Health care is one of the biggest expenses that you’ll have to pay for when you retire, following housing and food.1 It’s also not likely to decrease. Why?
- The length of life has grown (a great deal) from the time Social Security was developed.
- Inflation in health care is generally more than general inflation.
- Health problems related to age and chronic illness issues have increased.
- The median retirement age is 62. Medicare starts at 65.
How much will the cost of health insurance be in retirement?
In real terms If a couple retires at age 65 will pay more than $660,000 to cover health-related expenses taking 68 percent of their Social Security benefits.5
But Medicare helps but Medicare isn’t it?
Not quite. Many think that it’s “free,” but you must pay for premiums. It doesn’t cover all expenses. A study conducted by Principal(r) discovered that 44 percent of retirees are struggling to anticipate and manage health healthcare and long-term health costs.6 Costs out of pocket depend on your age and your overall health, your location as well as your income, and whether you have additional Medicare policies.
Although people frequently worry about how they’ll afford healthcare in retirement, they typically consider its medical expenses. It’s actually a broad range of expenses that include:
- dental,
- vision,
- hearing aids,
- prescriptions,
- and even and even.
“With costs climbing, it’s never too early to plan for health care expenses in retirement, even if that’s still 10 to 20 years away,” says Heather Winston, assistant director of financial planning and advice at Principal.
How can we cover future medical expenses?
Because Medicare will not be able to cover everything, increasing your savings for the future will allow you to make up the gap. There are many methods to tackle this challenge:
1. Savings account for health (HSA)
An HSA is a great beginning point if currently participating in a health insurance plan with a high deductible.
Benefits The benefits: With an HSA You “own” the account, and the funds in it will increase year to year. Contributions can be made to the HSA until the age of 65, even if you’re not employed.
“An HSA offers a triple advantage on federal income taxes: The money isn’t taxed, it grows tax-free, and you’re not taxed when you take it out for eligible medical expenses,” Winston states. “Those funds may help you cover health-related expenses in retirement, such as premiums for long-term care insurance.”
Cons The drawbacks.
You are able to withdraw HSA cash at any time for eligible health care costs but it could result in fewer funds to use in retirement.
2. Individual savings accounts (IRAs)
A substantial portion of the funds that you deposit into retirement savings accounts could be used to pay for health care.
The benefits of contributing to a variety of retirement accounts let you save for the long term and can put towards medical expenses later on. And you are able to continue increasing your retirement savings until you’ve reached your maximum. It is important to note that traditional and Roth IRAs have different tax advantages.
“An ideal time to think about increasing your contributions is when you’re receiving an increase in salary or bonus or a lump sum. If your earnings increase by three percent, taking about a percent of it and putting it towards your retirement account is money that you’re likely to not lose during your entire year.” Winston says.
Cons: With retirement plans sponsored by employers accounts as well as traditional IRAs withdrawals are tax-deductible. If you take the money before 59.5 and you’ll have to pay penalties. (Though there are other options for emergency cash compared to the premature 401(k) withdrawal.)
3. Emergency fund
As you near retirement, it’s always recommended to establish an emergency fund that can help cover medical expenses that may arise during retirement.
The advantages: Since you’re likely to keep an emergency money reserve in a bank account that’s accessible and liquid that it’s faster and more convenient to access your funds. This could be useful in the event of an unexpected (and costly) medical expense or if you need to swiftly replace an eyeglass that has broken such as.
Cons: The emergency fund that you have in a bank account generally has a very lower interest rate (it’s unlikely to increase significantly).
For helpful tips on starting for starting your journey, read “Why you need an emergency fund and how to build it.”
Benefit coverage: Long-term Care (LTC) along with disability income coverage
Because LTC isn’t covered under Medicare It’s possible to look into purchasing insurance that covers nursing homes assisted living, at-home, or care, making you less likely to draw on the retirement funds to pay for the costs. You choose what amount you want to cover and make payments for premiums.
Similar to having disability insurance, it lets you continue to earn a living when an illness or injury hinders your ability to work or work. This can also help to preserve the value of your HSA and retirement account.
