Estimating Health Care Costs for the Duration of Retirement (USA)

[rantk81]

My employer provides a decent (but not phenomenal) health insurance benefit.  When deciding on when to "pull the plug" and go FIRE, I will be on my own to bear these costs.

This seems to be incredibly difficult to predict, based on the factors:

- What will the costs of plans be in the future?  Definitely will be going up, especially as I age.
- What "MAGI" income will I have and how will it affect a government subsidy?
- How much faster will "out of pocket maximums" increase than inflation?
- What health costs will I incur in a year on average?
- What is the probability of having an expensive event in a year?
- How much more frequently will these "expensive events" occur as I get older?

Are there any good resources, spreadsheets, web pages, etc, that help predict this out into the future?

It seems the "out of pocket maximums" all cap out somewhere around $6500, and most plans have deductibles that aren't far from the "out of pocket max" figure anyway (unless you go up to the really expensive "gold" and "platinum" plans.)

(The math on the plans seem to be quite funny whereby if you add the additional cost of the premiums for the "expensive" plans, it essentially offsets the deductibles/maxes for the cheaper plans.  From what I've seen, the expensive plans are a very bad deal because all they do is shift the cost of your health care into predictable monthly payments instead of paying the care providers... The caps seem to be essentially the same though.  Even if you had a year of high-costs, it appears the expensive plans won't really save you that much overall anyway.  Much better to "gamble" with the lower cost bronze/silver plans.  The Gold/Platinum plans seem to ONLY be a good deal if you KNOW 100% for sure you are going to blow through a ton of medical expenses in a year.)

At my age (mid 30s) non-smoker, it looks like most of the Silver plans that I would be interested in are in the neighborhood of $200/month right now, all with out of pocket maximums approaching about $6500.  Depending on how I "manage" my income from investments, I could probably be clever to get some subsidy for the premiums.  I don't like to rely on government handouts/credits when calculating whether or not I'm financially independent.

I take care of myself, but I've had some medical issues in the past beyond my control.  I've had several years of making essentially zero claims to my health insurance, but I've also had a couple of years where I've hit the out-of-pocket max too. 

Best I can estimate now is probably the cost of my premiums plus on average 1/3 of the OOPMAX per year...  (200 * 12) + (1/3)*(6500) is about $4600/yr.

At 4% SWR, that means having $115K invested in assets at retirement time, simply for my future health care.  (Assuming costs don't grow vastly faster than inflation and thus blowing the 4% SWR theory out of the water.)

But these numbers seem very loose.  An even worse case scenario (ignoring inflation) would be 200*12+6500=8900 => need $222K at 4% SWR.  Seems ridiculous.

The thing going for early retirees is that they are young so they probably have a lot of years at the start of retirement with very minimal expenses, and the expensive years will come later.  If the big expensive years come early on in retirement, then I'm probably not likely to live to be old anyway ;)

How are other people estimating this?

[regulator]

Effectively, I am not.  I know what my premiums are and I expect to hit part or all of my hefty deductible every few years (history of the last 5 years would have had me hitting it once and de minimus costs all other years).  I expect my premiums to escalate at 5 to 10% annually.  Actually, I expect that if I kept the same policy I would expect at least 10% annually, but I shop around every year and shave a few points off the rate of increase.  Eventually I will get a break as my kids go off the policy, but that is many years in the future.

The subsidies can be pretty good if you have low income in at least some years.  In 2 years of being on exchange policies we have had a low income and a high income year.  The low income year made the premiums very low and the deductible and max OOP tiny.  The high income year was just the opposite.  While this system stays in effect, I just view the loss of subsidies as an extra income tax.

What can I say?  This is the price of relative freedom.  At least you can buy a decent policy on the open market now that does not come with pre-existing condition exclusions, rescission, etc.  Eventually the system will change.  Remain agile, mobile and hostile and otherwise enjoy life as best you can.

[KCalla]

I agree that estimating health care costs is difficult.  Articles like this one from Fidelity
http://www.fidelity.com/inside-fidelity/employer-services/fidelity-analysis-reveals-extra-health-care
suggest that, based on 2014 findings, the average expense for couple retiring at age 65 in 2014 would be $220,000 for the rest of their lives.  This does not include nursing home or long term care insurance or costs.  It also assumes traditional Medicare coverage (there may be ways to shave that down with HMO Medicare, etc).
Retiring at 62 raises the remaining lifetime average, for a couple, to $271,000.  Of course, for any of us as individuals, the number may be lower (or higher).
I imagine that for a single, it would be about half that, but that's my guess only.

