How Inflation Affects Retiree Health Care

  • While the cost of health care has fallen recently, it’s still nearly 30% higher than it was a decade ago, according to the US Bureau of Labor Statistics.
  • “Spending shocks” and rising healthcare costs can put investment portfolios at risk, especially during periods of market volatility.
  • There are a number of ways retirees can safeguard so-called return risk sequence savings, experts say.

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There are many risks for retirees, and those risks can be compounded by the rising cost of health care in retirement.

While the cost of health care has fallen recently, it’s still nearly 30% higher than it was a decade ago, according to data from the U.S. Bureau of Labor Statistics. Medical prices typically grow faster than other costs to the consumer.

There is also a greater chance that retirees will need health care as they age. A 65-year-old couple who retires in 2022 will spend an average of $315,000 in health care costs in retirement, not including long-term care, according to Fidelity Investments.

In addition, retirees face a greater likelihood of “spending hits” due to unpredictable costs, such as medical expenses, according to JP Morgan Asset Management’s 2023 retirement guidance.

Of course, each retiree’s costs will be different, said certified financial planner Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Michigan. “There’s no silver bullet for this,” he said, noting that health care expenses can be hard to predict.

Periods of stock market volatility can further aggravate financial problems due to so-called return sequence risk, caused by using your portfolio when asset values ​​have declined. Research shows that the wrong timing of withdrawals can hurt your savings over time.

Retirees may be exposed to sequence of return risk through a “shock spending event,” such as expensive health care or simply higher living expenses over time, Watson said.

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One strategy to reduce this risk is to increase income by waiting to claim Social Security, he said. For 2023, the average retirement benefit is $1,827 per month, but the maximum payment increases to $3,627 at full retirement age, which is currently 66-67.

Watson also suggests a “cash cushion” to help cover living expenses during a prolonged stock market downturn. “We always have to have a Plan B to finance our living expenses,” she said.

While experts may suggest one to three years of cash value, you can cut expenses or keep less cash by supplementing with a home equity line of credit or a pledged asset line of credit that uses your investment account as collateral, said.

Carolyn McClanahan, CFP and founder of Life Planning Partners in Jacksonville, Florida, urges retirees to become “empowered patients” when it comes to health care expenses.

“The best way to plan for health care costs is to learn to be a good health care consumer,” said McClanahan, who is also a physician and a member of the CNBC Advisory Council.

For example, retirees can reduce unexpected medical costs and surprise purse withdrawals with some health moves. You can also ask questions about tests or prescriptions before accruing expenses.

“Because health care is so dependent on fees, doctors have very little incentive to help you make better decisions about what you can do to keep costs down,” he said.

McClanahan also highlights the financial, physical and emotional benefits of working in retirement, at least a part-time job. “Work is an important way that people engage socially,” which could provide a cognitive boost, she added.