Retirees Rejoice: Healthcare Costs Hold Steady Amid Economic Uncertainty

Despite the stock market’s impressive start in the first half of the year, worries over the economy are mounting amid expected further monetary tightening and an anticipated recession. Consumers have faced a hard time battling rising prices since the end of the pandemic.

Yet there is at least some welcome relief for one group of Americans – retirees.

For the first time in almost a decade, expected healthcare costs for retirees have remained flat year-over-year, according to a study by Fidelity.

The asset manager’s latest Retiree Health Care Cost Estimate priced the average rest-of-life medical bill for a 65-year-old retiring this year at $157,500 – the same amount as last year’s forecast.

This may surprise some, especially with inflation still hovering above pre-pandemic levels. 

What has plateaued medical prices, then? The Inflation Reduction Act. The recently enacted legislation will likely cap retirees’ out-of-pocket prescription drug costs starting in 2025.

“Our analysis finds that limits on how much retirees can spend on prescriptions covered by Medicare Part D from the Inflation Reduction Act are likely to temporarily offset the overall inflationary trend of health care costs for retirees,” said Hope Manion, Senior Vice President and Chief Actuary, Fidelity Workplace Consulting. “Even so, those planning for retirement need to build a plan that incorporates the still-high cost of health care and the medical and drug expenses not covered by Medicare.”

Preparing for medical costs beyond work is a multifaceted and highly personalized process. This article will look at healthcare in retirement and offer expert opinions on the subject.

Top Priority 

Healthcare has risen to the top of people’s retirement agenda, in no small part thanks to recent world events.

“The biggest shift we’ve seen is the number of people taking healthcare seriously… the pandemic has made the age-associated health risks associated far more apparent,” says Caleb Vering, Associate Wealth Advisor at Farnam Financial.

“Allocating assets for healthcare in retirement is all about context,” he adds. “Little has changed about how much will be needed, but the pandemic has given retirees a lot more context about what healthcare in retirement might look like for then.”

Americans face unique challenges in building a secure medical safety net. Despite spending more on healthcare than any other rich country, America has worse health outcomes than its peers. Compared to all other OECD high-income countries, the U.S. has the lowest life expectancy at birth and the highest rate of people with multiple chronic diseases, per a report from The Commonwealth Fund.

The U.S. remains the only one of the 38 OECD members not to have universal healthcare for all citizens. Despite this drawback, things are gradually improving in America as people seek out solutions beyond their company’s cover.

“More people are taking control of their healthcare choices instead of relying solely on their employers. Both Affordable Care Act enrollment and the assets invested through Health Savings Accounts (HSAs) have grown in recent years,” says Kevin Estes, Financial Planner and Founder of Scaled Finance.

HSAs are an attractive way to fund medical expenses and as a triply tax-advantaged investment vehicle. Not only are contributions to HSAs tax-deductible, the savings can be spent tax-free on eligible medical expenses. Finally, any growth realized is tax-free.

“For individuals enrolled in qualified high-deductible healthcare plans, a Health Savings Account (HSA) offers a unique triple tax advantage. Contributions can be invested for growth and used for various expenses – including long-term care premiums,” says Estes.

Sometimes it is a case of lengthening one’s time horizon. Making sacrifices early in retirement can pay off in the long run in the twilight years.

“Delaying Social Security benefits may help fund substantial healthcare expenses later in life,” says Estes. “Opting to start benefits at 67 instead of 62 may increase monthly income 30%. Each year delayed past full retirement (until age 70) results in an 8% increase in benefits for life. 

These higher payouts will also be subject to annual Cost of Living Adjustments.”

For the Long Haul 

Over the coming decades, retirees are expected to live longer. 

According to a 2020 study by the Census Bureau, American life expectancy is predicted to increase by around six years by 2060, reaching an all-time high of 85.6 years.  

Longevity can be a mixed blessing, though. Living longer comes at an extra cost as there may be extra expenses further down the road they need to be prepared for, whether through a part-time job in retirement or taking other actions.

“Roughly 70% of retirees over age 65 will have a need for long-term care services in their lifetime,” says Vering. “Since long-term care insurance has become prohibitively expensive, we advise clients to self-fund if their investable assets can support it.” 

While the Inflation Reduction Act may help offset some costs, preparing for healthcare in retirement remains a vital responsibility for all Americans. By planning for retirement and consulting with a financial advisor, individuals can position themselves to tackle the significant financial burdens that may arise. 

Leveraging tax-optimized Health Savings Accounts (HSAs) and optimizing the time horizon for social security strategy can further broaden one’s personalized healthcare safety net. Ultimately, medical costs must be a pillar of any retirement plan, for there is no real wealth without good health. 

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Disclaimer: This article is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.