- The cost of medical care is a too-often overlooked consideration when planning for retirement.
- While the cost of healthcare has typically increased at a rate that exceeds the inflation rate, COVID brought a temporary reprieve in the rising cost of medical care expenses.
- Financial professionals can take several steps to help clients plan for the rising costs of healthcare in retirement, like encouraging them to use HSAs when eligible and encouraging them to consider future medical expenses in their plans for retirement.
Today, while everyone is concerned about the high overall inflation rate, it’s important to note that historically the cost of medical care has grown at a rate that exceeds the general inflation rate. In fact, since 1935, the cost of medical care has risen at an annual rate of more than one whole percentage point higher than general inflation (4.67% vs. 3.56%).1 Further, the cost of health care for consumers, as measured by the increases in health care premiums, increased 55% over the past decade, while wages rose only 30% during that time.2 This means over the recent past, US citizens have continually had to spend a larger and larger portion of their annual earnings on health care.
COVID-19 did bring a reprieve from the amounts individuals spent on health care. But it’s worth taking the time to examine what brought that slowdown and why it’s only temporary. The return to the average annual increases in medical care expenses will make it even more critical to consider health care costs when planning for retirement.
Many people understand that their health care costs are likely to be higher in retirement as they age and need more medical care. Still, people often grossly underestimate what the extent of those expenses will be. Financial professionals can take several steps to help people understand what they may have to spend on health care once they retire and how they can prepare to cover, and potentially minimize, those expenses.
A temporary decline in out-of-pocket spending
Total spending on health care in the United States rose by 9.7% in 2020.3 Still, much of that gain came from increased federal government expenditures for vaccine development, COVID testing, and financial support for health care providers and businesses affected by the pandemic.
A closer look at the numbers, though, reveals that individuals’ out-of-pocket spending in 2020 declined by 3.7%, largely because of the decreased use of health care services.4 Many hospitals and outpatient care centers suspended elective procedures, such as knee and hip replacements and cataract surgery. Many individuals also voluntarily avoided settings in which they would potentially be exposed to COVID and therefore delayed other nonessential healthcare services, including many preventive screenings. For these same reasons, private health insurance plans’ spending also declined by 1.2% in 2020.5
Even with the decline in out-of-pocket spending, households’ expenditures on health care, which includes other costs like health insurance premiums, did increase during the year, albeit at a slower rate than it did in 2019 (1.1% vs. 4.4%).6
Health care costs will likely keep soaring
The worst year of the pandemic – 2020 – appears to have been an anomaly in terms of individuals’ and private health insurers’ spending on health care. The longer-term trends that drive higher medical costs remain in place. A study by the American Hospital Association found that hospital expenses per patient in 2021 were 20.1% higher than they were in the pre-pandemic year of 2019.7 Those high expenses were driven by significant increases in the costs of drugs, labor, and supplies, as illustrated below.
Increase in Hospital Expenses Per Patient from 2019 to 20218
The cost of health care for a family of four covered by an average employer sponsored preferred provider organization (PPO) plan rose by 4.2% to reach $30,260 in 2022, according to the Milliman Medical Index.9
Helping clients prepare for retiree medical costs
The cost of health care is often overlooked when people plan for retirement. They generally assume Medicare will cover most, if not all, of their healthcare expenses. But many people retire before age 65, when Medicare eligibility generally begins. These people might not recognize that, unlike with Social Security, there is generally no early opt-in that allows them to qualify for Medicare early. The only exceptions to this rule are for those who receive Social Security disability payments, have Lou Gehrig’s disease (ALS), or have been diagnosed with end stage renal disease.
Even when they become eligible for Medicare, most retirees need to rely on Medicare supplemental programs to cover the costs of deductibles, coinsurance, copayments, or any other excess charges imposed by health care providers that Medicare does not cover. Medicare also does not provide coverage for long-term care, and people generally need to buy a private insurance plan to cover the costs of extended nursing home care or in-home health care services.
