How healthcare changes seniors’ inflation math

There’s been no sign that inflation is heating up along with the economy, and that may tempt people planning for retirement to be complacent about inflation risk. But it’s important to remember that the inflation rate experienced by seniors is higher than that of the overall economy.

From 1985 to 2014, the Consumer Price Index ran 5.1 percent behind the CPI-E, an experimental measure created by the U.S. Bureau of Labor Statistics to measure the inflation affecting elderly Americans, according to research by J.P. Morgan Asset Management.

The culprit is health care, which accounts for 13 percent of expenditures by Americans over age 65, compared with 5 percent for all other age groups, according to the Center for Retirement Research at Boston College.

Even health care inflation has been quiet lately. The monthly premium for Medicare Part B (outpatient services) has been flat at $104.90 for three consecutive years. The Congressional Budget Office projects that inflation-adjusted spending per Medicare beneficiary will rise at an average annual rate of 1.5 percent in the coming decade, compared with 4 percent from 1985 to 2007. The key moderating factors include constraints on payments to health care providers under the Affordable Care Act, and a slowdown in the quantity and intensity of healthcare services being utilized.

Still, many experts think health care inflation will return to historical norms, and that’s an argument for conservative, careful inflation planning for retirees. A reasonable hurdle rate is 5 or 6 percent – and planning using lower numbers may put your plan at risk. Learn more in my column this month at WealthManagement.com.

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