Given longer lifespans and rising medical costs, health care has become a top concern among retirees – women most of all. In fact, expected health care costs in retirement are about $83,000 greater for women than men.
With greater longevity and smaller savings, however, female clients may have a tough time weathering these costs, particularly when they’ve taken time out of the workforce to raise families. Even among affluent women, the likely need for long-term care looms, threatening to wipe out savings and dishevel legacy plans.
While Americans do need to save more for retirement in general, they need an efficient strategy for planning for health care costs. Costs are rising at an unprecedented rate, but optimizing a portfolio to address health care needs will help combat inflation and reduce the burden on women and their families.
The effects of health care inflation
The official U.S. inflation rate is just under 2.5 percent, but health care costs are rising far faster – 5.47 percent, according to HealthView Services. Likewise, Social Security’s cost of living adjustment averages 2.6 percent, even though medical costs disproportionately affect seniors.
While Medicare’s “hold harmless” rules prevents the Part B increase from eclipsing the COLA, that rule doesn’t apply to high-income earners, nor does it affect increases on supplemental health policies.
“Someone’s Social Security benefit might have gone from $1,500 to $1,520 this year, for example, but their overall Medicare expenses increased much more,” says Heidi Hanson, financial services representative with Baystate Financial.
As a result, insurance premiums and out-of-pocket costs are roughly $280,000 in today’s dollars for a 65-year-old retiring man and $362,000 for a 63-year-old woman. Due to increasing lifespans and inflation’s compounding effects, today’s 55-year-olds can expect to spend an additional $7,000 to 8,000 in their last two years of life.
How should clients prepare for these costs?
“We think about health care in terms of three ‘buckets,’” says Laurie Barry, senior vice president of wealth management at UBS Wealth Management. “There’s pre-Medicare for clients who retire before 65, Medicare costs and long-term care. We plan for these with different parts of their portfolios.”
Likewise, sound retirement plans often include three segments: liquidity, longevity and legacy.
“65 percent of our clients from our investor report survey say they have different asset allocations for each of those buckets, and over 50 percent focus most on longevity,” says Barry.
That longevity portion is typically earmarked for individual insurance, Medicare premiums and long-term care. The earlier a client plans to retire, the more it will need to contain. Depending on their longevity and proximity to retirement, it may also need to be heavy on riskier, growth-oriented investments that can outpace health care inflation.
“The time we have determines our asset allocation, and we choose investment vehicles based on each woman’s accessibility – an employer match for an HSA, for example,” Barry adds.
On that note, match or no match, the HSA is one of the best tools for efficiently covering health care costs in retirement. One of the only vehicles to offer tax-free contributions, growth and withdrawals, it can be used for out-of-pocket expenses any time, and it can cover Medicare premiums in retirement. “Save as much of that money as possible for retirement,” Hanson advises.