Digging Into Healthcare Inflation

Yesterday we looked at an article in the WSJ about a lack of confidence that people have about being able to afford retirement. Today Barron's wrote about the same study as cited in the WSJ article and added a couple of other interesting things. 

This really jumped out;

In a separate survey, just 36% of those without a financial advisor reported knowing how much they needed to retire comfortably, versus 66% of those working with a financial advisor

The point from me is not that everyone should have an advisor, I realize that most people will not hire one which is fine but anyone choosing not to work with an advisor does need to spend some time on the basics. Chances are most people won't spend some time on the basics but they should (repeated for emphasis).

It has never been easier to put some sort of basic framework together thanks to the plain old internet and also AI. 

• How do I plan for retirement?
• How does Social Security work?
• What role does my savings play in retiring?
• Should I work part time after I retire?

None of those questions are particularly sophisticated. They're probably good starting points. This is very much in the no one will care more about your retirement than you discussion. 

The article had a mention of the recent $1.46 million estimate needed to retire comfortably survey. That would pay either $58,400 or $73,000 at either a 4% or 5% withdrawal rate. Will you have $1.46 million when you retire? Is $58,000-$73,000 an adequate amount when combined with your expected SS payout? Should you assume a 23% haircut to SS? How do the numbers look after that? 

Something new to me was the attempt to quantify healthcare inflation. Barron's cited Millman who comes up with an expected inflation rate for healthcare of 6.8% annually. Millman has a calculator that you can you use. It's not detailed but this is what it thinks based on our (my wife and I) particulars. 

The number is bigger than the Fidelity number that gets cited by just about everyone. This year, Medicare Part B for a couple making $100,000 would be $405/mo (covers both). If it inflated at 6.8% per year (if that is what Millman means) then it would cost $784/mo ten years from now. Part G in Arizona right now would be $400/mo (round number estimate from Copilot) and in ten years it would be $772. So part B and G in ten years would add up to $1556. I guess Millman's numbers include some sort of prescription estimate (I left out Part D, small outlay but I concede the flaw). 

To try to figure future needs for prescriptions, at 60, I take no prescriptions. Copilot says the odds that I will be able to get away with zero prescriptions at 70 are 30-40%. The odds that I only need 1-2 prescriptions at 70 are 40-50%. Interestingly, if I make it to 70 without needing prescriptions, the odds of not needing any at 80 are 25%-35%. This seems like a decent example of the Lindy effect. You can repeat this same exercise for your situation into the AI of your choice.

The polypharmacy number for 60 year olds stunned me. You can see where this is going. My odds for no prescriptions at 70 are so-so at best but if I only need one or two (my wife is just as much of health nut as me) at 70 then we can take a meaningful bite out of Millman's number. I know one person who at 74 a few years ago was taking no prescriptions (patient on a call for an ATV accident) and he might be the oldest person I've ever met to be on zero meds.

One idea I've had about how to approach, I will call it older ages, not necessarily retirement, is to break it up into segments. What will you need financially from whatever age you stop working until you start taking RMDs. What will you need physically for some immediate block of time like 60-72 maybe? What might you need from 72 to 85 and then maybe in the last segment of life. Sidebar joke, back at the original iteration of my blog, a reader commented about expecting to get shot by a jealous husband when he was 110. 

I'll try to think that idea through a little more and blog about it in the future. 

I'll close out that Millman just launched two ETFs that try to combat healthcare inflation. MHIP tries to "generate returns that over time exceed the U.S. healthcare cost inflation rate" and MHIG tries to "generate returns that are generally equivalent to the U.S. healthcare cost inflation rate." The funds just started trading a couple of days ago and unfortunately, the website for each fund doesn't really have any information yet. I think they are multi asset funds but I will update when there is more information available. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.