Retirement calculations: how to account for 2 different inflation rates (healthcare and "regular" expenses)? CFiresim?

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Topic Author
Gnomon
Posts: 47
Joined: Fri Sep 17, 2021 8:11 pm

Retirement calculations: how to account for 2 different inflation rates (healthcare and "regular" expenses)? CFiresim?

Post by Gnomon »

In a previous thread I asked about the costs of various supplemental health insurance premiums once you are 65 and Medicare eligible. While it's going to be quite complicated making the trade-offs in the various plan options once I'm medicare-eligible, I want to figure out how I would factor these quite significant expenses that are above and beyond regular expenses, into my retirement readiness calculations, today.

The premiums do vary wildly depending on all sorts of factors, but a given individual can probably come up with a reasonable guess for their min and max annual premiums at age 65, and then do the overall retirement calcs at the max and min levels, and with the inflation adjustments. If the numbers still work even at the max levels, all is good. But I have a feeling they won't.

The annual inflation rate of healthcare premiums seem to currently be in the 7%, plus or minus a couple percent, range. That's significantly different than the ~2% "rule of thumb" to use for annual inflation of all other expenses, and can really blow your expenses from age 65 to death (age 95 or whatever you choose) way beyond expectations. Does anyone think using 7% inflation exclusively for healthcare premiums is too high? too low? Or what range would you recommend I use?

When I ran numbers just on these "Medicare+" costs over a 30 year period (for age 65-95) and 7% inflation, I get cumulative numbers indicating I'd need an additional ~$300k in the min case, to as much as an additional $1.2 million in the max case. (For the max case and the $1.2 million number, I just inflated $1000/month, or $12k annual, at 7%, and summed the annual amounts, but $1000/mo may be a bit low for the max case)

For many people, these are hugely disruptive numbers. It can take you from thinking (before factoring in these Medicare+ numbers) sure, I can retire no problem, to uh-oh, maybe I'm not ready to retire after all.

But I'm not sure how to fold these stand-alone calculations for Medicare+ back into my retirement calculations before I was considering this.

So that was the background explanation. Now to my question:

The online retirement simulator cFIREsim (at https://alistair-marshall.github.io/cFIREsim-open/ ) is about the only tool I can find that allows you to enter 2 different streams of expenses at different inflation rates and different start dates. In the "Spending Plan" field, you can select "inflation adjusted" (I presume that means using CPI) but there are several other choices in the drop down menu, and I have no clue what those are. Does anyone had views on using some of the alternative adjustments instead?

Besides the "Spending Plan" field, there is also a "Individual Expenses" field. If I understand the purpose of that, this is where I'd enter the Medicare+ expenses beginning at age 65, through death, and set its own inflation rate (a fixed rate is the only choice besides CPI in this field, so here I'd enter 7% annual).

Before I spend a lot of time running various scenarios to try and figure out how much this blows up my retirement plan (or not), does cFIREsim seem like a reasonable tool to use for the purpose I described above?

Thanks.
Topic Author
Gnomon
Posts: 47
Joined: Fri Sep 17, 2021 8:11 pm

Re: Retirement calculations: how to account for 2 different inflation rates (healthcare and "regular" expenses)? CFiresi

Post by Gnomon »

Hi, bumping this in hopes of getting some responses.

Is the reason for no responses because I am making a judgment or 1st-pass calculation error in arriving at the conclusion that this multi-hundred-thousand to million dollar cumulative health premium expense, once on Medicare and until death, will have a major impact on my (and most people's) retirement readiness calculations (and that the simplistic retirement readiness calculators are ignoring this completely)?

The ideal answer would be yes, you can ignore this completely. That would make things much easier. But I'm not seeing how that answer is possible.
abc132
Posts: 2435
Joined: Thu Oct 18, 2018 1:11 am

Re: Retirement calculations: how to account for 2 different inflation rates (healthcare and "regular" expenses)? CFiresi

Post by abc132 »

I have always started with a retirement medical cost that seems reasonable in real dollars for today, and then I have it increase 3% over inflation for each year I age.

If you assume 10k real at 65, this would increase annually by (inflation+3%) in nominal dollars or (3%) in real dollars. This 3% real increase covers additional medical costs due to aging another year and the increase in medical costs over time for a given set of care.

Sorry, I'm not sure about the best method for incorporating this type of thing into CFiresim.
Sahara
Posts: 603
Joined: Tue Dec 04, 2018 5:21 pm

Re: Retirement calculations: how to account for 2 different inflation rates (healthcare and "regular" expenses)? CFiresi

Post by Sahara »

NewRetirement uses optimistic and pessimistic rates of inflation in their planner. They also use different rates in different areas - one rate for general inflation, one for Medical cost inflation, one for housing. You can override the defaults if you want. You enter your own account growth rates. Then you can toggle between optimistic and pessimistic and average while viewing your plan. The default they set for pessimistic medical inflation is 5.5. It’s pretty easy to compare the options, for example Original Medicare plus D to Original Medicare plus Supplement plus D to Medicare Advantage in their tool. I agree that the cumulative costs can loom quite large.
Topic Author
Gnomon
Posts: 47
Joined: Fri Sep 17, 2021 8:11 pm

Re: Retirement calculations: how to account for 2 different inflation rates (healthcare and "regular" expenses)? CFiresi

Post by Gnomon »

Thanks for the replies.

ABC123: If CPI plus a fixed percentage could be used, that would make things easier as far as most retirement calculator inputs go. But I wonder if medical premiums actually follow that relationship fairly closely (a fixed percentage above CPI). Have you or anyone seen any data on that?

Sahara: Thanks for the Newretirement.com reference. I had not come across that one before. I registered for a free account, but you really have to buy the subscription version to get any real control over the variables. It seems to mostly operate as a black box, and they don't tell you much about what they're doing in their calculations (or maybe they do when you subscribe). Anyway, it does have more inputs for medical expenses than other tools I've seen so I'll probably sign up for the 2 week trial when I anticipate a slowish period for work when I'll be able to spend time messing with it.

If they also have a way to adjust for COL changes (relocating from one city to another including sell+buy new home, shortly after retirement) that would be a bonus since I can't find any retirement calculators that do that, and that's something I need to also factor into my plan.
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