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The rule of 72 is a convenient mental math tool to quickly estimate the future value of today’s investments, extrapolated some years forward. It’s quite handy, as Jonathan noted in the Math section of HumbleDollar’s Guide. Expecting a 7.2% return from your stock funds? Your holdings should double in value over 10 years (72 divided by 7.2). Of course, the rule assumes a magical world where your returns are always the same and markets are perfectly linear (ha!), but it’s still handy for quick guesswork.
Its use isn’t limited to envisioning potential growth of investments. It can also help imagine the outcome on our lives from a shrinking process which melts the purchasing power of money like an ice cube on a summer day: inflation.
According to the 2025 Global Investment Returns Yearbook, by Dimson, Marsh, and Stanton (published now by UBS), the U.S.’s average annual rate of inflation over the past 125 years has been 2.9% (geometric mean), or 3.0% based on an arithmetic mean. Using that latter round number, the rule of 72 suggests our purchasing power could be cut in half in 24 years (72 divided by 3) if our income doesn’t keep up with inflation.
The CPI inflation indexes were created using a basket of items which may or may not reflect how each of us spends our money. But there is one item which all of us need: healthcare. Adam Grossman posted a piece in 2021 (“Their Loss, Your Gain”) about LTC insurance; in that, he linked to a FRED blog post which showed how healthcare costs since 1948 grew at an average rate about 1.5 percentage points higher than the general CPI rate. Envisioning that trend with the Rule of 72, we would spend twice as much on healthcare costs every 16 years (72 divided by 3.0 + 1.5).
I would expect health insurance premium inflation to track healthcare cost inflation, but I’m no expert on this topic. A recent post by Dick Quinn drew my attention to pages 204 and 205 in the most recent report by the Board of Trustees for Medicare. On those pages, you’ll find two interesting tables, one which estimates the future monthly premiums for Medicare Part B and Part D through 2034, and another which estimates the future income-related monthly adjustment amount (IRMAA) to the base Medicare Part B premium. When I dropped those figures into my financial planning spreadsheet, I was surprised to see the Trustees expect Part B premium increases averaging roughly 7.2%. The IRMAA increases tracked at roughly the same rate.
I’m not sure how to think about these “intermediate estimates” in this Trustees report. Is it really possible we’ll see the purchasing power of our Medicare dollars cut in half every 10 years (72 divided by 7.2)? Yikes.
I recently retired in 2023 and have been monitoring healthcare costs. The Medicare Part B premium increased 5.9% (2023->2024), 5.9% (2024->2025), and is expected to increase 11.6% (2025->2026) to $206.50/month. My MediGap supplement increased 9.5% (2023->2024) and 6.8% (2024->2025).
Costs for assisted living or long-term care vary greatly depending on location and services, but AI said:
This is very helpful, thanks Cheryl!
The Medicare report states that the greater than the expected increase in Part B costs are mainly due to a greater than estimated increase in hospital outpatient and physician charges for medication administration. There has been a signicant growth in FDA approval of very expensive drug infusions, including one or two for early Alzheimer’s disease.
That makes sense, thank you for highlighting this key point.
After reading your article, I guess I will keep my current stocks/fixed income allocation for the foreseeable future.
Perhaps let’s first hear from others who know more about these Medicare estimates which are higher than the CPI + 1.5 pct points discussed in the FRED blog.
@RDQ: Are those estimates often revised down?
Inflation makes those wonderful investment returns seem smaller, and they are, in real dollars. With 3.0% inflation the long-term average, annual real return for the S&P 500 is about 4.35% and for 10-year U.S. Treasury bonds it is 0.96%.
Another “inflationary” item might be taxation. That’s more difficult to pin down, but as everyday items go up in price, so does the amount taken as sales tax, although a few states don’t have a statewide sales tax. They fund via other means and some impose income and personal property tax.
“Inflation makes those wonderful investment returns seem smaller, and they are, in real dollars. With 3.0% inflation the long-term average, annual real return for the S&P 500 is about 4.35%”
That is not correct.
https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
“Since 1957, the S&P 500 has delivered an average annual return of 10.54%, but when adjusted for inflation, the real return drops to 6.68%”
AI Overview for “annual real return for sp500”
“The S&P 500’s annual real return, accounting for inflation, is approximately 6.5% to 6.7% when looking at long-term historical averages, though it can vary depending on the specific time period and data source. For example, since April 1957, the real return has been around 6.5%, while a 50-year average ending in August 2025 was about 8.0%”