While overall inflation may remain subdued for years, health care costs and other related items that affect retirees the most continue to rise at a sharp pace. According to the Bureau of Labor Statistics — the government agency that provides Congress the data that they use to determine increases in Social Security, Medicaid and Medicare — health care related costs have risen by nearly 4% annually over the past decade, a pace nearly double that of overall inflation.
Moreover, the BLS also publishes a Consumer Price Index for the Elderly. While this doesn’t break out health care specifically, it reinforces the fact that life’s necessities get progressively more expensive as you age. By some estimates, including a 2014 study by Boston College, health care costs for retirees may represent over 10% of their annual expenditures and may rise by as much as 8% annually over the next 25 years.
From an investment perspective, this means that you need to account for greater annual distributions (cash-flow) from your investments to keep up with these costs over time.
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One simple, popular strategy to help with this is investing in high-quality dividend-paying stocks. The key here is “high-quality.” Investors should focus on strong balance sheets and companies that have a consistent track record of raising their dividends – the so called “Dividend Aristocrats.” Investors are wise not to simply look for the highest yielding stocks, as these could be troubled companies whose stock may fall sharply.
I do not recommend inflation-adjusted bonds, as these tend to be pegged to overall inflation, which is likely to remain muted. However, allocating a portion of your portfolio to floating rate bonds, in particular higher-quality ones, may have some long-term benefits. These types of bonds generally adjust their interest rates up or down at a fixed schedule based on overall interest rates. Given that rates are likely to rise over the next few years, this represents a decent alternative to fixed-rate bonds that yield very little right now.
There are also annuities available that have medical riders, which do not require any medical exam (although there is a waiting period before this benefit can be triggered). While I’m generally not a fan of annuities as I find them too expensive in relation to the benefits they provide, this is an example where the products’ cost and benefits match up. Before considering such an investment, make sure to fully understand all of the costs and restrictions associated, and shop around — more and more insurance companies are offering low-cost and no-load annuities with increasing benefits.
Finally, as with any investment or financial plan, try to anticipate the unexpected. How would you handle a sudden $30,000 medical bill due to a longer hospital stay? What about in-home care expenses? Discuss these with your family and your financial adviser now, and plan on those costs rising at a faster pace than any other expense.
This column is the last in a six-part series on investor education.
- Column 1 – Understanding your goals
- Column 2 – Why benchmarking to the S&P 500 is not a good strategy
- Column 3 – It’s about cash-flow, not returns
- Column 4 – How much are you paying for your portfolio?
- Column 5 – 5 critical questions to ask your financial advisor
- Column 6 – ‘Senior Inflation’ the not so silent retirement killer
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