How Inflation Affects Health Care for Retirees

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

While the cost of medical care has fallen recently, it’s still nearly 30% higher than a decade ago, according to data from the US Bureau of Labor Statistics. In general, the prices of medical care increase faster than other consumer costs.

There is also a greater likelihood that retirees will need medical care as they get older. A 65-year-old couple who retired in 2022 will spend an average of $315,000 on healthcare costs throughout retirement, not including long-term care, according to Fidelity Investments.

Additionally, retirees are more likely to experience “spending shocks” due to unpredictable costs, such as medical expenses, according to JP Morgan Asset Management’s 2023 Retirement Guide.

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 to this,” he said, noting how difficult healthcare spending can be to predict.

Periods of stock market volatility can further compound financial problems due to the so-called streak of return risk, caused by operating your portfolio when asset values ​​have declined. Research shows that the wrong timing of withdrawals can damage your nest egg over time.

Retirees can be exposed to sequence of returns 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 that risk is to boost income while waiting to claim Social Security, he said. For 2023, the average retirement benefit is $1,827 per month, but the maximum payout increases to $3,627 at full retirement age, which is currently 66 to 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 fund our living expenses,” he said.

Although experts may suggest one to three years of cash, you can reduce your 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, he said.

Carolyn McClanahan, CFP and founder of Life Planning Partners in Jacksonville, Fla., urges retirees to become “patient empowered” when it comes to healthcare spending.

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

For example, retirees can reduce unexpected medical costs and surprise wallet withdrawals with a few health measures. You can also ask about tests or prescriptions before accumulating expenses.

“With health care being so expensive, doctors have very little incentive to help you make better decisions about what you can do to cut costs,” she said.

McClanahan also enjoys the financial, physical and emotional benefits of working in retirement, at least with a part-time job. “Work is a big way people engage socially,” which can provide a cognitive boost, she added.