The Retirement ‘Spending Smile’: Why You Need a Healthcare-Specific Inflation Hedge
The Retirement ‘Spending Smile’: Why You Need a Healthcare-Specific Inflation Hedge
COACHING POINTS
- The Spending Smile: Retirement spending is U-shaped, not flat. High at 65 (Travel), Low at 75 (Slowdown), and High again at 85+ (Healthcare). Standard plans that assume “Flat Inflation-Adjusted Spending” dangerously underestimate the late-life spike.
- The Inflation Gap: General inflation (CPI) is ~3%. Medical inflation (Med-CPI) is historically ~5-6%. If your entire portfolio only targets 3% growth, your purchasing power for healthcare effectively shrinks by 2-3% every year. Over 20 years, this cuts your medical buying power in half.
- The Hedge: Don’t just save more cash. Buy assets that profit from rising healthcare costs. Healthcare REITs (own the nursing homes) and Pharma ETFs act as a natural hedge. When your bills go up, so do your dividends.
You’ve planned for your travel budget, but have you planned for your $12,000/month memory care facility? The “Spending Smile” phenomenon means your most expensive years might be your last ones. To survive the “Medical Inflation Monster,” you need a dedicated bucket of assets that grows in lockstep with the cost of care.
Calculating the erosion of purchasing power for healthcare.
- Standard COLA: Social Security rises by ~2.5% (CPI-W).
- Medical Cost Trend: Rises by ~5.5%. Authority: Centers for Medicare & Medicaid Services
- The Gap: -3.0% per year.
- Result: A $100k medical bill today costs $265k in 20 years. Your COLA-adjusted income only grows to $163k. You are $100k short.
What-If Scenario: Portfolio Structure (Age 85)
Assumption: Medical costs double every 12 years.
| Asset Allocation | Portfolio Growth (Nominal) | Medical Purchasing Power |
|---|---|---|
| Standard 60/40 | 6% | Flat / Declining (Consumed by Med-CPI) |
| With 15% Healthcare Hedge | 6.5% (Sector Boost) | Rising (Dividends rise with rents/drug prices) |
Visualizing the Smile Curve
*Figure 1: Spending Path. The “Smile” shape shows why a flat withdrawal rate fails. The Green line (Hedged Income) matches the late-life surge.*
Execution Protocol
Segregate 10-15% of your portfolio specifically for late-life care. This is separate from your “Lifestyle Bucket.” Do not touch this money for travel or cars.
Invest this bucket in Healthcare REITs (e.g., Welltower, Ventas) which own senior housing, and Healthcare ETFs (e.g., XLV). If care costs rise, these companies make more money, increasing your asset value.
Social Security is the only inflation-adjusted annuity you have. Maximizing it by delaying to age 70 is the best base layer of protection against the “Smile” effect. (See Article #232).
COACHING DIRECTIVE
- Do This: If you are self-insuring for Long-Term Care (no insurance policy). You must hedge the specific risk of medical inflation.
- Avoid This: Ignoring the “Smile.” Assuming you will spend less at 85 than at 65 is a fatal error. The mix changes (less travel, more care), but the total often rises.
Frequently Asked Questions
What is the ‘Retirement Spending Smile?
It is the empirical observation that retiree spending tends to be high in the early years (travel/hobbies), dips in the middle years (slowing down), and spikes again in the late years (healthcare/nursing). Relying on a flat inflation adjustment ignores this late-life surge. Authority: Blanchett, Journal of Financial Planning
Why is Medical Inflation (Med-CPI) dangerous?
General inflation (CPI) averages ~3%, but Medical CPI averages ~5-6%. If your entire portfolio only targets 3% growth, your purchasing power for healthcare effectively shrinks by 2-3% every year. Over 20 years, this cuts your medical buying power in half.
How do I hedge this specific risk?
Create a separate ‘Healthcare Bucket’ in your portfolio invested in assets that correlate with rising medical costs, such as Healthcare REITs (nursing homes) or Pharmaceutical ETFs. If medical costs skyrocket, these assets likely appreciate, offsetting your higher bills.