Retirement Planning Guidebook by Wade Pfau

Author:Wade Pfau
Language: eng
Format: epub
Publisher: Wade D Pfau
Published: 2021-01-15T00:00:00+00:00

This couple has tried to be conservative with their projected health care expenses. Nonetheless, it can be hard to overcome a nagging feeling that savings are insufficient to overcome whatever retirement throws their way. To help build additional comfort with their planning, the couple decides to earmark additional funds as reserves to cover unexpected health care expenses. The nature of uncertain expenses is difficult to quantify, but to help organize their thinking, Exhibit 7.8 provides a basic calculator to determine how much reserves they wish to set aside at retirement to cover unexpected health care expenses. They are 65 and decide they would feel better if starting at 80 they could handle an additional $2,000 of health expenses through their planning age of 100. The $2,000 of expenses is identified in today’s dollars, but the couple includes an assumption that the $2,000 need grows with 5 percent inflation to match health cost growth, while the overall consumer price inflation is 2 percent. Thus, the health care spending amount is growing at about 3 percent faster than the overall inflation rate, which matches the assumption used in the Vanguard study. They also think in terms of the funded ratio from Chapter 3, in which they use a conservative 0 percent real discount factor to determine how much to set aside today to cover this additional expense starting at age 80. The calculation identified that to be comfortable meeting this additional spending need, they would like to have $83,012 of additional reserve assets at the start of retirement to manage their health care spending risk. These inputs we have discussed, including the health care budget and health care reserves estimate, are then used in the overall retirement preparedness calculations in Chapter 3.

Exhibit 7.8

Health Care Reserves Estimator

Current Age 65

Age that Additional Expenditure Begins 80

Age that Additional Expenditure Ends 100

Additional Annual Health Care Expenditure (Today's Dollars) $2,000

Inflation Rate for Health Care 5%

Overall Inflation Rate 2%

Real Discount Rate 0%

Health Care Reserves (Today's Dollars) $83,012

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