I agree with your analysis of ACA Health Insurance "metal levels".  You are basically deciding how much to prepay and how much to "self insure".

As regular stated, it is a good idea to figure in some price inflation.  In addition, figure in that the premiums increase based on age.  For example, fortor us (age 60 and 63), the lowest cost Bronze plan available costs about $800 per month (averaging $400 per person but in fact the younger one pays a little bit less).  All of the ACA ("ObamaCare") plans saved us significant money over the plans we were able to get before ACA (we have been buying our own medical insurance (no job benefit) for many years).

I think there is often a surprise when we older folk realize that Medicare will have monthly costs....but way lower than what we pay before Medicare.

These are are important things to consider in our FIRE plans.  Yay to you for working this into your plans.  While some health problems can be prevented, some cannot.

[WolfpackFan]

This is a great thread and one I'd considered posting here myself.  I think rising health insurance costs as you age is an oft overlooked hurdle of early retirement.

You can't just hit your number with only today's health insurance rates factored in.   Somehow one needs to take into account how much that health insurance cost rises with age which has already been said ain't easy.

Seems for asap early retirees the optimal course of action is to aim for the subsidies, but that would seem to cap income and essentially limit your lifestyle to that specific income for a lifetime.

[Retired To Win]

My employer provides a decent (but not phenomenal) health insurance benefit.  When deciding on when to "pull the plug" and go FIRE, I will be on my own to bear these costs.

This seems to be incredibly difficult to predict, based on the factors:

- What will the costs of plans be in the future?  Definitely will be going up, especially as I age.
- What "MAGI" income will I have and how will it affect a government subsidy?
- How much faster will "out of pocket maximums" increase than inflation?
- What health costs will I incur in a year on average?
- What is the probability of having an expensive event in a year?
- How much more frequently will these "expensive events" occur as I get older?

Are there any good resources, spreadsheets, web pages, etc, that help predict this out into the future?...

How are other people estimating this?

I really think we have to be philosophical about it.  There is only so much control we can project onto these questions.  We have to accept that there are not going to be any guarantees.  As for me, I've done what I can to be proactively prudent without also condemning myself to an endless round of OMYs.

What will be, will be.

[Eric]

Health insurance costs should stay steady as you age, thanks to the ACA and it's subsidy structure.  (Assuming you can stay below 400% of poverty level)  Health care costs, well, that's highly individual and something that is hard to extrapolate in a once size fits all manner.

Jeremy at Go Curry Cracker is starting a series on the ACA, subsidies, and related tax strategies.

Here are the first two posts (with more to come I believe).  Warning!  Technical reading ahead. I had to read the 2nd one about 3 times to really grasp it.  Not that it's not well written, it's just a very complicated topic:

http://www.gocurrycracker.com/obamacare-optimization-early-retirement/
http://www.gocurrycracker.com/obamacare-optimization-vs-tax-minimization/

This could help too:

https://seattlecyclone.com/optimizing-the-affordable-care-act/

[rantk81]

@Eric - Thanks for posting those!  I especially like the seattlecyclone link.  I've been looking around for a while for a good article about how to optimize ACA subsidies and how certain actions can affect MAGI.  That link is extremely informative!

[Abe]

your healthcare costs are significantly influenced by a few factors:

1. your overall exercise regimen, which influences your heart and lungs. Patients with chronic heart or lung disease have much higher costs than those without. Genetics plays some role, but hereditary syndromes that cause significant dysfunction are (other than cystic fibrosis) very rare.

2. whether you smoke or not. If you do, your costs will be much higher due to higher risk of various cancers, heart disease, stroke, and lung disease.

3. whether you would pursue aggressive end of life care (ventilator, other life support, expensive chemotherapies, multiple surgeries, etc). Roughly a third of costs come from the last year of life in patients who do pursue this strategy.

4. If you have diabetes or not (uncontrolled diabetes damages almost every organ).

5. If you pursue long-term care for dementia or bed-bound state. (Risk of dementia is exacerbated by other illnesses, but is also heavily genetically influenced). See chart below, but this is one of the most expensive out of pocket costs for elderly. I won't get into details but people can be kept alive and miserable for years, with costs racking up swiftly.

