A bit of serendipity this last week. I was reading an article from some of our American friends (ThinkAdvisor) when Joni Mitchell’s “Big Yellow Taxi” came on the radio. The line that stuck in my head was “You don’t know what you’ve got till it’s gone”, as I was reading about the healthcare costs faced by Americans in their retirement.
Now, many of us have become quite used to the idea that we may have to pay for private treatment for medical conditions in our retirements. In fact, it has started to become sufficiently normal that we have begun to factor it into our clients’ retirement spending plans.
However, in the long run, the American market gives us a good insight into how much we actually benefit from the NHS in retirement. Joni was right – “You don’t know what you’ve got till it’s gone”!
According to ThinkAdvisor (1), quoting a paper published by HealthView Services (2) (who used 530 million healthcare claims to work out their figures), an American couple on average can anticipate annual health care expenses of about $14,700 (that’s £11,750 in real money) in their first year in retirement, and this grows to about $54,500 (£43,500) in the last year of retirement (at expected longevity).
Projections by the American arm of Fidelity show that a typical American individual can expect to spend nearly $160,000 (£128,000) on health care and medical expenses through their retirement.
According to ThinkAdvisor, this is sufficient to make the US 4% rule fail (and we already know that the US 4% rule doesn’t apply in the UK; this post explains what the rule is and why it doesn’t work for us – One of the reasons for the failure of the US rule is that healthcare expenses are a significant component of retirement expenditure, and HealthView Services predict that costs by more than inflation every year for retirees (this would appear to be the case for UK retirees too, based on our anecdotal experience). The failure of the rule is serious as it makes planning for your retirement expenditure even more uncertain than it already is.
Putting it another way, if we no longer had an NHS, we may well have similar health expenditure in retirement to the American experience. And that could mean having to find another £160,000 by the time you retire, in order to have the same standard of living when you stop work. The suggestion from ThinkAdvisor is that US citizens should have a separate pot to cover their healthcare costs (or, as they put it a portfolio where “returns and principal withdrawals are managed specifically around a health care-spending decumulation glidepath”!).
My point is that we are all guilty of complaining about the NHS and undervaluing it. It may be true that we would pay less in tax and National Insurance if we didn’t have it. But it would need to be an enormous tax saving to make up for the extra costs we would face in retirement. Next time I am tempted to moan about the NHS, I’ll remember to look at things “From Both Sides Now”.
PS I usually turn the radio off when Joni comes on!
- https://www.thinkadvisor.com/2023/07/19/4-rule-falls-short-for-retirees-with-big-health-care-expenses/
- https://hvsfinancial.com/white-papers/automating-retirement-planning-decumulation/
Philip Wise | philip@sussexretirement.co.uk
Managing Director and Chartered Financial Planner
