Tips to Build Your Emergency Health Care Reserve in Retirement
Filed under: Retirement
If retirement is right around the corner, you may be in the process of finalizing your strategy. You may be considering when to actually leave the working world or when to file for Social Security benefits. Perhaps you’re reviewing your investment strategy or thinking about downsizing to a more affordable home.
The final years before retirement are often your last opportunity to solidify your financial future, so it’s important to consider every possible risk. One risk you definitely shouldn’t ignore is the prospect of sizable health care costs in retirement.
Many retirees assume that Medicare will cover all their health care expenses in retirement. That assumption is usually incorrect. Medicare is a valuable tool, but it only partially covers most treatments. Some needs, like long-term care, aren’t covered at all. In fact, Fidelity estimates that the average retired couple will spend $275,000 to cover out-of-pocket medical expenses.1
If you haven’t included medical costs in your retirement budget, now may be the time to do so. You also may want to build a reserve fund to help you cover these costs. Below are a few tips on how you can cover your medical expenses without impacting your lifestyle in retirement:
Fund your health savings account.
Do you have a health savings account, also known as an HSA? Many people use their HSA to cover current medical expenses. It can also be used as a powerful tool to help pay for medical costs in the future, however, including retirement.
You can contribute up to $3,450 as an individual or as much as $6,900 as a family to your HSA in 2018.2 These contributions are tax-deductible. Then you can invest the funds according to your goals and risk tolerance without paying taxes on any growth as long as the funds stay in the account. You can then withdraw the funds tax-free to cover any qualified medical expenses.
Many people assume that HSA funds have to be used within a calendar year, but that’s not accurate. You can accumulate HSA assets into the future, even after you retire. You can then use those tax-free funds to cover your retirement health care costs, including premiums, deductibles and even long-term care costs.
Supplement your Medicare coverage.
As mentioned, Medicare doesn’t cover everything. In fact, there are many treatments that Medicare doesn’t cover at all. Even if a treatment is covered, Medicare will usually only pay a portion of the bill. That may leave you with a significant amount of out-of-pocket costs.
However, you can buy supplemental policies to enhance your Medicare coverage. Some supplemental policies offer lower deductibles or copays, or even coverage for services not usually included in traditional Medicare, such as rehabilitation, dental and vision, and even prescription drugs. Supplemental policies may come with additional premiums, but they could also save you from substantial costs.
Consider long-term care insurance.
The U.S. Department of Health and Human Services estimates that the average 65-year-old has a 70 percent chance of needing long-term care at some point.3 Long-term care is extended assistance with basic living tasks such as eating, mobility and bathing. It’s often provided in the home or in a facility.
As you might expect, long-term care can cost thousands of dollars per month and is sometimes needed for years. It’s also not covered by Medicare, so if you don’t have a plan in place, it can drain your retirement savings.
Long-term care insurance can help you offset these costs. You pay either a one-time or an ongoing premium. In exchange, the insurance company pays some or all of your costs if you ever need long-term care. Many policies will cover care provided either in a facility or in your own home. It could help you get the care you need without depleting your savings.
Ready to develop your retirement health care strategy? Let’s talk about it. Contact us at Ambrose Financial & Insurance Services today. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
1https://www.fidelity.com/viewpoints/retirement/retiree-health-costs-rise
2https://www.cbsnews.com/news/irs-allows-higher-retirement-savings-account-limits-in-2018/
3https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html
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17280 – 2018/1/17
