Bob’s Journal for 11/21/19

Some Notable Events That Grabbed My Attention This Week

Prescription drug expenses absorb more and more of retirement income, but it’s not because medicine prices are soaring.

There are a few well-publicized cases of significant increases in prescription drug prices, with insulin probably drawing the most attention. But in general, the price of medicine isn’t rising rapidly. In fact, studies found that prices for generic drugs are declining. Generic drugs account for 80% to 90% of all prescriptions.

In addition, insurance picks up a lot of the cost of prescription medications for many people. Other studies have found that out-of-pocket costs for prescription medications declined in recent years.

So, why are retirees spending more and more money on prescription drugs, and why is the cost of prescription drugs taking a larger share of the typical retiree’s spending?

The answer is that as people age they usually take more medications. That’s partly because pharmaceutical companies develop drugs for conditions that couldn’t be treated by medicine in the past.

But it’s also because people develop more conditions that can and should be treated with prescription drugs. As people age, average spending on prescription drugs increases 5% to 6% annually even when drug prices don’t change because people take more medications. In fact, many retirees spend more on prescription drugs than on their other retirement medical expenses.

Social scientists call this the prescription drug escalator. You can find more details here. You need to factor this reality into your retirement plan. It doesn’t matter much in the early years of retirement, but prescription drugs can crimp other spending and require adjustments as the years go by.

Is Old Age Made Up?

I often hear experienced retirees say, “Growing old isn’t for wimps” or some other variation of the saying. Their point is that aging brings a lot of aches, pains and other unpleasantness you need to face.

If that’s your view, you might be interested in the new book, “The Longevity Economy: Unlocking the World’s Fastest-Growing, Most Misunderstood Market” by Joseph Coughlin.

Coughlin is the founder and director of the Massachusetts Institute of Technology Age Lab, a research organization devoted to studying aging and business. The book is directed primarily at businesses, instructing them on ways to understand and serve older members of the population as their percentage of the population increases.

But the book also should interest many people in that segment of the population, even if they aren’t running businesses.

Coughlin argues that old age is made up. He also uses the terms “mass delusion,” “story” and “fictional.”

Coughlin doesn’t argue that the physical effects of aging aren’t real or that people will live forever. Instead, he writes that the social construct or notion of oldness is at odds with reality. Coughlin says the older segment of the population is very diverse, while the societal belief is that everyone older than a certain age is unproductive and in need of significant assistance.

This narrow view of aging and older people means the older segment of the population isn’t being served well. It also means that businesses are missing out on many opportunities to innovate and provide goods and services to a relatively wealthy group.

You might enjoy reading the book for its myth-shattering discussions. Coughlin also argues that baby boomers aren’t going to accept this state of affairs much longer and will demand that businesses provide goods and services that meet their needs.

The Amazon Effect and Retail Sales

Retail sales data always have been volatile from month-to-month, but they’re becoming even more difficult to interpret.

A major factor is the growth of online sales. In the official retail sales reports, the headline number is broken down into different categories, such as clothing, furniture, gasoline, etc.

The problem these days is that all online sales are grouped into a category called “Non Store Sales.” Because of that, sales from other sectors continue to be moved into Non Store Sales as online sales increase.

Overall retail sales have bounced up and down, and the individual categories have done the same. The exception has been Non Store Sales. This category has increased for 10 consecutive months.

Over the last four years, the category has had only five months when sales were lower than the previous month. That is by far the best performance of the retail sales categories.

Non Store Sales now is the second-largest category among retail sales and is growing eight times faster than overall retail sales.

The shift to online shopping doesn’t have much effect on the overall retail sales numbers. But it does provide a problem for investors who want to analyze shifts in consumer preference among different types of goods and services.

Here’s a final interesting point. Despite the rapid growth in online sales, they still haven’t reached the growth rate they had before the dotcom bust.

The Data

Lower interest rates are helping housing. Housing starts increased in October to the highest level since May 2018. Permits increased even more to the highest monthly level since before the financial crisis.

The three-month average of starts for single-family homes increased sharply over the last two months to a 12-year high. Permits for single-family homes also reached a 12-year high.

Home builders also remain optimistic, though the Housing Market Index from National Association of Home Builders (NAHB) declined to 70 from 71. That’s the second-best level of 2019. Traffic, a weakness in this survey for a while, increased to near its highs since the financial crisis.

Existing home sales had a good month in October. Sales increased 1.9%, compared to a 2.5% decline in September. The improvement wasn’t uniform across the country. Sales increased in the south and Midwest but declined in the west and northeast. Sales are up 4.6% over 12 months.

The latest data indicate manufacturing continued to be weak in October.

Industrial Production declined 0.8% in October, compared to a 0.3% decline in September. Manufacturing production declined 0.6%, compared to a 0.5% decline in September. Some of the decline in production was due to the strike at General Motors.

Business equipment production declined 0.6% in October, following a 1.1% decline in September. That’s a sign that weak business investment continues.

The Empire State Manufacturing Survey also was weak. The General Business Conditions Index was 2.9 in November, compared to 4.0 in October. Though the index number is positive, it indicates growth is very low and declining.

Yet, the Philadelphia Fed Business Outlook Survey improved to 10.4 in November from 5.6 in October. This has been the strongest of the manufacturing surveys. It was strong almost across the board and indicates manufacturing is improving as the year closes, at least in this region.

Retail sales increased by a modest 0.3% in October, compared to a 0.3% decline in September. Excluding autos and gas, sales increased only 0.1%.

The Leading Economic Indicators Index from The Conference Board declined by 0.1% in October following a 0.2% decline in September.

New unemployment claims were unchanged at 227,000. Economists expected claims to decline after last week’s sharp 16,000 increase, which was revised higher from the 14,000 initially reported. The weekly claims number is at the highest level since June.

The Markets

The S&P 500 rose 0.54% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.24%. The Russell 2000 added 0.23%. The All-Country World Index (excluding U.S. stocks) lost 0.08%. Emerging market equities increased 0.47%.

Long-term treasuries rose 3.00% for the week. Investment-grade bonds increased 0.99%. Treasury Inflation-Protected Securities (TIPS) added 0.88%. High-yield bonds lost 0.45%.

In the currency arena, the U.S. dollar fell 0.37%.

Energy-based commodities declined 0.90%. Broader-based commodities fell 1.35%, while gold gained 0.57%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

Join me for the Orlando MoneyShow, February 6-8, 2020, at the Omni Orlando Resort at ChampionsGate. I will be speaking Thursday, Feb. 6, 11:30 a.m. about Important Changes in IRAs and Other Retirement Planning Strategies You Must Know. On Feb. 7, I will talk at 11:30 a.m. about 10 Questions You Must Answer Before and During Retirement. Other investment experts who will be speaking include Hilary Kramer, Bryan Perry and Mark Skousen. Register by clicking here or call 1-800-970-4355 and mention my priority code of 049320.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

Do your heirs know how to handle an inherited IRA? If not, they’ll join the long list of heirs who made simple mistakes that triggered additional taxes and penalties. To avoid this result, be sure your heirs have a copy of Bob Carlson’s Guide to Inheriting IRAs.