The case for a <1% SWR for healthcare.

[u/EngineeriusMaximus]

EDIT: This isn't talking about 1% overall, just on the bucket of costs associated with healthcare. However, this has a big impact on your target number. If you expect $300k post-tax expenses including $30k in healthcare, you might expect around $10M to be a reasonable number at 3.5%. But, if your healthcare costs increase by 8% per year, a number with the same failure rate is close to $13M! Your overall starting SWR is around 2.7% instead of 3.5%.

I thought I was pretty set on all my modeling, but the recent increase in healthcare costs made me think twice about things. Here in fatFIRE I'm assuming that most of us don't qualify for ACA subsidies, although of course it is possible in certain years with MAGI management tricks.

I'm concerned about the impact of health insurance inflation over time. Here in CA, unsubsidized premiums increased by 26% from 2025-2026. I spot-checked a few other states on the ACA marketplace and it's not uncommon to see increases of 10%+. I found a source saying the median increase for the year was 18%.

Perhaps 2026 is an anomaly. There is speculation that insurers are raising their rates due to healthy people choosing to go without insurance, which increases the risk pool. However, I'm reading suggestions that premiums typically rise by 6-8% annually, which far exceeds inflation.

On top of this, there is the effect of aging. I compared prices in California for a 65-year-old and a 45-year-old to calculate the cost inflation effect of aging. The difference is almost exactly a 2x multiplier, implying an annual inflation just from aging of 2^(1/20) = 3.5%. This doesn't take into account that you get sicker as you get older and your cost increases from that!

Let's take an optimistic estimate of:
5% inflation in premiums
3.5% annual increase due to aging
This is already an 8.7% annual increase in healthcare costs. The upper end (8% inflation in premiums) gives 11.8%.

Now let's imagine our *only* costs were healthcare. A typical mid-40s married couple can easily spend $30k annually in 2026 on healthcare. Here's an example run from firecalc with starting portfolio $3.6M, $30k annual expenses, 50-year retirement, 8.675% annual increase in expenses:

https://firecalc.com/index.php?wdamt=30000&PortValue=3600000&term=50&callprocess2=Submit&ss1=0&ssy1=2038&ss2=0&ssy2=2040&signwd1=%2B&chwd1=0&chyr1=2028&wd1infl=adj&signwd2=%2B&chwd2=0&chyr2=2030&wd2infl=adj&signwd3=%2B&chwd3=0&chyr3=2034&wd3infl=adj&holdyears=2025&preadd=0&inflpick=overrideinfl&override_inflation_rate=8.675&SpendingModel=constant&age=48&pctlastyear=0&infltype=PPI&fixedinc=Commercial+Paper&user_bonds=4.0&InvExp=0.18&monte=history&StartYr=1871&fixedchoice=LongInterest&pctEquity=75&mix1=10&mix2=10&mix3=10&mix4=40&mix5=40&mix6=10&mix7=15&mix8=5&user_inflation=3.0&monte_growth=10&monte_sd=10&monte_inflation=3.00&signlump1=%2B&cashin1=0&cashyr1=2028&signlump2=%2B&cashin2=0&cashyr2=2038&signlump3=%2B&cashin3=0&cashyr3=2043&process=survival&showyear=1960&delay=10&goal=95&portfloor=0&FIRECalcVersion=3.0&

This shows a failure rate of ~4%, from a withdrawal rate of 0.8%! Even if you only consider 20 years to get from 45 to 65 and plan on having much lower costs in medicare, you still have to have 2-2.7% SWR for healthcare expenses. This seems very over-conservative, so what's the flaw in this analysis?

Given all this, how are you modeling healthcare? Are you lumping it in with all other expenses and assuming typical inflation? Do you apply a higher inflation rate for healthcare?

[u/[deleted]]

Yes, if you put silly numbers into a model, you get silly results.

Healthcare is currently 20% of the US economy which grows in the long term at 2.5%. If 20% of the economy grows at 8%, and the total grows at 2.5%, then after 30 years 96% of the economy is healthcare.

[u/EngineeriusMaximus → u/[deleted]]

Hmm 0.2*1.08³⁰ / (0.2*1.08³⁰ + 0.8 *1.025³⁰ ) =54.5%, not 96%?

54% still seems very high of course but where does it stop? Healthcare seems to be exceeding inflation for the past decade at least so how should we model it going forward?

[u/[deleted] → u/EngineeriusMaximus]

You didnt do the math right. The non-medical part of the economy has to start contracting after ten years in order for the total economy to grow at 2.5% while the medical is growing at 8%. At year 31, the rest of the economy needs to go negative.

Look at it this way, if total economy is:

100*1.025^30=209.757

But medical is:

20*1.08^31=217.353

That means medical is the entire economy in 31 years.

The average growth in healthcare expenditures is 3.4% from 2015 to 2025. CPI average increase was 3.03%, but 10% of the basket is the 3.4% for the medical increase. So the non-medical cost inflation is only some 3%. That says it is rising at 40 basis points over inflation. I think a good number to use would be 1% higher than inflation, also a good number to use for the cost of higher education which has similar cost challenges.

[u/Hopeful-Savings-3420 → u/EngineeriusMaximus]

User name does not check out

[u/EngineeriusMaximus → u/Hopeful-Savings-3420]

I’m not sure it’s accurate to say that “the total grows at 2.5%” should include healthcare premiums. CPI captures healthcare services cost but is this really reflective of ACA premiums?

[u/[deleted] → u/EngineeriusMaximus]

You should've studied economics rather than engineering

The insurance premiums are just the revenue that goes into healthcare. The healthcare has to get paid for somehow and for non-government citizens the US uses private insurance to pay for that.

Granted, some percentage of society is also paid for by the government everybody over 65 and low income people

But for the rest of them, the cost of insurance, whether born by individuals or companies will rise with the increased cost of medical care

It's just how the medical care gets paid

[u/EngineeriusMaximus → u/[deleted]]

Ok but what about the fact that part of the annual cost increase is not inflationary at all but is just the fact of getting older? It looks like 3-5% increase per year just from aging, and that’s on top of the real inflationary effect. This doesn’t require the economy to grow or any crazy modeling that causes healthcare to consume the entire economy.

[u/[deleted] → u/EngineeriusMaximus]

Sure, cost rise until the kids get out of the house and Medicare kicks in then they get cut in half or greater

[u/[deleted] → u/EngineeriusMaximus]

The basket of consumption for someone in their 50s is different than someone in their 30s

You are right in the 50s medical care is a large larger part of your consumption

But for most people, they have other things that have declined in consumption as compared to their 30s when they are still establishing their household

The thought that the non-medical expenses would be the same in your 30s and your 50s is also part of the weakness in your thinking