Inflation has been hitting retirees from the gas pump to the grocery store. Their next shock is expected in medical costs and health insurance—the expenses retirees can least avoid.
“This isn’t like inflation at
or the grocery store because you don’t have another option,” said Peter Stahl, president of financial advisor training firm, Bedrock Business Results.
The projected price increases are big enough to blow up the plans of many seniors who expect their overall costs to roughly track inflation. Stahl advises retirees to plan on 10% to 14% increases for a couple of years, before dropping closer to the 5% historical norm as pressures ease. Seniors who can’t handle such increases may have to look elsewhere for spending cuts or plan on working a few more years.
Pandemic-induced labor and medical supplies shortages are pushing up costs everywhere in healthcare—from clinics and hospitals to labs and nursing homes. Typically, there’s a two- to three-year lag before higher costs work their way into insurance premiums and copayments as state insurance commissions and Medicare evaluate costs and approve rates.
Recently, health insurance companies have been asking state regulators to approve 10% to 20% increases, according to McKinsey and Co., which is forecasting sharp healthcare inflation through 2027.
“Just because they want 10% to 20% doesn’t mean they will get it,” said Ron Mastrogiovanni, president of HealthView Services, which gathers healthcare data and runs financial planning projections, Still, HealthView also sees sharp price increases for several years, including the Medicare Part B premium that retirees pay for doctors and labs.
Currently, retirees with modified adjusted income below $97,000 pay $1,979 a year in Part B premiums. Healthview projects that the premium will rise 6.3% in 2024 and 6.2% in 2025, 8% in 2026, 7.8% in 2027, and around 6% annually through 2031.
People on traditional Medicare often buy a supplemental, or Medigap, plan to cover the roughly 20% of expenses that Medicare doesn’t. Price of this insurance is also expected to rise sharply. The most popular Medigap policy is the G Plan, which picks up nearly all costs except for a $226 annual deductible. A 65-year-old woman who starts Medigap Plan G this year at the national average of $1,517 a year, should expect a 10.7% increase in 2024 and over 10% each year through 2027, says HealthView.
Instead of traditional Medicare, retirees can opt for a Medicare Advantage plan, which more resembles the health insurance offered by employers to workers. Medicare Advantage often has no monthly premiums. But people must go to specific doctors and hospitals or get hit with big out-of-network fees. And when they see a doctor, they typically face copayments, which healthcare experts say could adjust higher due to inflation pressures.
Retirees on fixed annuities or pensions without inflation adjustments could be hit particularly hard by soaring medical costs, said David Blanchett, managing director of PGIM DC Solutions. While he noted that Social Security’s inflation adjustments would help people on fixed incomes, the adjustments historically have lagged behind medical inflation.
And a cruel surprise awaits people who retire early or are laid off before age 65 and must buy their own insurance. Typically, people in their 60s face the highest premiums because they don’t have the federal government or an employer negotiating lower fees with healthcare providers, said Paul Keckley, managing editor of The Keckley Report.
Doctor and financial planner Steven Podnos, of Cocoa Beach, Fla., points to a 63-year-old former doctor and his 61-year-old wife in Miami. They pay $42,000 a year for a high-deductible policy they wanted so they could keep funding a health savings account. Their out-of-pocket spending can run another $3,000 for the year,
Unexpected healthcare costs could expose seniors to sequence-of-return risk if they draw down depleted investments, said Sudipto Banerjee,
T Rowe Price
vice president. They may have to take a far larger chunk out of IRAs or 401(k)s than planned. And the timing couldn’t be worse because most portfolios still haven’t recovered from last year’s market rout.
Unusually high inflation for the next few years requires that advisors or do-it-yourselfers do more sophisticated planning than often occurs, said Chicago financial advisor David McClellan, a partner in Forum Financial Management.
“Most advisors don’t know much about Medicare and they don’t want to open a topic where their knowledge is an inch deep,” said McClellan. Consequently, as clients prepare to retire, advisors commonly ask individuals to add up all household expenses. Then, the annual spending sum is run through planning software with a 2% to 3% annual inflation expectation.
Other planners may plug in a 5% inflation rate for healthcare, and “that’s better than nothing,” said McClellan. But more detail is necessary; especially for affluent clients who don’t get the subsidies most retirees get for Medicare. https://www.marketwatch.com/articles/medicare-premiums-taxes-irmaa-51671059739
Banerjee also suggests advance planning: Besides using an updated inflation rate for healthcare spending now, blend into possible spending the chance of another $5,000 to $10,000 over two years in your 70s to cover a healthcare shock ranging from hospital to nursing home rehab costs, dental services and drugs not covered by Medicare.
“If you are a very healthy 65-year old, use the largest number and see if your plan blows up,” said Banerjee. “Be realistic and see if you are comfortable.”
Write to firstname.lastname@example.org
Read the full article here
Discussion about this post