Early retirement

Depends on your definition of "normal" dosen't it? For example a large number of state employees have life time health coverage after their vested retirement age (sometimes at 50 with 5 years of service). So they would not be "normal" by your definition?

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I find the same issue trying to run a small business as a single person. I am getting to the age where my body is starting to have issues. I looked at getting a personal medical plan, and they quoted me $4200/month, the state maximum, due to a pre- existing condition. I am too small of an operation to have a group plan. It is starting to look like my only real option is to give up on my business and find a day job with a medical plan, or pin my hopes on some kind of government mandated universal health plan.

-john-

Assuming that a 50-year-old male is just looking to fund the insurance policy until Medicare kicks in at age 65 and his medical insurance costs go down dramatically, immediateannuities.com says that he can get a fixed annuity that pays $1,000 per month for 15 years for $131,579, with the provision that if he dies before age 65 his beneficiaries get the remaining monthly payments. However, the monthly payments are not adjusted for inflation.

The same male can get an inflation-adjusted single life annuity with initial benefit amout of $1,000 per month for $253,680. I haven't found the cost of an inflation-adjusted 15 year annuity, but it probably is in the $180,000 range.

The bottom line is that he would need to set aside far less than $300,000 to provide for medical insurance to age 65.

Dave

Dave

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It depends on what you mean by "early", I suppose. I am at the stage of really starting to look at some the issues, as I crossed the half-century mark last year. Right now, my tentative plans are to punch out around age 60.

My 30 mark with the company comes up in 2011. I have a pension coming, but not much in the way of retiree health coverage. I believe, but I'll need to confirm with HR, that I can continue the company's coverage indefinitely (paying the full premium of course). If the market had a good bull rally over the next few years, I go earlier. A really bad bear market might delay things, say to 62 and start early SS.

Brian

But what if they raised the eligible age for Medicare?

And even if he/she did have 300K for health insurance, we already know that the rate at which medical expenses are going up far exceeds the rate of inflation that the above mentioned 4% withdrawal rule would allow for.

If at all, one should budget more than 300K for this, not less! The cost of making incorrect assumptions is poverty in old age...I'd err on the very conservative side.

Anoop

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Most of my research on early retirement suggests 4% withdraw rate might be "too high" and 3% might be closer for money to last 40 or 50 years. 3% allows for initial withdraws to be the dividend yield of a portfolio, allowing principal to grow for a significant time while retired.

There is more than one way to retire early, more than one way to withdraw and I have found a whole web community which discusses this (not sure if appropriate to post links, if you want a link, ask).

Having a good handle on expenses is important. Health care as you mentioned is on that list. Replacement cars every

Withdraw strategies also factor in- the 4% rule was designed for a

Dividend yield is one way many people can retire early (live off yield, let principal grow). Not increasing withdraws when market drops is another. There is a 95% rule I don't fully understand, but I believe it suggests to leave 95% of portfolio value intact or to adjust withdraw rate once portfolio is 95% of original value which some people also use.

I have 18 years to retire at age 53. I plan to have an HSA for health expenses, a paid off house and travel much more than I do now (Europe, cruises, skiing in the rockies, white water rafting).

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Skip, as someone mentioned you only need to bridge yourself until Medicare eligibility, not a lifetime, and it might be more like a 10-12% withdrawal rate. But you're right, it's going to be a substantial cost for an early retiree, under the present system (which I believe will change, but who knows how long that will take). Some possible ways to help:

• get some part time work that has benefits, even if only access to self-paid health insurance at group rates (if that's helpful). Not an option everywhere but it's out there.
• do some part-time work as an independent contractor, strictly for the purpose of paying for this, and being able to fully deduct it - which effectively reduces the cost. Under current law you would pay only self-employment taxes if you earn k and pay k in health insurance premiums. With no SE income it's an itemized deduction, part of medical expenses, which are only deductible to the extent they exceed 7.5% of your AGI.
• plan waaaay in advance and stick with a career that leaves you with some benefits, if early retirement is a priority. I'm doing my best to talk a client into this one at the moment...staying put with the present employer instead of job-hopping to yet another, very similar job, would set up excellent early-retirement benefits. People need to factor this into job changes once they reach a certain age.

I don't think working a bit is such a bad way to go, if you plan it in advance so you have something enjoyable (or at least tolerable) to do. Especially if the upside is being able to retire early.

-Tad

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As Dave responded, the health issue may be more about bridging the gap to 65. If 'normal' is median, then it just doesn't happen. On the other hand, you read about the $80,000 earners who never changed lifestyle as they worked up from $40,000. If one can save a high (25-30) percent of income, they may find they are saving toward that 20X number but they can live on less than half their pre-retirement gross.

I think the health warning is the one to worry about more than any other. I can plan for a certain lifestyle yet cut back on things like vacations, dinners out, etc. in bad times, but the rising health costs are toughest to plan, and will eat into everything else.

Joe

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I see two issues:

As joe alludes- most of my ER strategy now is accumulation. I started saving 6% of my pay (small amount- just graduated and single) in

The expenses part also varies, but if a person could LBYM to save

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The 401K withdrawal difficulties only would last until the age when the withdrawal penalty goes away.

