Get Real
Presenting U.S. News's ultimate retirement calculator--the essential tool you need to plot your strategy for the future
The health care illusion Managed care and other measures will control the cost of health care when I retire.
Although you'll probably live longer than you imagine, don't count on being healthier. The need for and the cost of health care typically increase dramatically as you age. On average, for example, a 40-year-old man consumes about $2,000 a year in health care services, whereas a typical 75-year-old consumes five times that much. That's why, as the population ages, huge inflationary pressures are put on the health care system.
How big will those pressures be in the next century? Over the past 40 years, health care costs have risen an average of 70 percent faster than the general rise in prices--and that was before the boomers started to gray. The federal government predicts that by 2030, as boomers enter their 70s and 80s, health care spending will top $16 trillion, representing nearly 1 out of every 3 dollars in the economy.
Who will pay the bill? No one knows for sure, but it's a good guess that the next century's elderly will become responsible for paying a much larger share of their own costs than their counterparts do now. Eligibility requirements for Medicaid nursing-home benefits, for example, are likely to be tightened. Since the cost of a nursing-home bed is projected to be $97,000 a year (in today's money) by 2030, those who don't make provision for this potential liability could easily become impoverished.
Medicare, which covers medical costs for the elderly, is also likely to become less generous--limiting the conditions and treatments it covers, for example, or imposing higher deductibles and copayments or a means test. Reform is virtually certain; even after assuming huge increases in the efficiency of the health care system, the actuaries at Medicare project the system will go broke within 10 years.
How can you take these factors into account as you plan your own retirement? We suggest that you assume the cost of health care will rise by at least 3 percentage points above the general rate of inflation, which is close to the historical norm, and that you assume your entitlement to subsidized health care will be substantially reduced. This is one area where it's best to assume the worst--you'll be pleasantly surprised if things turn out better than expected.
The Social Security illusion I can count on Social Security to pay me the full benefits promised me under current law.
If you look at the problems of Social Security in isolation, they don't seem too daunting. Today, the program costs the equivalent of about 11 percent of wages; by 2035, the cost will be about 18 percent, and it won't reach 19 percent before 2060 even if no benefits are cut.
But Social Security doesn't exist in isolation. As we've already seen, the cost of Medicare and Medicaid will skyrocket as well; so will the cost of veterans' benefits, pensions for civil servants, and similar entitlements. The federal government spends nine times more on the average senior citizen than it does on the average child. This means that as the population ages, federal spending grows geometrically. If left on its current course, entitlement spending would consume all federal revenues within 33 years (goodbye national defense, the court system, and interstate highways). It's hard to imagine that a spending program as large as Social Security can remain exempt from budget cuts.
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