1. Don says

Comment one: I’m a mathematician, and what I usually do is compute my known predictable expenses. I usually add for a pair of glasses, and save that amount. Most years, I’ve used up my account within the last few weeks of the year and I just haven’t bothered to get new glasses. Next year I’m budgeting for new glasses for my wife and for me. It isn’t mathematical, but it works pretty well.

Comment two: I suspect that the normal distribution is probably not correct for this purpose. I suspect a long-tailed distribution is probably more appropriate, like an exponential distribution, because medical expenses aren’t symmetric. Most years you have expenses right around your predicted amount, but on rare occasions you have a lot of expenses (although generally that is capped by out of pocket limits). Just something to think about.

2. Harry Sit says

Don – Thank you for your comments. I have a column in my spreadsheet for user-specified probabilities. You can assign whatever distribution to the bands.

3. Debbie M says

Choosing an amount is fascinating. So far I’ve been healthy, so my expected value is pretty close to my minimum value (with a long tail). Except one year my minimum value was actually too high an estimate because my prescription was switched to a generic brand and I found a much cheaper way to get glasses (online).

I hear people with several kids can generally count on at least one expensive thing happening, though.

Fortunately, my company has the three-month post-year grace period thing (which I believe is allowed but not required by law), so I can safely overestimate a little. And with all the little deductibles at the beginning of the year, I can definitely spend more then than in the average month. So far I haven’t had to use it, though.

There are plenty of other fascinating questions such as: Do you include non-urgent things like wisdom tooth removal, hoping that it will force you to finally get around to doing it, or do you keep that out of the equation, fearing that you can’t trust yourself? Do you pay an extra \$9 for a debit card, knowing that it will help you actually make your claims, or do you risk not having the card, hoping you’ll actually fax in the forms? I can barely even predict my actions, let alone change in my health, the cost of things, or in the availability of things.