The Unhealthy Hole in Your Retirement

You may have a few question marks hanging over your retirement plan -- like whether the aging Social Security system will be shored up in time for your farewell party at the office. Even if retirement remains decades away, you've been warned not to rely on Uncle Sam.

Though Social Security hogs all the headlines, an even greater problem should keep you awake at night. Worry about Medicare. It's in much bigger trouble, which raises serious questions about how future retirees will pay for health care.

It's estimated that Social Security will exhaust its reserves in 2041, but Medicare's hospital insurance trust fund is targeted to deplete its reserves by 2019. In bureaucratic terms, that's just around the corner. With the inflation rate for health care running faster than a sprinter on a triple-shot espresso, the Medicare programs that pay for doctor bills, outpatient services, and prescription drugs have been requiring huge -- and probably unsustainable -- infusions of cash.

Your retirement health
You've probably noticed that you're shouldering more of your health-care costs. Your health insurance premiums probably take a bigger bite out of your paycheck, and your out-of-pocket costs may be creeping up, too.

Don't expect this trend to stop when you hit your golden years. In one measure of how escalating health-care costs might pinch your retirement plans, the Center for Retirement Research at Boston College calculated that 44% of households are at risk of being unable to maintain their current lifestyle in retirement. That assumes workers keep punching their keyboards until age 65, and tap into all their financial assets (including home equity) in retirement.

The number of people who will see their standard of living slip in retirement jumped to 61% when the researchers incorporated health-care costs into their equation. That's before any changes to make the Medicare system more sustainable. Who knows whether those changes will tap retirees for bigger contributions?

The good news
That sounds pretty dire. But Fools, like Scouts, will always be prepared. If you're not retired yet, you have time to pad your retirement savings to cover the unknowable costs of keeping yourself fit and spry into old age.

Imagine for a moment that you stashed away just a little bit of money during some of your prime earning years, from age 35 to 45. An extra $100 saved each month during that decade can turn into $16,470, even if you earn only 6% on your money.

Let's say you never add an extra dime to that tidy sum, and you just let the money sit around for another 20 years until you wave goodbye to your cubicle forever. You'd have more than $54,000 extra for medical expenses. (Let's hope that copayments don't clock in at $1,000 per visit by the time you get to retirement.)

Better news
That's an improvement, but I'll bet you could do a little bit better. The unknowable cost of health care is yet another reason why anyone with some time before retirement should consider the possibility of better preparing themselves by investing in stocks.

Maybe health-care stocks could be your ticket to a healthy retirement.  Check out these popular names in health care from Motley Fool CAPS:

Source: Motley Fool CAPS as of Oct. 30, 2008.

If you'd rather not pick and choose, you can buy a whole swath of the health-care industry with exchange-traded funds such as the Vanguard Health Care ETF (AMEX:VHT).

Further hale and hearty Foolishness:

• There's a health-care crisis coming.
• You need to save a lot for health care in retirement.