Do you have a strategy to pay for health care in retirement? Medicare will cover many of your expenses, but it won’t cover everything. You’ll still face premiums, copays, deductibles and other costs. According to a study by Fidelity, the average married couple will pay $275,000 for out-of-pocket medical expenses in retirement. That figure doesn’t even include the cost of long-term care.1
As you get older, it’s possible that you may become more vulnerable to injury and illness. In the later years of retirement, copays for prescription drugs and medical treatment may eat up a big chunk of your monthly income. You could require treatments and services that aren’t covered by Medicare at all, such as dental, vision or physical therapy.
Fortunately, you can take action today to manage your health care expense risk in the future. Below are three tips to help you cover your out-of-pocket costs and protect your retirement assets. If you haven’t yet developed a strategy to pay for your out-of-pocket health care costs, now may be the time to do so.
Use a health savings account (HSA).
Many people think of their health savings account (HSA) as a vehicle to cover immediate health care expenses. However, it can be a powerful long-term savings tool to fund your medical needs in retirement.
An HSA is an effective retirement funding tool largely because of its unique tax treatment. Your contributions are tax-deductible, and all growth in the account is tax-deferred. Your distributions are also tax-free as long as you use them to pay for qualified medical expenses. Fortunately, the list of what qualifies is very broad. Most medical costs are eligible for a tax-free distribution.
This means you can save money today on a tax-advantaged basis to fund your health care costs in retirement. By using HSA tax-free distributions to pay for your medical expenses in retirement, you may be able to reduce your withdrawals from IRAs and other assets.
Take life insurance distributions.
Do you have a life insurance policy that has accumulated cash value? If you’re like many Americans, you bought life insurance early in life, perhaps when you first got married or had kids. As you approach retirement, however, you may feel that you no longer need that life insurance protection.
Don’t get rid of your life insurance coverage just yet, though. That cash value could help you pay for medical or long-term care costs in a tax-advantaged manner. You can withdraw your premiums tax-free from your life insurance policy. You can also take tax-free distributions in the form of a loan. You have to pay the loan back over time. However, those distributions could serve as a helpful emergency reserve.
Consider long-term care insurance.
Long-term care is likely to be a reality for many retirees. The U.S. Department of Health and Human Services estimates that today’s 65-year-olds have a 70 percent chance of needing long-term care at some point in their lives.2
Long-term care can be provided in a facility or in the home. In either case, though, this type of care can be costly. Many seniors pay thousands of dollars per month for long-term care. Often, care is required for several years. It’s easy to see how such care can become a drain on your retirement assets.
You may want to consider purchasing long-term care insurance. You pay premiums to an insurer, which then pays some or all of your long-term care costs. Most policies cover care provided either in a facility or in your home. Some even cover home modifications or reimbursements to family members for care they provide.
Ready to develop your health care funding plan? Let’s talk about it. Contact us today at Thomas Financial. We can help you analyze your needs and implement a strategy. Let’s connect soon and start the conversation.
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