Forecasting Medicare Part B Costs

Post questions about how to use the planner, user inputs, how the planner works, and comments and suggestions.
Post Reply
Old Mike
Posts: 17
Joined: Wed Aug 19, 2020 2:52 pm

Forecasting Medicare Part B Costs

Post by Old Mike »

Hey Jim!

My wife and I are both 60 and we plan to retire at the end of next year. FRP has been a blessing for us to prepare our work force exit. I've tried to factor in as much as possible for Additional Inputs and I want to make sure I have Medicare Part B costs entered correctly.

Using today's cost schedule from Medicare.gov, my wife and I would pay $144.60 each. When factoring this into FRP, I'm using $289.20 as the annual expense and have COLA entered as "inflation".

Three questions...
  1. Have I set this up correctly?
  2. I've read some articles that Medicare costs rise each year by "wage inflation" which is allegedly about 1% less than CPI movement. Does this sound right?
  3. If the answer to #2 above is yes, then would it be correct to assume the having COLA set as inflation is somewhat excessive? (In FRP, I have inflation set to 3%.) If not, what Medicare inflation would you suggest?
I will have a couple of other healthcare cost questions later but let's start here.
Last edited by Old Mike on Tue Nov 17, 2020 6:26 pm, edited 1 time in total.
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Forecasting Medicare Part B Costs

Post by jimr »

Based on what the medicare.gov site says about part b premium costs, I think those premiums are monthly cost, not annual. Aside from that, setting the cash flow up using "tracks inflation" seems like a sensible approach. You could get fancy and use "Fixed COLA" instead and set the COLA rate lower than inflation, but it probably won't make much difference and it adds complexity.

Really, forecasting the best rate to use falls more under "financial planning help" rather than "technical program support" and I'm not a financial planner and don't want anything I say to be misinterpreted as financial planning advice.

For that, I suggest bogleheads.org as a decent source of DIY financial planning information.
Old Mike
Posts: 17
Joined: Wed Aug 19, 2020 2:52 pm

Re: Forecasting Medicare Part B Costs

Post by Old Mike »

Thanks Jim. I did mean to suggest that I was multiplying the $289.20 by 12. Sorry about that.

I don't post any more on the BH forum. The people there tend to provide too many non-answer answers. And when you get specific, they only seem to reply that everything the poster has done is wrong. I left that forum a long time ago.
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Forecasting Medicare Part B Costs

Post by jimr »

That's too bad that you haven't had good experiences at bogleheads.org.

I haven't been as active there in the past few years, but every now and then I take a look and it still seems like there's a lot of good discussion going on. Maybe it's more hit or miss now.
Old Mike
Posts: 17
Joined: Wed Aug 19, 2020 2:52 pm

Re: Forecasting Medicare Part B Costs

Post by Old Mike »

Hi Jim,

Let's take the forecasting part out of my previous question and just look at how to plug a future expense into FRP.

I think it was the Kaiser Family Foundation that said an average healthy couple retiring in 2019 would spend $395k in healthcare costs including premiums and out of pocket expenses between 65 and 95 years of age. If we are 5 years away from 65, then we should probably inflate that number. Some say 7% is a fair inflationary number for healthcare expenses. That is a scary thought but let's go with it.

The $395k turns into $554k in five years at 7 percent.

Since this is a cumulative number over 30 years, how would one create an expense input into FRP for this? It doesn't make sense to just plop $554k as a one-time expense at age 65 but I'm unsure how to divide this number up over a 30 year period.
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Forecasting Medicare Part B Costs

Post by jimr »

The answer depends on how they calculated the original estimate. Did they take into account the timing of the payments and the time value of money, or did they simply add up all the payments?

In truth, trying to convert that Kaiser lump sum estimate into an annual expense doesn't seem very straightforward to me because you have to understand all the assumptions that go into the estimate and also do appropriate time value of money conversions. In the end, it'd likely be easier and more reliable to google to find another source that offers an annual estimate of expected expenses.
Old Mike
Posts: 17
Joined: Wed Aug 19, 2020 2:52 pm

Re: Forecasting Medicare Part B Costs

Post by Old Mike »

I can hardly believe that with all of the information out there about retirement planning that no one is seriously giving thought to putting a number on one of the single biggest expenses in retirement. I don't think anyone can put forth a serious effort to plan for retirement without certain critical numbers, yet no one is doing it. Perhaps all the talk about early retirement is conjecture and no one is actually retiring early, or if they are doing it then its being done blindly.

I'm certain the KFF number is a cumulative actual payment amount. In its simplest form, it is an average of $13,166 per year. But how does one factor that into FRP? Perhaps its best to enter it into FRP as an annual $13,166 expense but without any inflation/COLA.
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Forecasting Medicare Part B Costs

Post by jimr »

If you're sure the estimate is a lump-sum adjusted to today's value dollars, you could enter it into FRP by entering it as a one-time expense at age 65. To accomplish this, you'd set up an "other expenses" cash flow with start age and end age equal to 65, the amount set to $395k, and the COLA set to fixed COLA at 7%.

The trouble with doing it this way is that you don't get to earn any return on that money, since it's gone from your portfolio right away. In real life, assuming your portfolio return is greater than inflation, you'd hopefully do much better than that because you'll be paying the lump sum over several years.

You could enter it as an annual expense, but I don't think $13k with no cola is correct. I think you'd want to use $495k/30=$16500 and also because you're paying this amount over time with less and less valuable dollars (due to inflation), you'd want the payment to adjust for inflation (eg track inflation).

As a test, you could try entering both approaches in additional inputs and selectively enabling/disabling them to see the difference between the two. Also, if, as another test, you set your portfolio return to the inflation rate (and the std dev to 0), I think these two approaches should result in roughly the same ending portfolio value, showing that they're basically equivalent ways to enter the same thing. (as an aside, any differences in ending portfolio balance between the two approaches would be due to differences in the amount of taxes due).
Old Mike
Posts: 17
Joined: Wed Aug 19, 2020 2:52 pm

Re: Forecasting Medicare Part B Costs

Post by Old Mike »

Hmm... I feel like I'm being dense here.

If the KFF estimate was $395k in 2019, then we want to inflate it to a 2025 estimate... so six years of 7% inflation (I originally wrote five years, but was wrong about this). That is then $593k of total lifetime payments for healthcare premiums and out of pocket expenses. Then we divide by 30 years to get a starting input of $19,766.

But since this $593k is thought to be the sum of the actual payments for all parts of the healthcare outlays, I don't understand why we would put inflation on top of that. Can you set me straight here?
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Forecasting Medicare Part B Costs

Post by jimr »

Old Mike wrote: Fri Nov 20, 2020 12:03 pmBut since this $593k is thought to be the sum of the actual payments for all parts of the healthcare outlays, I don't understand why we would put inflation on top of that. Can you set me straight here?
As I understand it, the lump sum is the total amount of all future healthcare expenses discounted back to the present (eg a lump sum in today's value dollars). To convert a lump sum into a series of payments that will be made in the future, each payment has to be adjusted to account for the impact of inflation. If you don't do that, each future payment will have less and less value and the sum of the payments (in real dollars) wouldn't actually equal the original lump sum.

The key is that you always have to take into account the timing of any cash flows because the timing determines its real (inflation adjusted) value.
Post Reply

Who is online

Users browsing this forum: Ahrefs [Bot] and 26 guests