Our Blog Apr 11, 2017
Americans are devoting more of their income to health care as costs rise faster than inflation. Investors should prepare for this trend to continue as part of their financial planning.
When it comes to pressing financial issues, health care is one of the top consumer concerns. Some 85% of American consumers are concerned with healthcare costs, placing it ahead of other big issues such as saving for retirement (62%). Anxiety over health care costs doesn’t appear to be abating. These costs have consistently ranked as the top concerns throughout 2016.1
This is no surprise. The cost of health care has been rising steadily for decades, and it seems likely to continue doing so for the foreseeable future, regardless of any potential policy changes. As such, it is now a key issue that advisors need to consider when helping their clients plan for the future.
While costs are rising, financial planning can help
In 2014, health care expenditure rose to consume more than 6% of the average American’s pretax income for the first time, according to the U.S. Bureau of Labor Statistics (BLS). That’s a significant increase from the recent past: From 1984 to 2010, it had stayed in a range of 4.2% to 5.2%. Costs did fall back slightly in 2015, but they were still far above their long-term average.
The reality of high and rising health care costs highlights the need for sensible financial planning to cover future needs. There are two big factors at play. Not only are health care costs consistently rising more quickly than inflation and income over time, but they also get higher as people get older. A focus on growing assets via effective investment strategies can help cover higher health care costs in the future.
High earners also need to plan
This is an issue for all income groups. According to the BLS, in 2014 around 8% of Americans’ total expenditure was directed to health care, compared to 4.8% in 1984 (which is as far back as the data goes). Higher earning Americans represent the top 20% of earners, with an average pretax income in 2014 of $172,952. Higher-earning Americans have historically spent less than the nationwide average — at least as a proportion of their total expenditure — and in 2014 they allocated 6.9% of their total spending on health care.
That may be below the national average, but it is worth noting that prior to 2009 they had never devoted more than 5% of their total expenditure to health care. And 30 years earlier, in 1984, they were spending just 3.5%.
The only group that has seen a sharper increase is the second-highest-earning quintile, which has seen its healthcare spending rise from 4.3% of total expenditure in 1984 to 8.4% in 2014.
Given the trends, if a client hasn’t updated their financial plan in the last few years, then they should consider doing so in order to take account of the likelihood that more of their income will need to go to health care in the future.
Financial planning for workers and retirees
Those with workplace health insurance are not immune from rising costs. The average deductible for people with employer-provided health coverage rose by 255% between 2006 and 2015, according to a recent survey by the Henry J. Kaiser Family Foundation, with the cost being higher among smaller firms, those with 200 employees or fewer.
It is when people head toward retirement that costs really start to escalate, though. A report for the Society of Actuaries found that the future health care costs for someone aged 65 with an expected lifetime of 20 years will be around $146,400. That includes costs not paid for by the federal government through Medicare. If that individual were to live for an additional five years, to age 90, total costs would rise to $220,600.2
Such figures underline the need for careful financial planning from an early stage, and just as important, the need to adjust those plans as one gets older, as the possibility of higher costs could increase.
Many investors will need to focus on growing assets through investing to meet the steadily rising costs of health care. For advisors, understanding these needs and how they might affect a client’s financial plan can be the basis for more productive and compassionate client conversations.
1 Source: Ipsos for Ameriprise Financial. Data as of December 2016.
2 Source: Society of Actuaries. Data as of June 2013.