Also, younger people spend more than older people, on things such as kids and mortgage. So when one gets to the point of retirement, hopefully the kids are grown and do not require maintenance, house is paid off, etc.

Also, instead of full retirement, one could opt for working part time or just getting a less demanding job.

Skip, I'll use a term I've used before. That $1000 a month pays for sick care, not health care. Health care comes from daily exercise, spending time and money in the produce department at the grocery store, and minimizing stress in one's life. These are far less expensive ways of addressing the issue.

That said, I'll be the first to admit that we wouldn't have been able to retire early if it hadn't been for the health insurance component of my husband's pension.

Elizabeth Richardson

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I've observed health care costs have been doubling every five years for middle age. About half of that is due to premium age adjustments - every five-year cohort is 40%+ higher premiums and copays. The other half is half is medical inflation- a good 10% a year. So age 50 to 65 is three doublings or a factor of eight. I find the 5-year doubling period for the past 15 years when I total all my premiums and outlays.

Meidcare premiums and copays are on the same doubling rate, but starting at a lower amount. The premiums have inreased from $53 a month to $122 for standard medicare in the past five years. Plus co-pays are going up. Plus means-testing is phasing in ...

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At some point, won't costs have to level out? If any one sector grows faster than the rest of the economy, won't it grow as its share of the pie, until it crowds out all others? (I recall in 1984 being told that semiconductor sales in $$ grew at 14% long term. I mumbled 'not for long' and was asked to explain myself. If the economy grew at 5%, that meant that semi's share of the pie would double in 8 years, give or take. Indeed, cars were using more electronics each year, but at some point it had to level out. It took a couple decades, but the growth and forecasted growth had mitigated.)

Joe

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The US has an insatiable appetite for medical care - basic healing, extreme healing ($100K drugs for a few extra months of life), looking good, and sport. 16% of US GDP is now health-related, with projections of 20% to 25% by mid-century not out of line. The wealthy US economy decided to spend its economic surpluses on health.

That 16% isnt funded out of thin air. Its a mixture of public and private revenues. 25% of the federal budget goes to medical:

Its not of line to project 1/4 to 1/2 of my retirement budget to be devoted to medical premiums and expenses, the way trends are going.

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My belief is that costs won't keep rising at these rates because the money isn't there to pay for them - same reason $140/bbl oil doesn't currently look sustainable. We talked through this topic in the Feb 08 thread "Planning for health care costs in retirement" - it was when that Fidelity study was getting press, where they said a newly retired couple needs $215k just for health care. But this requires a market where money just appears from thin air, because the average retired couple has something like 1/3 that amount saved, for all retirement costs.

Many economists used to say that US gasoline consumption isn't price-sensitive. Then gas hits $4/gallon and you can't give away an SUV, and we see the first-ever drop in year-on-year gasoline use. At some point the same will happen with health care, it's not going to become

Or put another way, there's a finite pool of dollars available for consumption of all these things...health care, housing, energy, etc. It's zero-sum, so a dollar more for energy is a dollar less for the others. And none of them are immune to basic principles of supply and demand. The costs can temporarily get skewed by bad policy (cheap financing for subprime borrowers, lack of workable health-care insurance approach for all of US, federal subsidies for the purchase of low-mileage passenger vehicles) but that won't go on forever.

-Tad

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I don't think anyone can plan for employer-provided health benefits in retirement. You might have them when you retire, but how long will it be before the employer makes unilateral changes?

There are several "tiers" to the PERS retirement system in Alaska. The court has ruled that the retirement benefit package promised to the employees, including system-paid health care, are a contract and cannot be unilateraly revoked. I don't know why this doesn't seem to apply to privately admnistered pensions. Perhaps the employees aren't so well organized nor represented.

Elizabeth Richardson

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My recollection of the deciding case (Douglas Aircraft - before it was part of McDonnell Douglas now Boeing) was that the offer of health care after retirement was not a contractual promise and was not covered by ERISA (pension law).

I suspect that if you read the Alaska plan it specifically promises coverage after retirement. I no longer have the booklets that I got from General Dynamics which offered coverage until age 65 and then an allowance to cover the cost of Part B. After GD sold the missile business to Hughes, we were left to Hughes' generosity - the ability to buy health coverage at COBRA rates until age 65 and then you depend solely on Medicare. There was a legal challenge but the Douglas precedent held.

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This is certainly a concern, but your healthcare insurance premium seems high. I just got a price sheet from Kaiser Permanente for individual (non-employer) plans. Monthly rates for each covered adult ages 50-54 are $199, 55-59 are $249, 60-64 are $298. This is a 70/30 plan, $2000 deductible with hospitalization and prescription coverage, $30 copays. This is similar to plans I've had with previous employers so I would call this a "good" plan, but perhaps it's not? Do health insurance premiums vary that widely region to region? Perhaps then early retirement may also entail changing residence to a lower-health-insurance-premium location?

-Will

william dot trice at ngc dot com

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