There’s been no sign that inflation is heating up along with the economy, and that may tempt financial planners to be complacent about the inflation risk facing their retired clients. But the inflation rate experienced by seniors is higher than that of the overall economy.
From 1985 to 2014, the Consumer Price Index ran 5.1 percent behind the CPI-E, an experimental measure created by the
<p> The culprit is health care, which accounts for 13 percent of expenditures by Americans over age 65, compared with 5 percent for all other age groups, according to the
Even health care inflation has been quiet lately. The monthly premium for Medicare Part B (outpatient services) has been flat at
Still, many experts think health care inflation will return to historical norms, and that’s an argument for conservative, careful inflation planning for retirees. “A reasonable hurdle rate is 5 or 6 percent,” says
That outlook includes a sizeable bump for “uncertainties,” including the actual rate of health care inflation and federal policy changes that could saddle seniors with a larger share of the healthcare bill.
Social Security Not Keeping Pace
HealthView does an annual calculation of the portion of annual
Health care inflation aside,
- The gap between
Social Securitycost-of-living adjustments (COLAs) and health care inflation has widened. Social Security’s automatic annual COLA—which is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers(CPI-W)—averaged 2.6 percent over the past decade, but just 1.4 percent over the past six years.
Social Securityis on pace to replace less income in the coming years, due to the long-term cuts in benefits enacted in 1983, which are still being phased in. Benefits replace around 40 percent of pre-retirement income today, according to Social Security’s actuaries, but that figure will slip to 36 percent by 2030. It could fall to 29 percent if health care inflation heats up.
In addition, fewer households will receive defined benefit pensions in the years ahead—another key source of guaranteed income that can help offset health care expenses.
What’s more, fewer workers can count on retiree health benefits. Twenty-eight percent of U.S. employers with more than 200 employees offered retiree coverage in 2013, down from 66 percent in 1988, according to the
Planning for Health Care Inflation
Financial planners can help clients blunt the impact of health care inflation on the income and expense side of the equation.
The challenge is less critical for very affluent clients, says
No Simple Answer
The health care inflation projections also offer a strong argument for keeping some part of client portfolios in equities, says
Consider modeling health care expenses differently than general expenses, and plan conservatively. “We break retirement into three pieces,” says Balasa. “First is the younger, more active years when you’re spending more and probably healthier. The second phase is less active but with more health care costs, and the third definitely has less overall spending but health care costs rise.”
J.P. Morgan’s research confirms that health care spending rises as other categories—such as entertainment, food and beverages, apparel and transportation—fall. (See chart above.) “The only other categories that rise are charitable giving and political donations,” Roy says.
Planners can add value by learning how to assist clients with complex
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