What You Need to Know
- Health care costs could eat up 71% of the Social Security benefits of a 65-year-old couple.
- A 55-year-old couple could spend more than $1 million on post-retirement health care.
- The 55-year-old couple could spend 93% of Social Security benefits on health care.
Current U.S inflation is at a 40-year high and will affect one of the most significant expenses in retirement — health care.
Even a short period of high inflation will substantially increase future health costs.
Financial advisors largely recognize the importance of incorporating health care expenses in the retirement planning process.
The magnitude of those expenses is large, Medicare surcharges can have a significant impact on clients’ finances, and clients have a fundamental desire to ensure that their health care needs are met.
But, in spite of the existence of protections like Social Security’s annual cost-of-living adjustment (COLA), some may be surprised at the extent to which inflation will affect retirees’ budgets.
Health Care Costs Rise Faster
The key is to understand the differential between consumer price inflation and health care inflation.
Health care prices have historically risen 1.5 times to 2 times as fast as consumer prices.
The 5.9% inflation-adjusted increase in Social Security benefits for 2022 was, for example, accompanied by Medicare Part B premium increases of almost 15%.
The dramatic increase in Medicare premiums is a result of higher-cost goods, services, and wages, as well as greater utilization of medical services following the COVID-19 pandemic.
The net result of this difference is that retirees have to pay more out of their pockets for health care.
In the same way that compounding returns help grow retirement savings, the compounding differential between general inflation and medical inflation rates works against current and future retirees.
Each annual increase in retirement health care expenses creates a higher cost base for the future.
This means that even a short period of high health care inflation, followed by a return to historical averages of around 5.9%, will drive future costs higher and must be planned for.
In a new white paper, we illustrate different scenarios to highlight the impact of inflation.