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How to Combat Healthcare Cost Inflation in Retirement

Health-related expenses can arise unexpectedly. Learn how to prevent them from throwing your long-term plan off track.
You’re ready for retirement. You’ve prepared mentally, emotionally and financially. But inflation may occupy a corner of your mind, considering the jumps it has made over the past year. The U.S. Bureau of Labor Statistics reported an increase in the Consumer Price Index (CPI) of 5.4% in July from a year earlier, matching the largest rise since August 2008. While everyone is talking about inflation for all sorts of reasons, it may affect retirees in other ways – namely, rising healthcare costs.

Even with Medicare, healthcare costs can add up to a major component in a retiree’s budget. According to the 2021 Retirement Healthcare Costs Data Report, lifetime health costs for couples retiring in 2021 can range widely – from $156,208 to $1,022,997. Factors that impact expenditures include coverage, health, longevity, income and state of residence. And, unfortunately, the historical trend that healthcare costs rise 2 to 2.5 times faster than overall U.S. inflation is expected to continue.

No reason to panic. Remember, you’ve planned for this and you have an advisor to help you through it.

How to combat it
There’s nothing we can do to stop inflation, but we can make a plan to deal with its potential implications. Knowing unpredictable healthcare costs may be coming – and will likely be higher than they are today – it’s wise to examine your specific situation with your advisor so you can set yourself up for the retirement you envisioned. Here are some do’s and don’ts as they pertain to your financial planning for rising healthcare costs due to inflation.

Don’t expect Medicare to take care of it all. Despite having Medicare coverage, there are still out-of-pocket costs, such as dental, vision, long-term care and other potential expenses. It pays to learn how the system works and what can be done to minimize costs. Work with a trusted advisor to help navigate the waters and understand the differences in coverage options. That might mean considering a Medicare Advantage Plan (or Part C) or a Medicare supplement to ensure you’re covered. Determining if your doctor and preferred facilities accept Part A and Part B, as well as ongoing medication costs (Part D), should all be calculated when comparing plans – and recalculated when open enrollment launches each October. Also, keep in mind that Medicare does not cover long-term care, so you would need to consider adding that coverage separately.
Do optimize your Social Security strategy. Before you stop working, think about when and how to implement a claiming strategy that will help your household get the most from Social Security. So much of our strategy on how to maximize Social Security retirement benefits depends on guesses as to how long we’ll live. How are your blood pressure, cholesterol, weight and other health markers? How long have your parents and other relatives lived?

Another thing to remember is that Social Security is indexed to inflation, so there’s built-in protection (even if it’s not as high as medical inflation). Remember, too, that you don’t have to take Social Security just because you’re retired. If you can live without the income until age 70, then you will ensure the maximum payment for yourself and lock in the maximum spousal benefit. Just be sure that you have enough other income to keep you going and that your health is good enough that you are likely to benefit from the wait.

Don’t forget about your health savings account (HSA). While you’re still working, consider maxing out contributions to your HSA. The annual limit for 2022 is $3,650 for self-only coverage and $7,300 for a family plan. It might not seem like much but, because contributions never expire, you can sock these savings away to use in retirement. A bonus? For those 55 and older, you can elect to add $1,000 annually as a catch-up contribution. Years of these contributions do add up and can lessen the blow of medical expenses later in life.
Remember, these contributions are pre-tax and withdrawals for qualified medical expenses are tax-free. Some plans even allow you to invest unused funds. After you reach age 65 or if you become disabled, you can withdraw HSA funds without penalty but the amounts withdrawn will be taxable as ordinary income.

Do consider a line of credit for health emergencies. If you’re concerned about unforeseen medical expenses, think about opening a line of credit that would give you peace of mind. Doing so leaves invested funds working toward your larger financial plan, while an open line of credit with securities as collateral can be leveraged in case of an emergency. Homes are typically retirees’ largest assets, so a home equity loan may be an option to consider. There are even medical credit cards that offer zero interest for promotional periods that could be of use in an emergency and allow you to pay it in full before you incur any fees.

Don’t take on additional risk to make income. It may be tempting to get more aggressive with your investments to make up for the gap inflation is causing, but you’ve been too calculated and strategic all these years to make a hasty decision like that. Consult your advisor to determine if your risk level is ideal for your situation, taking into account your concerns about inflation. Your situation is not like anyone else’s, so you can’t let headlines sway you from your well-thought-out plans. Getting riskier is just that and not a mitigation tactic for inflation.

The biggest thing to do when thinking about how inflation is affecting your retirement plans is to have these discussions with your advisor. The value of having a financial advisor at your side is to help guide you through the considerations and trade-offs you should think through. They know your specific situation and can partner with you to make adjustments if needed. With proper precautions in place, you’ll be able to achieve the retirement you’ve been dreaming about.

Sources: thestreet.com; hvsfinancial.com; medicare.gov; medicare.gov; forbes.com; shrm.org; jackson.com; nerdwallet.com

Disclosures:  Atlantic Union Bank Wealth Management is a division of Atlantic Union Bank that offers asset management, private banking, and trust and estate services. Securities are not insured by the FDIC or any other government agency, are not deposits or obligations of Atlantic Union Bank, are not guaranteed by Atlantic Union Bank or any of its affiliates, and are subject to risks, including the possible loss of principal. Deposit products are provided by Atlantic Union Bank, Member FDIC.

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