Inflation is impacting health-care costs in retirement. Here's how to fight it

Prices for gas, food and housing have skyrocketed in the last year. Less noticeable, to some, is the rising cost of health care. 

Medicare, the U.S. government’s national health insurance program for Americans age 65 and over, imposed a 14.5% increase in premiums for Part B (outpatient care coverage) for 2022, a record high and nearly double the March reading of the annual U.S. rate for inflation as measured by the Consumer Price Index. 

Rising health-care inflation can have major consequences for current and future retirees, as medical expenses are expected to take up an ever greater share of retirees’ income. “When you have to prioritize your living expenses versus health care, that’s a major problem,” said Kathy Martin, a 50-year-old resident of New York state, when asked what worries her most about health-care costs.

Martin works out a few times a week with seniors who are part of the Silver Sneakers fitness program at her local gym in Somers, New York. Her classmate Laura Rodriguez, 67, shares her concern. “What’s going to happen when I get older, you know?” she said. “How am I going to be able to pay for the care that I need?”

Studies illustrate how increasing medical expenses can add up. If health-care costs grow at 2% above consumer inflation for the next two years, a healthy 55-year-old couple could face $267,000 in additional medical costs when they retire at age 65, according to an analysis by HealthView Services. 

That same couple could expect to spend more than $1 million on health-care expenses in their lifetime, nearly the same amount as they could expect to collect in Social Security benefits. 

“Whether you’re affluent or you’re the average person … when you look at your Social Security check, you’re paying for health care,” said HealthView Services CEO Ron Mastrogiovanni. 

After paying the premiums, Medicare covers about two-thirds of the cost of health-care services, with out-of-pocket spending making up about 12%, according to the Employee Benefit Research Institute.  

“Other than housing, food and transportation,  [health care is] probably the most expensive item we’re going to face in retirement,” Mastrogiovanni said. “Know what it is; be prepared.”

HealthView Services estimates that a 55-year-old couple would need to invest an additional $53,000 to cover the $267,000 in added costs from inflation. 

Increasing savings now can add to security later. Experts say consider adding more money to your 401(k) plan or a Roth individual retirement account, if you qualify. “The most important thing is that you start saving and you start saving early; the earlier you do, the better prepared you’re going to be,” said Paul Fronstin, director of health benefits research at EBRI. 

Health savings accounts are another tool to save for future health-care costs, but they require a high-deductible health-care plan and have annual contribution limits. For 2022, the HSA contribution limit is $3,650 for single-insured and $7,300 for families. For people over 55 years old, each of those limits increases by $1,000, via “catch-up” contributions.

There was a time when employers offered health benefits to retirees, but EBRI found only about 4% of companies have those benefits, down from about 45% before an accounting rule change in the late 1980s required firms to put the liability on their balance sheets.

“When they had to do that, it just didn’t look good on the balance sheet, so they started cutting back on the benefit to the point where very few workers are going to be eligible for this kind of benefit in the future,” Fronstin said.

Meanwhile, Silver Sneakers fitness instructor Melanie Scala, who turns 59 next month, said “I definitely feel like I’m heading people in the right direction to cut down on their health costs.”

Yet, while physical fitness may help control some health-care costs, experts say planning ahead for medical expenses over a longer life should also be factored into the equation.