There may be another compelling reason to save and that is that while many aspects of retirement savings are predictable, the big unknowable is health care costs. “If you believe in the logic of the life cycle model, then once you get used to peanut butter, all else follows,” said Jonathan Skinner, a economics professor at Dartmouth College who has studied retirement issues and recently wrote a paper titled “Are You Sure You’re Saving Enough for Retirement?” for the National Bureau of Economic Research. “That’s the assumption that I am questioning: Do people want to be stuck in peanut butter in retirement?”
He said he came to the conclusion that a strategy to reduce retirement expenses “will be dwarfed by rapidly growing out-of-pocket medical expenses.” He noted projections based on the Health and Retirement Study, a survey of 22,000 Americans over the age of 50 sponsored by the National Institute on Aging found that by 2019, nearly a tenth of elderly retirees would be devoting more than half of their total income to out-of-pocket health expenses. He said, “These health care cost projections are perhaps the scariest beast under the bed.”
As Victor Fuchs, the professor emeritus of economics and health research and policy at Stanford University, told me, money is most useful when you are old because it makes all the difference whether you wait for a bus in the rain to get to the doctor’s appointment or you ride in a cab.
“Saving for retirement may ultimately be less about the golf condo at Hilton Head and more about being able to afford wheelchair lifts, private nurses and a high-quality nursing home,” Professor Skinner said.
His best advice for people in their 20s and 30s: maximize workplace matching contributions, seek automatic savings mechanisms like home mortgages and hope “that their generation can still look forward to solvent Social Security and Medicare programs.”