The cost estimates found online generally assume average health (or lack thereof), which may overestimate your costs if you are able to avoid the above 5 conditions. If you are reasonably healthy, medication costs may be no more than $10-20 a month (cholesterol-lowering drug, blood-pressure lowering drug, and some tylenol). The rest (surgery, acute severe illness like pneumonia) is hard to predict but average out-of-pocket medicare costs per person per year are around $5k/year and can be used as a guide: http://kff.org/health-costs/report/how-much-is-enough-out-of-pocket-spending-among-medicare-beneficiaries-a-chartbook/

[WolfpackFan]

Health insurance costs should stay steady as you age, thanks to the ACA and it's subsidy structure.  (Assuming you can stay below 400% of poverty level)

I cannot find anything that substantiates that assertion.  Everything that I have seen indicates that age is one of the factors in determining your ACA health insurance premiums.  Also, I'm seeing the subsidy structure is based on income level alone.  No where have I found anything to suggest that subsides increase as you age.  Is there a source you have that states otherwise?

[rantk81]

At this site: http://obamacarefacts.com/obamacare-subsidies/

It says:

The amount of cost assistance you can get is based on the second-lowest-cost Silver plans in your state’s Marketplace.

So presumably if the cost of the 2nd-lowest-cost-silver-plan increases with your age, so will the subsidy, since it is based on that?

[WolfpackFan]

I don't think that's what that means.  The SLCSP is the base, and your income level determines the percentage of that base that you pay for the year.  The SLCSP base goes up the older you get.  Any subsidies are a percentage of the base and are not adjusted for age, the way I understand it.

In other words, subsidies are a function of income and income alone.  They are NOT a function of age.

[Abe]

You are correct. Even with subsidies the cost goes up due to age, and they are income based.

[Eric]

Health insurance costs should stay steady as you age, thanks to the ACA and it's subsidy structure.  (Assuming you can stay below 400% of poverty level)

I cannot find anything that substantiates that assertion.  Everything that I have seen indicates that age is one of the factors in determining your ACA health insurance premiums.  Also, I'm seeing the subsidy structure is based on income level alone.  No where have I found anything to suggest that subsides increase as you age.  Is there a source you have that states otherwise?

Have you played with any of the online calculators?  For instance, if I use the Covered California website, enter $45K per year, and adjust the age of my wife and I from 40 to 45 to 50 to 55, my monthly premium for the 2nd lowest silver plan was $343/mo, at every age.  The subsidies increased everytime, but the premium stayed the same.

[Eric]

You are correct. Even with subsidies the cost goes up due to age, and they are income based.

The cost of the policy may go up, but the subsidies also increase.  Your premiums do not go up.  Test out the online calculator for your state by putting in different age ranges.  The monthly premium stays constant as you age.

[Abe]

Ah, you are right. I didn't think the subsidies keep up with the increased premiums with age, but they apparently do! In that case, scratch everything I said above and go have a cigarette! Just kidding! It does seem that the ACA basically stabilizes the baseline cost of healthcare, so even major illnesses shouldn't break the bank (which I guess was the point).  The important thing that isn't factored from this analysis is that total co-pays will go up as you use more services with age. This will be especially important for operations (average age to undergo an operation in US is 55) and any expensive chemotherapy or immunotherapy for cancer or auto-immune diseases (co-pays can reach thousands for some courses). Looking at the kaiser family foundation estimator http://kff.org/interactive/subsidy-calculator/ , and assuming $30k/year in "income" for an individual: $2.5k x 40 years = $100k in premiums only (not accounting for inflation). We also know from the KFF analysis at http://kff.org/health-costs/report/how-much-is-enough-out-of-pocket-spending-among-medicare-beneficiaries-a-chartbook/   that Medicare patients use another $1.9k in co-pay (I took out the long-term care facility since a health non-retiree won't need it). Conservatively estimated $1.9k x 40 years = $76k in co-pay costs (over-estimate since younger patients probably will have less expense).

Total costs are then looking to be ~$170k over 40 years or ~$42k per decade. Hopefully that gives you an idea of what to expect! I would add a buffer in case of significant cost over-runs. However, this should be limited because even with long-term critical illness as an inpatient, catastrophic coverage would activate. The days of $200,000 hospital bills should be over with proper insurance.