Expect a Longer Life? Expect escalating healthcare costs.

In this country, it is costly to be ill, but it can be more expensive over time to be healthy. This is because medical prices rise faster than the inflation rate, and retirees often consume more costly care as they age.

According to Ron Mastrogiovanni, CEO of HealthView Services, a company that supplies financial planners with retirement healthcare-cost tools and data, "longevity, not conditions, is the primary driver of healthcare expenses." Consider the subsequent: HealthView Services' projections, which are based on actual claims data and expressed in future dollars, indicate that a healthy 65-year-old woman who lives until 89 will incur approximately $175,000 more in lifetime healthcare costs (monthly premiums and out-of-pocket expenses) than a woman of the same age with Type 2 diabetes who lives until 81.

In the previous few years, medical prices have climbed only minimally, and in the case of Medicare Part B premiums, there has been a rare decline, while food and other essentials have skyrocketed in price. As a result of the pandemic's cost pressures, healthcare inflation is expected to return to or exceed its trend rate.

The Centers for Medicare and Medicaid Services (CMS) projects that between 2021 and 2030, national health expenditures, which include spending by the federal government and families, will increase at an average annual rate of 5.1%. In the meantime, the Social Security Administration projects that the average yearly cost-of-living adjustment for Social Security benefits over the next decade will be just 2.4%.

Preparing ahead can help you manage your future medical needs, especially long-term care, which is a wild card. Dave Goodsell, executive director of the Natixis Center for Investor Intelligence, believes that it is vital to recognize longevity as a risk and to manage accordingly. "Expect to live longer than you anticipate."

Anticipate Healthcare Cost Rises

In general, inflation in the health sector lags behind inflation in other sectors of the economy. Insurers and healthcare providers fix many medical rates through multiyear contracts. As these contracts come due for renewal, providers will demand larger reimbursements to offset their increased labor costs, supply-chain challenges, other pandemic-related barriers, and the technological innovation that adds to higher device and procedure costs.

As a vast government program, Medicare has some bargaining leverage to control what it pays doctors and hospitals. It may pass on a percentage of its increased expenses to its beneficiaries, while commercial medical insurance holders suffer the brunt of providers' price increases. This is something that early retirees should be aware of.

Continuing coverage from a former employer, often known as Cobra, typically costs 102% of the premium, whereas employed workers usually pay only 20% to 30% of their overall premiums. In 2023, the average monthly premium for a silver plan with a large deductible and no subsidies for a couple aged 60 will approach $1,900, according to the Kaiser Family Foundation.

Some early retirees begin earning Social Security at age 62 to assist in covering health insurance costs until age 65 when they become eligible for Medicare. In contrast, their permanently decreased payouts may not be adequate to cover ever-increasing medical expenditures in their later retirement years due to the move that enabled them to retire early. Individuals who file for Social Security benefits at age 62 would receive around 30% less than they would at full retirement age, which for those born after 1960 is 67.

Medicare Is Not a Solution

Many consumers enrolling in Medicare anticipate a reduction in their healthcare costs. It is not, however, as inexpensive as it is widely claimed.

Medicare consists of multiple "components," which you should know if you're unfamiliar with. In 2023, all beneficiaries will pay the $164.90 monthly Part B payment. (or more for beneficiaries with a greater income). Doctor and hospital visits will incur copayments, deductibles, and coinsurance in addition to copayments, deductibles, and coinsurance. The relevance of so-called Medigap coverage lies in this regard. You'll require it.

Medicare covers only 80% of your costs; you are responsible for 20%. However, because Medicare does not cap out-of-pocket spending, your costs can increase in the event of a significant sickness or accident. A supplement plan will cover a substantial percentage of your remaining liabilities and reduce your out-of-pocket payments in the event of a catastrophic event, making your budget significantly more predictable.

Your exact cost breakdown will be determined by the type of coverage you select: Medicare Advantage combines prescription drug coverage with Part A hospital care and Part B outpatient care for a low or no cost. Nevertheless, these plans, handled by private insurers, may impose substantial out-of-pocket costs if you become ill or seek care outside the plan's network.

With traditional Medicare, you have the choice of purchasing a stand-alone Part D prescription coverage plus a Medigap supplement. Here is where things can get very challenging for the elderly: Some Medigap insurance raise their premiums annually based on the beneficiary's "attained age." Beginning at a low rate, the premiums climb over time. HealthView Services projects that a 65-year-old woman who pays $1,517 per year for her Plan G Medigap premiums will pay $9,512 for the same coverage at age 89.

As the annual Social Security cost-of-living adjustment falls short of compounded medical inflation, retirees' healthcare bills absorb an increasing amount of their monthly checks. According to HealthView Services, a 65-year-old couple with a modified adjusted gross income of $250,000 in 2023 who pay Medicare high-income surcharges will spend 29% of their Social Security checks on healthcare today and 55% at age 85. It is hardly unexpected that these results worsen as incomes decline.

HealthView Services' forecasts exclude the possibility of long-term care expenses, so the actual amounts will be more significant for people who move into a nursing home, assisted-living facility or get care at home.

Are you stunned by these prices? This may be because prior generations were considerably more likely to obtain retiree medical benefits from their employment, which functioned similarly to a Medigap plan and often included prescription medication coverage. In both cases, employers significantly cut retirees' out-of-pocket costs. Also, prior generations had shorter average life spans, resulting in lower long-term care costs.

