Expect to Live a Long Time? Plan for Rising Healthcare Costs.

“Longevity is the big driver of healthcare costs, not conditions,” says Ron Mastrogiovanni, CEO of HealthView Services, a firm that provides retirement healthcare-cost tools and data to financial advisors. Case in point: A healthy 65-year-old woman who lives until 89 will incur about $175,000 more in lifetime healthcare costs (monthly premiums as well as out-of-pocket charges) than a same-age woman with Type 2 diabetes who lives until 81, according to HealthView Services’ projections, which are based on actual claims data and expressed in future dollars.

The past few years have seen only moderate increases in medical prices—and, in the case of Medicare Part B premiums, a rare decrease—even as prices for food and other essentials have soared. But healthcare inflation is expected to revert to trend increases or higher, due to cost pressures from the pandemic.

National health spending, which includes outlays by the federal government and households, is projected to grow at an average annual rate of 5.1% from 2021 to 2030, according to projections by the Centers for Medicare and Medicaid Services, or CMS. Meanwhile, the Social Security Administration projects that the annual cost-of-living adjustment to Social Security benefits will average just 2.4% through that time.

Careful planning can help you manage future medical needs, including the wild card of long-term care. “I think the key is recognizing longevity is a risk and managing toward it,” says Dave Goodsell, executive director of the Natixis Center for Investor Insight. “Plan for longer than you think you’ll live.”

Get Ready for Healthcare Inflation

Health inflation tends to lag behind price increases elsewhere in the economy. That’s because many medical prices are set in multiyear contracts between insurers and medical providers. As those contracts come up for renewal, providers will seek higher reimbursements to compensate for their increased labor costs, supply-chain woes, and other challenges of the pandemic, plus the technical innovation that contributes to higher prices on devices and procedures.

As a huge government program, Medicare has some bargaining power to limit what it pays doctors and hospitals. It might pass some of its increased costs along to its beneficiaries, but people with commercial medical insurance bear the brunt of rising prices charged by providers—something that early retirees should keep in mind.

Continuing coverage from a previous employer, known as Cobra, often costs 102% of the total premium, whereas employed workers generally pay only 20% to 30% of their total premiums. On the Affordable Care Act exchanges, the average unsubsidized, high-deductible silver plan premium for a 60-year-old couple is more than $1,900 a month in 2023, according to the Kaiser Family Foundation.

Some early retirees claim Social Security at 62 to help cover health insurance costs before they become eligible for Medicare at age 65. But the move that helps them in early retirement will wind up shortchanging them in late retirement, as their permanently reduced payments may not go far enough to cover ever-escalating medical costs. Those who claim Social Security at age 62 will get about 30% less than what they’d get at full retirement age, which is 67 for those born in 1960 or after.

Medicare Isn’t a Solution

Many people expect their healthcare costs to plunge when they go on Medicare. While it is good coverage, it isn’t as cheap as commonly believed.

If you’re new to Medicare, the first thing to know is there are several “parts” to it. All recipients pay the 2023 Part B premium of $164.90 a month (or more for higher-income beneficiaries). For visits to doctors or hospitals, you’ll also have copayments, deductibles, and coinsurance, or the portion of a bill you’re responsible for. That’s where so-called Medigap coverage comes in. You’ll need it.

Medicare alone covers only 80% of your total costs, and you’re responsible for the remaining 20%. What’s more, since there’s no out-of-pocket spending cap with Medicare only, your costs can skyrocket in the event of a serious illness or accident. A supplement plan will cover much of your remaining liability and limit out-of-pocket costs in a catastrophic situation, leading to much more predictability for your budget.

Your exact cost breakdown will depend on the coverage you choose: Medicare Advantage bundles drug coverage along with Part A hospital care and Part B outpatient care, for a very low or even no premium. But these plans, run by private insurers, can involve high out-of-pocket costs if you get sick or seek care outside the plan’s network.

With traditional Medicare, you’ll have the option of buying a stand-alone Part D drug plan and a Medigap supplement. Here’s where things can get particularly tough for the long-lived: Many Medigap policies raise their premium prices annually based on a beneficiary’s “attained age.” Premiums start low and then increase over time. A 65-year-old woman who pays $1,517 in annual premiums for her Plan G Medigap plan will pay $9,512 for the same coverage at age 89 in the year 2047, according to HealthView Services’ projections.

As the annual cost-of-living adjustment to Social Security falls short of compounding medical inflation, healthcare costs consume an ever-larger portion of retirees’ benefit checks. For a 65-year-old couple with $250,000 in modified adjusted gross income in 2023, who pay the Medicare high-income surcharges, healthcare costs will devour 29% of their Social Security checks today and 57% at age 85, according to HealthView Services. Not surprisingly, these numbers look worse as incomes fall.

HealthView Services’ projections exclude potential long-term care costs, so the actual numbers will be higher for those who move into a nursing home or assisted-living facility, or receive care at home.

