The Wrecking Ball Most Likely To Demolish Your Early Retirement Plans

Congratulations, you’re on the path to retire early.

Are you sure?

One thing I’ve noticed from perusing the financial independence blogs and commenters around the internet is that many following the path towards an early retirement have some blind spots that they’re ignoring. Today I’m going to talk about the most glaring blind spot in most financial independence plans: Healthcare.

At 65, the average couple retiring in 2018 needs approximately $280,000 saved after tax to cover their out-of-pocket healthcare expenses in retirement, according to Fidelity.

Keep in mind that the average retiring couple in 2018 is planning for a retirement of approximately 20 years and has Medicare to fall back on for their healthcare needs.

Healthcare on FIRE

If you’re among those planning for an early retirement, chances are very high that the burden of your healthcare costs are going to be much higher, for a few reasons.

The first is the length of your retirement. By choosing to retire before the age of 65, you have a much longer time period to plan for that could be beset with chronic health issues that you will have to address. If you’re younger now than Fidelity’s hypothetical 65-year old couple, chances are you’re going to have to plan to live well past the age of 85.

I’m in my late 30s – even if I retired at full Social Security retirement age for my cohort, which right now is age 67, I should be planning for a retirement that lasts much longer than 20 years – I would put 30 years as the minimum. It would be more prudent to plan for a 50 year retirement. Every year before the age of 67 that I retire is another year of healthcare expenses that I have to plan for.

Another reason is that Medicare is not going to be available to you. Yes, Medicare is a program in dire financial peril – but that’s a topic that I would be better off discussing on a political or policy blog posted on Unreined. The typical age of Medicare eligibility is 65 – there is some leeway there for those who have been eligible for Social Security for two years or more (the law actually says 24 months), or those who have been diagnosed with end-stage renal disease, but for the sake of ease let’s consider that you’re not going to get your Medicare coverage until the age of 65.

It's Expensive To Go At It Alone

So you’re going to have to look to other options for your healthcare coverage.

Let’s think about where that coverage could come from. The most obvious solution is to go uncovered and to pay out of pocket for all your healthcare expenses.

I don’t think that’s feasible for most of us. Not only will you be denied some forms of treatment and admission to certain facilities, but the costs of paying out-of-pocket prices for healthcare services are unsustainable.

An uninsured person, paying out of pocket, will pay upwards of $200 for a basic primary care appointment in 2018, according to Anthem. A basic chest x-ray, a very simple diagnostic image, can cost in the $400-$500 range depending on geographic location and quality of the facility. For an emergency room visit requiring more complex diagnostic tests and treatments, the facility costs alone will take at least a $1,000 bite out of your net worth – and that’s before the physicians’ bills roll in.

Most of us avoid these costs by belonging to a group health insurance plan where an employer or other entity covers some or most of the premium, or cost, of the insurance policy. When we retire early, more likely than not our access to group health insurance is going to go away, which means we’re left shopping for individual health coverage.

Let’s leave aside political arguments over the Affordable Care Act (aka Obamacare) for another day – it will suffice to say that, for a time, the ACA did make shopping for individual health coverage easier and less expensive in the long run, and many of those advantages have diminished or evaporated entirely under the Trump administration.

Today, individual health insurance will require a monthly premium of $400-$500 for individual coverage, and well over $1,100 for family coverage.

So if you’re a three-person household, you need to plan to spend at least $1,200 a month for health insurance BEFORE you consider any copays or coinsurance that might have to be paid at the time of care and treatment. Not only that, but you have to plan for that $1,200 to go up over the years.

For the sake of simplicity, though, let's assume I retire at age 40 and my household's insurance stays stable at $1,200 a month for the approximately 25 years I'll have to wait for Medicare eligibility. That would be $300,000 a month just to stay insured until Medicare kicks in.

Here’s the worst part – healthcare inflation far outpaces inflation in other areas of the economy. Since 2008, the cost of individual health insurance has increased by 123 percent – that $1,200 you’d pay in 2018 might be closer to $2,700 per month in 2028, and closer to $6,100 a month in 2038.

It Really Adds Up

And those monthly premiums only get you to your Medicare eligibility date. After that, you still need to plan to spend the $280,000 – or whatever number Fidelity comes up with when you reach Medicare eligibility – for your out-of-pocket expenses that occur on top of what your Medicare and supplemental coverage pay for. So even if I somehow avoided all that inflation and only paid $1,200 a month and had $280,000 in out-of-pocket costs after age 65, I would need at least $580,000 set aside for health care alone to get through my retirement.

How many FIRE people around the web are openly planning to spend upwards of half a million dollars in healthcare expenses during their retirement? Keep in mind that's a ridiculously low-balled estimate, their costs are more likely to be well over $1 million when all is said and done - and, God forbid, if they have to deal with more complicated diagnoses like cancer or HIV or hepatitis, maybe more than $2 million.

It’s deceptively easy to take that trusty 4% rule or income replacement technique and come up with a nice round number where we can say “this is it, I’ve done it, I’m financially independent!”

Yet if we fail to take into account the rapidly increasing cost of healthcare and the tremendous burden of covering our own healthcare expenses after an early retirement, we’re putting ourselves at risk of retirement failure – a failure that could put us back into the shackles of debt and poverty.

Please plan accordingly!

In future posts on this topic, I’ll discuss how and where we can save for healthcare, and I will also endeavor to come up with a coherent, easy-to-use method for calculating a baseline of healthcare expenses after an early retirement.