Rosalind Evans
Retirees face many risks, compounded by the escalating health care costs in their golden years.
Despite recent drops in medical costs, they still hover around 30% more than they were ten years ago, as revealed by the U.S. Bureau of Labor Statistics data. Generally, the growth rate of medical costs outpaces other consumer expenses.
Moreover, the likelihood of retirees requiring medical care increases with age. For instance, a couple aged 65 who retired in 2022 is projected to spend an average of $315,000 on health care during their retirement, excluding long-term care, according to Fidelity Investments.
Additionally, retirees are susceptible to “spending shocks” due to unforeseen expenses like medical costs, states J.P. Morgan Asset Management’s 2023 retirement guide.
Retirees’ expenses will vary significantly, says Anthony Watson, a certified financial planner and the founder and president of Thrive Retirement Specialists in Dearborn, Michigan. “There’s no one-size-fits-all solution,” he says, pointing out the difficulty of forecasting healthcare expenses.
Mind the ‘Sequence of Returns Risk’
The financial stress can be amplified during volatile stock market periods due to the sequence of returns risk, a situation where drawing from your portfolio when asset values are low can deplete your retirement savings over time.
Watson notes that retirees could encounter this risk through a “spending shock event” like high medical costs or increasing living expenses.
According to Watson, One way to minimize this risk is to increase income by deferring Social Security claims. In 2023, the average retirement benefit is $1,827 per month, but this rises to $3,627 at full retirement age, currently set at 66 to 67.
Watson also recommends a “financial safety net” to cover living expenses during a lengthy stock market slump. “We must always have an alternate plan to finance our living costs,” he advises.
While most experts propose having one to three years’ worth of cash, Watson suggests you might lower expenses or maintain less money by using a home equity line of credit or a pledged asset line of credit linked to your investment account.
Become an ‘Informed Patient’
Carolyn McClanahan, a CFP and founder of Life Planning Partners in Jacksonville, Florida, encourages retirees to be “informed patients” regarding health-care spending.
“Being an informed healthcare consumer is the optimal way to plan for healthcare expenses,” explains McClanahan, a doctor and member of CNBC’s Advisor Council.
For instance, retirees could cut down on unexpected medical costs and avoid abrupt portfolio withdrawals with prudent health management. It’s also advisable to inquire about tests or prescriptions before incurring expenses.
McClanahan notes that due to the fee-centric nature of health care, doctors might not necessarily assist you in making cost-effective decisions.
She also extols the financial, physical, and emotional advantages of working in retirement, even part-time. “Work promotes social engagement, which can offer cognitive benefits,” she concludes.
Navigating the retirement landscape with the added challenge of rising healthcare costs requires strategic planning and conscious decision-making. From postponing Social Security claims, and setting up a financial safety net, to being an informed healthcare consumer, these strategies can help mitigate the potential financial burdens in retirement. As the saying goes, “Hope for the best but prepare for the worst” – a mantra particularly applicable to a financially secure and healthy retirement.
