Growth in healthcare costs in the U.S. has significantly outpaced overall inflation. From 1982 to 2014, spending on healthcare grew at an average of 5 percent – faster than all spending categories other than higher education. In the past few years, however, the pace of healthcare spending increases has slowed. In 2014, health care spending rose 3 percent, which is still higher than the 0.8 percent increase in the overall Consumer Price Index.
A sound retirement strategy must plan for increasing healthcare expenses. While managing and investing for current income, an effective retirement strategy should also consider growth investments to cope with added healthcare costs.
Financial advisors need to ask the right questions to create accurate profiles of their clients and adjust their retirement plans and retirement income accordingly.
Over my 30-plus year career as a financial advisor, I have found healthcare expenses absorb an increasing share of clients’ disposable income. Medicare-related and drug expenses were the main component of this increased spending. And when one adds in the costs for long-term care, I find many individuals become especially concerned about spending down assets to pay for these expenses. These costs can be estimated and included in a financial plan that may also take in additional insurance as a solution to help cover these very real costs.
When assumptions are personalized for particular spending types, financial plans can be more targeted and effective. After a financial advisor has identified a client’s spending profile, the advisor should have detailed discussions of where income is being and will be spent. The assumptions of the financial plan can then be tailored to fit the client’s particular experience. Healthcare costs should always be carved out as a separate item in a plan. All other expenses should be carefully projected to most closely match a client’s profile. In this way, spending assumptions will be more accurate and clients will have greater peace of mind based on what is important to them.
If inflation is a concern, and it should be in healthcare expenses, you should consider an investment plan that includes growth investments in one’s retirement portfolio. Over time, income generation becomes increasingly important. I have found as a practicing Certified Financial Planner professional that personalized projections about spending and inflation – combined with annual reviews and updates –form the most useful retirement plans and lead to the most successful outcomes in planning for rising healthcare costs.
Mark S. Martel, CFP, is a local investment advisor representative and offers securities and advisory services through KMS Financial Services, Inc. He can be reached at 360.694.9940.