are you accounting for that?
« Reply #3 on: September 01, 2016, 11:31:46 PM »

tonysemail

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Re: Healthcare is outpacing inflation, how are you accounting for that?
« Reply #4 on: September 02, 2016, 12:12:33 AM »
yes, for some people, the mitigation plan is part time work or cutting back expenses.
other people it may mean medical tourism or geographical arbitrage.
I would probably move away from my HCOL area if my ER was failing.
the common wisdom is to stay flexible, monitor closely and make course corrections as required in the first decade of ER.
This is a good sticky if you haven't read it.
http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/

By hedging, I'm referring to carrying a home mortgage into FIRE.
borrowing money at today's cheap rates and repaying them with devalued dollars.
some discussion of it here-
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date

Ccube19

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Re: Healthcare is outpacing inflation, how are you accounting for that?
« Reply #5 on: September 02, 2016, 11:09:48 AM »
I think retirees are just as likely to see a dramatic decrease in cost long term from a completely socialized system as we are to see run away costs in the current system. So I treat it like any thing else just try and have general flexibility.