Shocked at these costs? That may be because previous generations were much more likely to have retiree medical benefits from their employer, which functioned like a Medigap plan and often included drug coverage. Some employers shouldered the full cost, and others covered part, but either way, they greatly reduced retirees’ out-of-pocket expenses in old age. Plus, previous generations had shorter life spans on average, so they incurred fewer long-term care costs.

For people who actually run out of money in old age, Medicaid will step in to cover long-term care costs at facilities that accept it (and many of the best don’t). You would need to completely deplete your assets and have almost no income to qualify. Plus, the government conducts what’s known as a “five-year look back” to make sure assets weren’t handed off to heirs. This program is a true safety net, not a planning opportunity.

Yes, There Are Real Solutions

Social Security is essentially a form of longevity insurance, with the fattest payouts going to those who wait the longest to claim. If people born in 1960 or later can delay until 70, they’ll receive 124% of what they’d receive at their full retirement age of 67, which is 100% of their earned benefit (people born before then receive an even higher percentage).

Beyond that, annuities can be a good option. Carolyn McClanahan, founder of Life Planning Partners in Jacksonville, Fla., and a Certified Financial Planner and medical doctor, often recommends fixed-income annuities for clients in danger of outliving their assets. That determination centers more on spending needs than overall wealth. Retirees with $3 million in assets plus Social Security who have $80,000 in annual expenses won’t have to worry about outliving their money, but a couple with $200,000 in annual spending needs could, McClanahan says.

Fixed-income annuities are the simplest type: an insurance policy where consumers pay a lump sum to a carrier in return for guaranteed income for life or a fixed time frame. The longer you wait, the higher the payout. For a single life policy in Florida with a cash refund (so beneficiaries get cash back in the event of an early death) and a $100,000 premium, a 65-year-old man would get $585 in monthly income as of late 2022, versus $648 if purchased at age 70 and $842 if purchased at age 80, according to Cannex Financial Exchanges, a provider of annuity data. A woman would receive slightly less because of her longer projected life span.

Many advisors use an annuity like this to supplement other sources of retirement income, including drawing down a portfolio of stocks and bonds held in a retirement account. Many different types of annuities are available.

Ideally, McClanahan advises clients in excellent health to hold off purchasing an annuity until their 80s. If cash is an issue, she urges them to work as long as they can, even if it’s just at a part-time job. Clients in average health might purchase an annuity in their 70s. Depending on their income needs, McClanahan might buy more than one annuity and then ladder them, staggering purchases over a number of years for a higher payout with each subsequent year.

Considering Long-Term Care Insurance

Medicare doesn’t cover long-term care, regardless of where it’s provided. The program will cover a rehabilitative stay in a care facility following, say, a hip replacement, but it doesn’t cover the kind of help that many older adults eventually need: assistance with activities of daily living such as bathing, dressing, and eating. Someone turning 65 today has about a 70% chance of eventually needing some long-term care, with an average duration of 2.2 years for men and 3.7 years for women.

Josh Strange, a Certified Financial Planner with Good Life Financial Advisors of NOVA in Alexandria, Va., says clients will often try to skirt the topic when he raises it with them. “They say, ‘Someone will take me behind the woodshed and shoot me,’ which I have never seen happen,” Strange says.

Because of its high cost, common wisdom holds that long-term care insurance is most appropriate for the mass affluent, those with $500,000 to about $2 million in investible assets. Anything lower than that, and you might exhaust your savings even before the need for long-term care arises. Anything higher than about $2 million, the thinking goes, and you can afford to self-insure against potential long-term care costs.

Yet Strange challenges that thinking, recommending that even higher-net-worth clients consider coverage. He likes hybrid life and long-term care products that offer long-term care coverage with a death benefit. They’re an easier sell for many consumers than traditional long-term care insurance, where premiums are forfeited if there is no claim, just like with home or auto insurance.

This coverage will typically defray just a portion of the costs if care is needed. (Note: The insurance company defines the eligibility criteria, not the family; usually the policyholder must demonstrate the need for assistance with at least two of the six activities of daily living.) If care isn’t required, it becomes a way to transfer wealth tax-free to heirs.

Prior iterations of hybrid life and long-term care policies optimized the death benefit and offered a small long-term care rider, but some policies today prioritize the long-term care benefit. One example is Lincoln Financial Group’s MoneyGuard Fixed Advantage, which has an average claim age of 83, according to the company. At that age, a married woman who bought a $100,000 policy at age 55 would have a long-term care pool of $916,607, a death benefit of $123,872, and a surrender value (the amount you get if you cancel your policy at any time) of $70,000, according to an illustration provided to Barron’s.

These policies are medically underwritten, which means the carrier will review your health status to determine your eligibility for coverage. That’s one reason to consider these policies in your early 50s, when you’re more likely to be in good health.

Whether you end up buying coverage or not, it’s important to consider your options when it comes to long-term care. “It’s something that 100% of people should talk to their financial advisor about,” Strange says.

Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com