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Plan Now to Fund Healthcare in Retirement


plan-now-fund-healthcare-in-retirement-bodySaving sufficient funds for a comfortable retirement is a challenge for most of us. Sadly, there's another large expense to figure in your retirement calculations: healthcare. While most U.S. citizens are eligible for Medicare coverage at age 65, you'll still have a number of medical expenses to cover after you retire:

  • Health insurance premiums if you retire before you're able to enroll in Medicare

  • Medicare premiums, deductibles, coinsurance, and copays

  • Dental care and expenses

  • Vision exams and eyeglasses

  • Hearing exams and aids

  • Long-term care (such as nursing home) expenses

Prices for the items above can be staggering for several reasons, both good and bad:

  • Americans are living longer on average. While most babies born in 1900 were not expected to live past 50, babies born today are likely to live to 80 or older. Longer lives mean greater chances of injuries, illnesses, and costs to treat age-related conditions.

  • U.S. medical costs are higher than other developed nations, mostly due to higher drug costs, medical device prices, doctor and nurse wages, and administrative fees. According to Reuters, while the U.S. spends an average of almost $1,500 per person on prescriptions, other developed countries spend less than $750.

  • Healthcare costs have outpaced inflation for years, exacerbating the high-cost problem.

  • Long-term care can easily cost $7,000 a month for a room in a nursing home.

According to Fidelity, couples should save at least $280,000 after taxes in today's dollars to fund medical expenses in retirement, and that doesn't include long-term care! Since the days of employers paying for retiree medical benefits are largely gone, you're unlikely to receive much outside help with this burden. While there are a few ways to maximize your savings, actually saving is the key.

How an HSA helps

One of your best bets for accumulating savings for retiree health care costs is a health savings account (HSA). Here's how it works:

  1. If your health insurance plan is a qualified high-deductible health insurance plan, you're eligible to open and contribute to an HSA.

  2. You can save pre-tax dollars in your HSA, up to $3,450 for individuals or $6,900 for families in 2018. You can add a $1,000-per-year catch-up contribution starting when you're 55.

  3. Depending on your employer, you may receive HSA funds from your company yearly.

  4. Your funds grow tax free and always remain yours, rolling over year to year. You may choose to invest your HSA funds in stocks, bonds, or ETFs, depending on your administrator's offerings.

  5. When you use your HSA funds to pay for qualified medical expenses (as defined by the IRS), you pay no tax on withdrawals.

While the tax advantages of an HSA are great for medical expenses at any time, if you're able to contribute to your HSA every year, invest the funds, and hold off on making withdrawals, you can accumulate a sizable account for medical expenses in retirement.

Related reading: Don't Miss Out on Deducting Medical Expenses from Your Taxes

Other savings tips

While HSAs, personal savings, and investment growth are your best friends when saving for retirement medical expenses, here are a few other ways to raise your account balance over the years:

  • If your employer and insurer offer a flexible spending account (FSA) instead of HSA, enroll and use it. Be sure to only set aside funds you know you'll use, because unlike an HSA, you can't roll over and keep FSA balances year to year. However, the taxes you'll save on medical expenses will help you save money that you can put toward your retirement health care fund.

  • Minimize your future medical bills by guarding your health now and following accepted medical advice: eat healthy, exercise, sleep seven to nine hours per night, and get vaccinated for illnesses like influenza and pneumonia.

  • Research medical and prescription costs. By using online comparison tools and asking your physician, you may be able to find ways to save on treatments, tests, providers, facilities, and prescriptions. Put those savings in your retirement medical fund.

Especially when added to the balance required for general retirement savings, a goal of saving $280,000 in today's dollars can seem impossible. But just like with retirement accounts, every little bit of saving helps, and starting as early as possible is the key. For advice customized to your financial situation, speak to a wealth advisor today!

Member SIPC & FINRA. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor.

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