Inflation assumptions within our retirement plans are an important factor in your planning for the future. The compounding of inflation over time can have a significant impact on the success of your plan. Here at AWMI, we revisit our inflation assumptions at least annually. We also recognize inflation for health care separately from the overall retirement spending inflation assumption. For an explanation of how we come to our overall retirement inflation rate, please re-visit Kim Butler’s blog, How much will my retirement savings buy me?
Health Care inflation is a significant factor that we incorporate into our planning separately, currently at an inflation rate of 6.5%. At such a high rate of inflation, this can negatively impact a financial plan and any change up or down can have a dramatic effect. As we ponder the unknown health care landscape, we note that Premera Blue Cross of Alaska announced in late summer a proposed rate drop for 2018 in many of their Alaska plans. As a result, this single data point has caught local attention. Nationally, health care cost inflation was 9.9% from 1983 to 1992, 6.4% from 1993 to 2010, and 4.3% from 2010 to 2015; a clear downward trend according to the Kaiser Family Foundation. The Foundation’s projection is for a health care inflation rate over the long-term of 5%.
This Kaiser rate is total inflation in all health care costs, including public and private. This includes you, your insurance company, and the government regulated expenditures in Medicare and Medicaid. Even if total costs are inflating at 5% generally, the cost shifting to the public through higher deductibles and cost sharing within health plans still drives health care inflation higher for the private sector, meaning you. We are all seeing it in our higher deductibles and higher out-of-pocket expenses.
As we look to project your health care costs during your retirement lifetime, this is often a span of over 30+ years, when typically, health care consumption is higher. The average health care cost inflation over the past 30+ years was actually 7.08%. The recent slowing, in particular since 2007, indicates that economic and demographic factors may be leading to positive change in the future. Most recently, however, uncertain legislation in Washington could create instability in health care expenditures in the short term and headwinds in predicting future trends until we clarify the legislative impact. As we look to conservatively estimate the impact of health care on your future financial plan, we will continue to use 6.5% until we see positive change materializing in your budget.
Our annual monitoring and review of our inflation assumptions will be interesting as we look forward in this health care environment and the many issues yet to be solved with an aging demographic.
Marietta Hall, CFP®
For more resources you can look at much of the source data on health costs statistics in the annual Medicare Board of Trustees Report released each summer and posted here:
The Kaiser Family Foundation at www.kff.org.
And lastly http://www.hhs.gov