Social Security and Medicare currently eat up about one-third of the current federal budget. If that isn’t frightening enough, consider that this share is expected to grow exponentially over the next 25 years.

This is a great example to help clients understand the impact of exponential growth. (Source: mathsisfun.com)

Consider the heights achieved by a special tree that grows exponentially over a period of 20 years.

• At 1 year old it is only 0.106 of an inch high … really tiny!
• At 5 years it is a little less than 6 inches high… as high as a cup
• At 10 years it’s about 72 feet tall … as tall as a building
• At 15 years it’s 10,827 feet … 10 times the height of the Eiffel Tower
• At 20 years it would be over 300 miles tall … up into space!

Certainly the costs of Social Security, Medicare and our other entitlements aren’t doubling every day or every year, but their rate of growth is so significant that the financial rating agencies have started sounding the alarm:

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.  Source: Arthur B. Laffer. “Get Ready for Inflation and Higher Interest Rates” The Wall Street Journal 11 June 2009. online.wsj.com

If these programs continue their current trajectory, it will be mathematically impossible for our country to pay for them. So what do our leaders do? They spend even more money on new entitlements.

Your client’s need to understand that radical changes could be necessary in the future. Their own retirement may suffer as taxes and/or inflation increases. The amount inheritance they had hoped to leave to their children could be greatly diminished by estate and inheritance taxes. At the very least, clients need to plan on getting less help from government programs like Social Security and Medicare and positing themselves to be more financially independent.

What Strategies Do You Use?

So this is a simplified list of the tools that help me run my business. Any other tools you can’t live without?

Let me know in the comments below!