For Americans contemplating retirement, the future cost of health care continues to be a significant uncertainty. While healthcare inflation has decreased since the early 2000s, medical cost increases still outpace general inflation. Experts believe that we will experience a 5%-6% average annual rise as the population continues to age, medical technologies expand, and costs shift to the individual.
To complicate matters, the government’s role in providing health care post-65 means that those planning for a thirty-year retirement must factor in political and tax considerations. The Medicare Board of Trustees’ recent report predicts that the Medicare Part A (Hospital Insurance) Trust fund will be depleted in 2026, at which point Part A revenues will support only 85% of Part A costs. There are both positive and negative forces impacting future costs. Drugs going off patent, increased efficiencies, care coordination, and healthier lifestyles point to lower costs. An aging population needing and wanting more care, medical innovations, and new therapies point to higher costs. Depending on which forces are stronger, a solution to the underfunding of Medicare may include increased means testing of benefits, higher premiums, and delayed eligibility (past age 65).
Factor in Appropriate Healthcare Inflation Rates in your Plan
As financial planners, we face the need to make projections with imperfect information. Our process is to inventory what we know today, learn what we can from looking at the past, and make reasonable judgments about the future. We have concluded that budgeting for a 6% increase in retirement medical costs is prudent. This takes into account the broad-based increase in health costs, and the fact that as you age, you consume more health services. For pre-retirees, cost increases are more dramatic because premiums rise 4% per year from age 40 to age 60 simply due to aging. Many pre-retirees handle these increases by electing higher deductibles- an unsatisfactory long-term solution.
Smart Moves to Cope with Health Care Costs
- Work with a qualified independent health insurance agent. Experts recommend consulting online sites for information, then using an agent to purchase coverage. Agents are paid by the insurance companies and not by the consumer, so there’s no extra cost, and you are likely to benefit from their unique knowledge of the changeable marketplace. This advice applies to those on Medicare and those with private plans pre-Medicare. Health insurance should be re-examined every year.
- Budget health care expenses separately from other expenses, and apply a higher inflation rate to health costs than to other expenses.
- Consider lower premiums and higher deductibles in the context of your health. Insure the catastrophic expense first, but always have coverage. Be sure you have adequate liquid savings to cover a higher deductible.
- Save for health care costs in a tax-deferred or tax-free vehicle such as a Health Savings Account (HSA) or IRA. Consider not using HSA contributions to pay for current needs but allow them to accumulate for future needs (tax-free growth and tax-free withdrawal for qualified health costs). More information on HSA’s can be found in our blog The Lesser Known Benefits of HSA’s. If you have substantial health costs, the tax impact of an IRA withdrawal may be offset by a large medical deduction in the same year.
- Use a financial planner who is well versed in the details of health care costs and incorporates them into a long-term financial projection that reflects your financial and health circumstances.
To ensure that you aren’t blindsided by future healthcare costs, it is important to be informed. Making a review of your total health care costs part of your regular financial checkup will serve you well as we continue to face uncertainty and changes in the health care industry.