Inflation is finally coming down from four-decade highs notched in 2022. With a string of monthly declines in the U.S. Consumer Price Index (CPI) as well as the Federal Reserve’s favorite price gauge, the Personal Consumption Expenditure (PCE), registering significantly lower readings, retirees can have better confidence that their nest eggs’ purchasing power will hold up. But there’s nuance to inflation. 

The pandemic caused a host of oddball trends in financial markets and economic conditions. With folks couped up at home, we were all left to our computers and smartphones to click and swipe away at products that caught our eyes on e-commerce marketplaces. Not surprisingly, goods inflation went through the roof – and tied-up supply chains did no favors to consumers looking to find good deals while working from home. 

Inflation: From Goods to Services

But now we are on the flip side of the goods-services price dynamic. More than three years removed from the worst of COVID-19, life has generally returned to normal for most families. Children are back in the classroom, folks are commuting (though office occupancy is still well below the pre-pandemic average), and in-office medical appointments are the norm. (Getting a health check-up via Zoom was just awkward, right?)

As a result, it’s not the price of goods that is so frustrating these days. Rather, the cost of things like travel, dining out, and medical care often make your jaw drop when the bills arrive. Even with technological improvements and the promise of generative artificial intelligence (AI) making inroads into lowering prices for, say, medical guidance, there seems to be no stopping the uncomforting inflation seen in health care writ large. 

Health Care Costs Temporarily Dip Due to Reduced Medicare Premiums

When planning for retirement, today’s consumer must assume the probability of facing health care expenses totaling in the six figures. According to the recently released Milliman Retiree Health Cost Index, a healthy 65-year-old retiree will need an estimated $90,000 to $203,000 over his or her remaining life. Those amounts are based on projections for total premiums and out-of-pocket financial outlays. 

What’s encouraging, but not enduring, is that 2023’s figures are actually lower from year-ago amounts due to reduced Medicare Part B premiums. Experts suggest that is not indicative of a trend, however, and health care inflation is expected to continue. What’s more, another report shows much higher cost projections.

Are Higher Savings Amounts Needed?

In the more well-known Fidelity Investments study that comes from the 2022 Retiree Health Care Cost report, a typical opposite-gender couple retiring in 2022, both individuals age 65, with life expectancies that align with actuarial tables, would need a whopping $315,000 to cover anticipated medical care costs. And that sum is net of taxes, so if you have, say, a $500,000 pre-tax IRA or 401(k), that portfolio will barely cover the financial needs of your medical-expense bucket. 

Planning Now Helps Retirees Live Their Best Lives Later

Setting aside your entire portfolio for possible health-related costs is no way to live. Proper retirement planning is needed to help protect your future. Setting goals is critical so you can enjoy your golden years. 

Halo Investing is all about helping individuals and families ensure their money lasts. We provide financial advisors with protective investment solutions for their clients. Structured notes, annuities, and buffered ETFs are designed to enhance income, cushion against market volatility, and make retirees’ money last.

Using Annuities to Help Shield Retirement Savings

Annuities had a record-shattering year in 2022 – and that goes beyond Halo. According to the industry benchmark – the LIMRA Individual Annuity Sales Survey – last year featured a rapid 23% jump in annuity purchases from 2021. The $311 billion total leaped past 2008’s prior high-water mark of $265 billion. It proves that a growing number of retirees view annuities as a key tool to building a solid financial foundation that protects against longevity risk. 

While we like to see investors using all available financial products to form the right retirement strategy, health-care inflation risk remains a common worry among not only the 65-and-up crowd, but also young people, as well as growing families. Entrepreneurs are especially anxious about how to procure quality health insurance at a reasonable cost. 

More Retirees Means More Opportunities for Advisors to Solve Financial Challenges

While we cannot cure all financial ills, Halo asserts that annuities can compliment strategies to fight personal finance risks in retirement. With a growing number of people exiting the workforce in the Baby Boom and now Gen X generations, individuals and couples in their 50s and 60s must ensure they have enough money saved for rising medical expenses. 

According to the Milliman report, a healthy 65-year-old male will need to have saved approximately $90,000 in today’s dollars for health care. Females face higher potential bills – requiring savings of $100,000. Those figures assume holding Medicare Advantage plus Part D plans, so clients without that coverage should expect higher costs and a bigger financial cushion. For newly-minted retirees with original Medicare plus Medigap and a Part D Plan, total outlays amount to $277,000 for a male and $315,000 for a female – that would imply a portfolio of nearly $400,000 (net of taxes).

Bracing for Higher Future Costs

What’s particularly troubling about the report is that inflation is seen as driving up costs over the next several years, as services inflation shows no signs of a fast slowdown. Retirees’ personal inflation rate is usually much different from what the CPI shows, and as long as the price tags on prescription drugs and surgical procedures keep rising fast, baby boomers may continue to endure high inflation trends. One of the report’s authors underscored that health care is “likely to drive up expenses for retirees over the next several years, more so than any other factor.”

A possible solution? Of course there’s no one-size-fits-all product, but a lifetime annuity with an inflation rider can help mitigate the rising cost of health care. Inflation-protected annuities (IPAs) offer holders a real rate of return based on annual changes in the CPI. Still, the client must work with the advisor to see if a lifetime annuity with an inflation rider is right for them to help protect against the aforementioned risk that health care prices continue rising at a faster clip than the broad CPI gauge – that is a key value-add opportunity for the planner. 

The Bottom Line

Inflation is on the mend across the economy, but the services component of CPI continues to run stubbornly hot. Medical costs are higher than ever, and protecting client portfolios from both longevity risk and rising personal inflation is a tall task for today’s advisors. Halo’s protective investment solutions, namely annuities with lifetime income options, may instill peace of mind with risk-conscious retirees. 

Note: Annuities are not suitable for all investors. All recommendations for annuity products must be suitable and appropriate for the client and must be based on a thorough fact-finding and understanding of the client’s unique financial situation, needs, goals and risk tolerance.

Please see our Halo Disclosure Page for important disclosures.