With better health care and longer life expectancies, individuals that plan to retire at age 65 can expect to live for another 20 years, based on the current life expectancy tables. The Federal Reserve considers inflation to be relative stable, but if you take a closer look at the economic data and the potential effect inflation has for retirees, rising health care costs are much more concerning to retirees than the general population. Those individuals aged 65 plus, tend to spend much more of their money on health care services, and medical expenses than all other age groups.

In this episode of Money Script Monday, Sean presents 7 steps to reduce the impact of rising inflation and health care costs on your retirement savings.

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Video transcription

Hello, and welcome to another edition of Money Script Monday.

My name is Sean Brady, and today's topic is, "How to Prepare for Inflation and Rising Health Care Costs."

Over the past few years, the inflation rate in the United States has been fairly low.

The average consumer price index has been 1.3% in 2016, 2.1% in 2017, and 2.4% in 2018. And the general economic outlook by the Federal Reserve on inflation is relatively stable.

But, if you take a closer look at the economic data and the potential impact inflation has for retirees, rising health care costs are of a much bigger concern for retirees than the general population.

That's because retirees have different spending habits than the general population.

The consumption basket, which is a collection of goods and services that are used to measure inflation or spending trends for retirees.

Those individuals aged 65 plus, it shows that they tend to spend much more of their money on health care services, and medical expenses than all other age groups.

In fact, when you compare it to other age groups, those individuals that are 65 plus spend 13.6% of their income on medical expenses when compared to other age groups, which is only at about 8%.

In 2017, the US healthcare spending increased 3.9% and it accounted for 17.9% of the nation's gross domestic product or GDP.

Now more than ever, retirees really need to consider how long they're going to live into retirement.

With better health care, and longer life expectancies, individuals that retire at age 65, they could expect to live for another 20 years or so based on life expectancy tables.

Even at the modest inflation rate of 2.5%, costs would double after about 28 years.

So, how can we prepare for these rising costs and expenses into our retirement?

Fortunately, we can utilize certain strategies today to help lessen the blow that inflation has on our health care expenses and other expenses in the future.

So, let's start off with this list, this list of seven.

Step #1

Step number one, understand how inflation could impact your retirement expenses.

Now, I want you to determine your potential retirement expenses, and how inflation could impact your consumption basket.

In terms of inflation, it really has to deal with diminishing purchasing power for retirees.

This is even true when the inflation rate is low, because retirees tend to spend their money on things that tend to increase in price such as healthcare.

Step #2

Now, step number two, estimate how many years you may be retired.

I want you to take a look at your own health status and your potential life expectancy. And consider if you're married, that one of you may live for 30 years or more into retirement.

Step #3

Step number three, familiarize yourself with Medicare options.

Now, it's important to note that Medicare doesn't cover everything, and if you need certain services that Medicare doesn't cover, you'll likely have to pay for that yourself, unless you have other insurance that covers it, or you have a Medicare health plan that covers it.

Even if you have a Medicare plan that covers it, a certain service or item, you'll likely have to pay a deductible, a co-insurance and co-payments.

So, it's really important to note that it doesn't cover everything and you should be wise to add those potential expenses in your overall retirement plan.

Step #4

Step number four, begin a review of your retirement income sources.

It's really important to make an expense list and identify your expenses by categorizing and as essential, discretionary, and unexpected.

Then once you've categorized them, identify how you're going to pay for each of those categories.

Generally speaking, you'll take your guaranteed income sources such as social security, maybe a pension if you have one, if you're lucky, and annuities to cover your essential expenses.

Then, you'll take your investable assets and you'll use those to cover your discretionary and unexpected expenses.

It's important to note that, if you do have these important retirement income sources, try and identify whether any of them have cost of living adjustments, or increasing income potential, because that can really help lessen the blow for inflation.

Step #5

Step number five, consider the impact of low-interest rates and high inflation rates during retirement.

All that means is, your total rate of return may be different than anticipated.

If you throw in sequence of returns risk, taxes, management fees, your retirement savings could really diminish much quicker than you thought or than expected.

Step #6

Step number six, manage your overall expectations of the effects of inflation and focus on what you can control.

The bottom line is, inflation can be a real retirement killer, and it doesn't have to be.

Retirees that take the time to develop a plan to combat inflation can really see successful retirements.

Reduce spending, creating a realistic budget for retirement, or leveraging your assets, or all three combined, can really help you understand and live a comfortable life into retirement.

They're always to soften the blow that inflation has on your long-term savings.

Step #7

Finally, step number seven, work with a financial professional.

Because they're the ones that are going to be able to keep you on track with your overall retirement plan.

They can suggest certain products such as annuities that can help you deal with the impact of inflation on rising health care costs and other inflationary expenses that happen in retirement.

Rising health care costs and inflation can be really big issues for retirees during their retirement.

It's important that if you follow up on the items in today's list, you'll really have taken a big step towards managing those big issues.

I hope you found today's presentation of value, and we'll see you again next time on Money Script Monday.