Healthcare is expensive for just about everyone, but it gets really expensive for retirees. The older you are, the more likely you are to start accumulating medical conditions, and thus the higher your health-related expenses will climb. Given the average cost of healthcare in retirement (hint: It’s more than the average retiree has in their entire retirement savings), it’s important to plan for how you’ll cover these expenses.
Use an HSA
Workers with an HSA-enabled health insurance policy can use a health savings account to save not just for their working years, but for their retirement years as well. HSAs are the only triple-tax-advantaged account: You get a tax break on both contributions and withdrawals, assuming you spend the withdrawn money on qualified healthcare expenses, and investments sold within the account are free from capital gains tax. This makes them hard to beat as a way to finance healthcare, assuming you qualify.
Most HSA-holders are advised to keep at least the equivalent of their health insurance plan’s annual deductible saved in the account. If you’re using your HSA to save for retirement, though, you’ll need to aim a lot higher. In fact, you’d be wise to max out the HSA contribution limits (in 2017, that’s $3,400 per year for self-only HSAs and $6,750 for family plans). Since those contribution limits are relatively low, you’ll also need to invest the part of your HSA balance that you’re saving for retirement in stocks, leaving the portion dedicated to near-term healthcare expenses in cash. You’ll need those extra returns to help the money grow faster.
Use a dedicated IRA
If you don’t have access to an HSA, you can still set up a dedicated healthcare expense savings account; you’ll just use an individual retirement account instead. While any type of IRA would do, it’s much better to use a Roth IRA for this purpose.
With a Roth account, you’ll pay taxes on the money you contribute to the IRA, but the money you take out will be tax-free. That shifts the tax burden to your working years, which means that once you retire and start using that money for healthcare expenses, you’ll be able to stretch those funds much further.
Roth IRAs have one major advantage over HSAs: The annual contribution limits are somewhat higher (in 2017, it’s $5,500 per year, plus an additional $1,000 for savers aged 50 or older). On the other hand, that $5,500 is the most you can save across all your IRAs during the year. So if your main retirement savings account is also an IRA, you likely won’t be able to save enough money through IRAs to fund both healthcare and the rest of your retirement expenses. You may need to save through another tax-advantaged savings vehicle — like a 401(k) if your employer offers one — or just use an ordinary taxable brokerage account to do some additional retirement saving.
There’s one more wrinkle that could affect retirement savers using a Roth: The IRS has set an income limit on Roth contributions. For any year that your income exceeds this limit, you won’t be able to contribute to a Roth IRA. However, you can get around this limitation by making a “backdoor” contribution — i.e., contributing to a traditional IRA, then rolling that money over to your Roth IRA. If you make the contribution and the rollover during the same year, the tax impact will be minimal.
Get long-term care insurance
Long-term care — that is, extended hospital stays, assisted-living facilities, in-home nursing, and so on — accounts for a huge chunk of the average retiree’s healthcare costs. Because most long-term care isn’t covered by Medicare, these expenses can get very large very fast. Long-term care insurance will help you cover those costs, and given the likelihood that you’ll need long-term care at some point during your lifetime, it can be a very good investment.
Of course, long-term care insurance can get pretty pricey, too. The easiest way to keep your costs low is to sign up for a policy long before you retire. The younger you are when you get a long-term care policy, the lower your premiums will be; for most people, their 50s are the sweet spot for purchasing such a policy.
The shorter your retirement is, the cheaper it will be. And if you delay retirement, that gives you a few extra years to build up your retirement savings. Waiting to claim Social Security benefits until after your full retirement age means you’ll get delayed-retirement credits that will increase the size of your Social Security checks for life. All in all, waiting a little longer to retire can have a major positive financial impact once you finally do make it to retirement. Your retirement may be a little shorter, but it’ll definitely be richer.
Article Published by The Motley Fool Sept 17 2017
Written by Wendy Connick