You’re ready for retirement. You’ve prepared mentally, emotionally and financially. But inflation may occupy a corner of your mind, considering the jumps it has made over the past year. The U.S. Bureau of Labor Statistics reported an increase in the Consumer Price Index (CPI) of 5.4% in July from a year earlier, matching the largest rise since August 2008. While everyone is talking about inflation for all sorts of reasons, it may affect retirees in other ways – namely, rising healthcare costs.
Even with Medicare, healthcare costs can add up to a major component in a retiree’s budget. According to the 2021 Retirement Healthcare Costs Data Report, lifetime health costs for couples retiring in 2021 can range widely – from $156,208 to $1,022,997. Factors that impact expenditures include coverage, health, longevity, income and state of residence. And, unfortunately, the historical trend that healthcare costs rise 2 to 2.5 times faster than overall U.S. inflation is expected to continue.
No reason to panic. Remember, you’ve planned for this and you have an advisor to help you through it.
There’s nothing we can do to stop inflation, but we can make a plan to deal with its potential implications. Knowing unpredictable healthcare costs may be coming – and will likely be higher than they are today – it’s wise to examine your specific situation with your advisor so you can set yourself up for the retirement you envisioned. Here are some do’s and don’ts as they pertain to your financial planning for rising healthcare costs due to inflation.
Don’t expect Medicare to take care of it all. Despite having Medicare coverage, there are still out-of-pocket costs, such as dental, vision, long-term care and other potential expenses. It pays to learn how the system works and what can be done to minimize costs. Work with a trusted advisor to help navigate the waters and understand the differences in coverage options. That might mean considering a Medicare Advantage Plan (or Part C) or a Medicare supplement to ensure you’re covered. Determining if your doctor and preferred facilities accept Part A and Part B, as well as ongoing medication costs (Part D), should all be calculated when comparing plans – and recalculated when open enrollment launches each October. Also, keep in mind that Medicare does not cover long-term care, so you would need to consider adding that coverage separately.
Do optimize your Social Security strategy. Before you stop working, think about when and how to implement a claiming strategy that will help your household get the most from Social Security. So much of our strategy on how to maximize Social Security retirement benefits depends on guesses as to how long we’ll live. How are your blood pressure, cholesterol, weight and other health markers? How long have your parents and other relatives lived? Another thing to remember is that Social Security is indexed to inflation, so there’s built-in protection (even if it’s not as high as medical inflation). Remember, too, that you don’t have to take Social Security just because you’re retired. If you can live without the income until age 70, then you will ensure the maximum payment for yourself and lock in the maximum spousal benefit. Just be sure that you have enough other income to keep you going and that your health is good enough that you are likely to benefit from the wait.
Don’t forget about your health savings account (HSA). While you’re still working, consider maxing out contributions to your HSA. The annual limit for 2022 is $3,650 for self-only coverage and $7,300 for a family plan. It might not seem like much but, because contributions never expire, you can sock these savings away to use in retirement. A bonus? For those 55 and older, you can elect to add $1,000 annually as a catch-up contribution. Years of these contributions do add up and can lessen the blow of medical expenses later in life. Remember, these contributions are pre-tax and withdrawals for qualified medical expenses are tax-free. Some plans even allow you to invest unused funds. After you reach age 65 or if you become disabled, you can withdraw HSA funds without penalty but the amounts withdrawn will be taxable as ordinary income.
Do consider a line of credit for health emergencies. If you’re concerned about unforeseen medical expenses, think about opening a line of credit that would give you peace of mind. Doing so leaves invested funds working toward your larger financial plan, while an open line of credit with securities as collateral can be leveraged in case of an emergency. Homes are typically retirees’ largest assets, so a home equity loan may be an option to consider. There are even medical credit cards that offer zero interest for promotional periods that could be of use in an emergency and allow you to pay it in full before you incur any fees.
Don’t take on additional risk to make income. It may be tempting to get more aggressive with your investments to make up for the gap inflation is causing, but you’ve been too calculated and strategic all these years to make a hasty decision like that. Consult your advisor to determine if your risk level is ideal for your situation, taking into account your concerns about inflation. Your situation is not like anyone else’s, so you can’t let headlines sway you from your well-thought-out plans. Getting riskier is just that and not a mitigation tactic for inflation.
The biggest do when thinking about how inflation is affecting your retirement plans is to have these discussions with your advisor. The value of having a financial advisor at your side is to help guide you through the considerations and trade-offs you should think through. They know your specific situation and can partner with you to make adjustments if needed. With proper precautions in place, you’ll be able to achieve the retirement you’ve been dreaming about.
When it comes to the impact of inflation on healthcare costs and your retirement preparations:
Sources: thestreet.com; hvsfinancial.com; medicare.gov; medicare.gov; forbes.com; shrm.org; jackson.com; nerdwallet.com
In Greece, old man is an honorific. A sign of respect, equating age with wisdom and a closeness to God, according to Arianna Huffington’s book “On Becoming Fearless.” Less so in the States, perhaps. The Greeks aren’t the only ones to venerate age, of course. Many Asian and Native American/First Nation cultures do the same. Koreans, for example, celebrate 60 with the hwangap, an acknowledgement of the fortunes of life (made possible in part thanks to advances in modern medicine), and the kohCui, or 70th birthday, another large celebration of the “old and rare.” Generally speaking, these countries and cultures have a history of communal aging, where the extended family cares for its elder members, while Americans tend to favor a more independent lifestyle as they grow older.