A 65-year-old couple retiring this year (2022) can expect to pay about $315,000 in health care and medical expenses over the remainder of their lives.10 However when surveyed, people anticipated that their medical care expenses over the duration of their retirement would be only $41,000. This equates to an alarming $274,000 shortfall.11
Financial professionals can help clients prepare for these expenses
To reduce the likelihood that clients will face overwhelming health care expenses in retirement, there are a number of steps financial professionals can suggest to help clients meet those costs, and even potentially reduce them.
- Encourage clients to become fully committed to preventive health measures.
Behavior certainly influences the amount of health care people will need. In your retirement planning meetings with clients, you can supportively remind them that investing more isn’t the only way to increase the odds they will have a comfortable retirement. Taking good care of themselves will make a big difference, too. Annual physicals and regular immunizations can help people avoid developing serious illnesses and incurring the costs associated with them. Other regular preventive screening tests, like colonoscopies, also help identify potentially serious medical issues earlier in their development when they are likely to be easier (and cheaper!) to treat.
Be sure to recommend any community resources that you think could help clients. These resources could range from smoking-cessation workshops to cooking classes on how to prepare healthy meals, or discounts on gym memberships. Even inviting a client to join a tennis or golf club you belong to could help them avoid the sedentary lifestyle that becomes an even greater risk for people as they age.
- Remind clients the more they invest, the more they’ll have to meet medical expenses.
People often set their retirement savings goal with a number in mind – the amount they expect they’ll need to maintain a reasonable income. People generally derive that number from their current expenses, forgetting they will likely need more medical care as they age. Make sure your clients include medical care expenses in the calculation of their retirement savings goal. Taking medical costs into account inevitably demonstrates that people will have to save more for retirement.
With your support, clients don’t have to be discouraged by that need, as they have multiple options to save more and make health care costs manageable. Encourage them to invest as much as they are reasonably able to in their retirement plans, increase their savings when their salary increases each year, and take advantage of higher “catch-up” contributions after they reach age 50. These and other measures will likely enable them to build a bigger nest egg at retirement and be ready to handle their out-of-pocket medical expenses.
- Encourage those eligible to consider HSAs.
The IRS does provide a tax-favored way to save for health care costs. Those who have high-deductible health plans (HDHPs) can set aside tax-deductible money in health savings accounts (HSAs). In 2022, those with an individual HDHP can contribute up to $3,650 per year to an HSA, and people with an HDHP providing family coverage can contribute up to $7,300.12 The IRS rules also provide “catch-up contributions” for those aged 55 and over, so each of these annual limits increases by $1,000 for those who’ve reached that milestone age.13
While tax-free withdrawals from an HSA can be made to cover qualified medical expenses in any year, people can also leave the money in the account to cover future expenses. Because balances in an HSA roll over from year to year, those who have the financial means may find it more beneficial over the long term to pay for current medical expenses out-of-pocket and invest their current HSA balance in order to achieve potentially tax-free gains. The HSA may then be utilized years down the road to cover their anticipated medical costs in retirement, when the account owner may be living on a fixed income.
You’re in a good position to help your clients plan for the costs of health care in retirement, and Nationwide can help. The Nationwide Retirement Institute® offers a variety of resources you can use to educate clients and help them recognize the importance of health care planning. There are also materials that offer guidance on how you can broach this topic and have effective planning sessions with clients.
Additionally, there is a wealth of education resources on Medicare that can help answer key questions clients may have, like how to enroll, what coverage Medicare provides for chronic illnesses, and whether it’s possible for someone to keep their employer-provided health insurance if they remain working past age 65.
Finally, the Nationwide® Health Care/LTC Cost Assessment Fact Finder allows you to conduct personalized assessments for each of your clients. The information you gather can be used to identify the solutions that can help a client meet any of the cost gaps in their medical insurance and long-term care coverage during their retirement years.