Medicaid will cover the cost of long-term care in Medicaid-accepting institutions (though many of the best ones do not). To be eligible, a person must have no remaining assets and nearly no income. Additionally, the government performs a "five-year look back" to guarantee that no assets were transferred to heirs. This initiative is an actual safety net and not a planning opportunity.

Truly, Real Solutions Exist

Social Security is essentially a type of longevity insurance, with the highest payments accruing to those who wait the longest to apply. If persons born after 1960 can defer retirement until age 70, they will receive 124% of what they would have gotten at their full retirement age of 67, which is 100% of their earned benefit (people born before then receive an even higher percentage).

In addition, annuities are a potential option. Carolyn McClanahan, the founder of Life Planning Partners in Jacksonville, Florida, and a Certified Financial Planner and medical doctor, routinely suggests fixed-income annuities to clients whose assets are at risk of depletion. This assessment is predicated more on spending needs than total assets. According to McClanahan, retirees with $3 million in assets plus Social Security and $80,000 in annual expenses will not run out of money. However, a pair with annual spending needs of $200,000 could.

Fixed-income annuities are the simplest type: an insurance policy in which consumers pay a single sum to a provider in exchange for a guaranteed income for life or a specified period. The payment increases as time passes. Cannex Financial Exchanges, a provider of annuity data, reports that a 65-year-old man would receive $585 in monthly income in late 2022 for a single-life policy with a cash refund (so beneficiaries receive cash back in the event of an early death) and a $100,000 premium in Florida, compared to $648 and $880, respectively if purchased at ages 70 and 80. A woman's benefits would be slightly reduced due to her longer predicted lifespan.

Numerous planners utilize this sort of annuity to augment other retirement income sources, such as a stock and bond portfolio stored in a retirement account. There are a variety of annuity types available.

In a perfect scenario, McClanahan encourages clients in good health to acquire an annuity at age 80. She tells them to work as much as possible, even if it's a part-time job if money is a concern. Clients in ordinary health may purchase an annuity in their 70s. McClanahan may acquire many annuities and "ladder" them over several years to obtain a larger payout each year, depending on their income needs.

Consider Long-Term Care Insurance.

Long-term care is not covered by Medicare, regardless of location. The program will pay for a rehabilitation stay in a care facility following, for example, a hip replacement. Still, it does not cover the assistance with bathing, dressing, and eating that many older persons eventually require. A person turning 65 years old today has a 70% chance of needing long-term care in the future, with a duration of 2.2 years for males and 3.7 years for women on average.

Certified Financial Planner at Good Living Financial Advisers of NOVA in Alexandria, Virginia, Josh Strange, notes that when he brings up the topic with customers, they typically attempt to avoid it. Some say, 'Someone will take me to the woodshed and shoot me,' which I have never witnessed, according to Strange.

According to popular opinion, long-term care insurance best suits the mass affluent or individuals with between $500,000 and $2,000,000 in investable assets. Below this amount, your savings may be depleted before you require long-term care. If your net worth surpasses around $2 million, it is assumed that you can afford to self-insure against possible long-term care costs.

However, Strange contradicts this view, proposing that even wealthy clients consider purchasing insurance. He supports hybrid life and long-term care plans that provide both a death benefit and long-term care coverage. These are easier to market to many consumers than standard long-term care insurance, which, like home and auto insurance, forfeits premiums without a claim.

If care is necessary, this coverage will typically only cover a percentage of the associated costs. (Note: The insurance company, not the family, establishes qualifying standards; usually, the policyholder must require assistance with at least two of the six activities of daily living.) If care is not necessary, it becomes a tax-free method of wealth transfer to heirs.

Earlier iterations of hybrid life and long-term care plans emphasized the death benefit and included a little long-term care rider; however, other policies today emphasize the long-term care benefit. According to Lincoln Financial Company, the average age of MoneyGuard Fixed Advantage claimants is 83. A Barron's illustration indicates that a 55-year-old married lady who acquired a $100,000 insurance would have a long-term care pool of $916,607, a death payout of $123,872, and a surrender value of $70,000.

The insurer will evaluate your eligibility for coverage depending on your health status, as these policies are medically underwritten. One reason to consider this insurance in your early 50s, when you are more likely to be in good health, is because of this.

Regardless of whether you decide to purchase long-term care insurance, it is essential to explore your alternatives. Strange asserts that everyone should visit a financial expert about this issue.

Talking with an expert can provide valuable insights and guidance on long-term care planning, so don't hesitate to schedule a meeting today. [Click Here]

Guarantees are based on the claims-paying ability of the issuing company. Long Term Care Insurance or Asset Based Long Term Care Insurance Products may not be suitable for all investors. Surrender charges may apply for early withdrawals and, if made before age 59 ½, may be subject to a 10% federal tax penalty in addition to any gains taxed as ordinary income. Please consult with a licensed financial professional when considering your insurance options.

The material is considered reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing is accurate or complete. This information is not a full summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. The investments mentioned may not be suitable for all investors.
The material is general. Past performance may not be indicative of future results. Raymond James Financial Services, Inc. does not provide advice on tax, legal, or mortgage issues. These matters should be discussed with the appropriate professional.

John M. Lynch, CIMA®, CPWA® Managing Director – LRIG, Financial Advisor – RJFS

Andrew Fentress, CFP® Financial Advisor

Adam Tobin, CFP®, CRPC Customer Relationship Manager

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