For those countries with more industrialized economies, retirement looks similar to how it does in the United States, a period of independence, supported in part by pensions or Social Security-type benefits. However, these countries sometimes struggle to contend with graying populations as a political and economic issue. Here are how some countries differ:
Japan: Japan has one of the highest life expectancies and low birth rates, so even though there’s a culture of younger people caring for elders, life is changing and leaving retirees more isolated. Those aged 65 and older make up a quarter of the population, growing to about 40% in the next 30 years. Perhaps it’s not surprising that Japanese citizens work until 70 on average – would-be retirees there don’t feel financially secure. Only 21% expect to maintain their quality of life in retirement, according to Mercer, and only 8% are confident they have saved enough.
Norway: Work-life balance in Norway is generally considered so good that many keep working, enjoying flexible hours, high income despite high taxes and six weeks paid vacation for those over 60 (five for everyone else). Work isn’t considered something to escape. One potential headwind? Norwegians tend not to save for retirement, leaving an 8% gap in what they’ll need to bankroll an affluent retirement, according to the International Longevity Centre-UK (ILC).
Australia: Australians tend to retire ahead of Americans, bridging any gaps in government benefits by supporting themselves. For the past 20 years, employers there have been obligated to pay 9% to 12% to every worker between 18 and 70, basically acting like a traditional pension, although the accounts are owned and managed by individuals, like a 401(k). Still, Australians will have to save an additional 6% of their income to avoid financial difficulties as they age, according to the ILC.
It’s certainly interesting how aging looks vastly different across countries. What’s most important is making sure the retirement you’ve planned aligns with your values – and feels good. Consider taking inspiration from other cultures to create a situation that makes you excited to embark on this next stage of life.
When you’re considering what aging looks like for you, don’t forget to think about:
Sources: lovemoney.com, October 2019; lovemoney.com/rich-countries; themoneyhabit.org; global.beyondbullsandbears.com/; schroders.com; visualcapitalist.com; visualcapitalist.com/demographic; visualcapitalist.com/pension; timesofindia.indiatimes.com; World Economic Forum; Sydney Morning Herald; seattletimes.com; pewresearch.org; pewresearch.org/waking-hours; statista.com; cnbc.com; aplaceformom.com; huffpost.com; Finnish Centre for Pensions; Mercer; Schroders; Breakwater Financial; The Happiness Formula: 2018 Global Retirement Reality Report; mercer.com; the balance.com; ncbi.nlm.nih.gov; Transamerica Center for Retirement Studies; Franklin Templeton’s Retirement Income Strategies and Expectations Surveys.
You’ve achieved a certain level of success, and you understand that the privileges of significant wealth come with challenges in equal measure. Among those challenges is successfully passing your wealth and values on to the next generation. Without careful planning, almost 70% of heirs’ money, assets and family harmony disappear after an estate transition.
You have the opportunity – while you’re living – to set your loved ones up for success, so to speak. A chance for open, honest communication, and for nurturing future-focused conversations about values, charitable giving and diligent stewardship. Estate planning is more than transferring money. It’s about what that money can do for future generations, and making room for your family to grow closer, stronger – to prosper. The conversations may be sensitive, but they’ll be worthwhile.
Research and data clearly demonstrate that lack of transparency or a shared family vision can adversely impact the rising generation. To stack the odds in your favor, you’ll need to create a framework to help your heirs flourish, strengthening family unity. Family meetings can help solidify decision-making and wealth governance – providing a structure that supports and sparks meaningful, multigenerational dialogue.
Each generation will have different ideas about how to use money to benefit their lives and those around them. While you may not always agree with your kids, give them a say in how the family wealth should be used. That can help connect generations and shape your family’s future while promoting openness and family harmony. If nothing else, family discussions will lend incredible insight into each other’s values and temperaments and will give you an opening to understand them better.
Support whatever conversations you have with documentation, storing legal paperwork, passwords, insurance policies, titles and deeds with a trusted attorney, advisor or in a secure online portal, like Vault, which allows you to assign various levels of access to particular people. Don’t forget to include the contact information of your estate planning team in case your heirs need it down the line.
Understand that wealth’s privileges and complexities deserve, even demand, thoughtful preparation and honest, ongoing conversations. Circumstances can and will change, as should your estate plan. So work with your advisor along with your other planning professionals to find fair answers to important questions, establish trust and open dialogue, and provide the gift of opportunity to those who matter most.
If you’re not sure how to start the conversation with your heirs, choose a topic below and let the dialogue flow naturally from there.
Sources: Accenture; cegworldwide.com; marketwatch.com; nextavenue.org; theglobeandmail.com; Raymond James research; themckenziefirm.com; yourestatematters.com; thebluntbeancounter.com; cushingdolan.com; Journal of Financial Planning; bravotv.com; mybanktracker.com; kiplinger.com; forbes.com; legacyfamilyoffice.com; shwj.com; stokerostler.com
“Learn from the past, set vivid, detailed goals for the future, and live in the only moment of time over which you have any control: now.”
– Denis Waitley
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