Published April 06, 2012
Many Americans aren't saving enough for retirement, leaving even less--or no--funds to cover any unexpected or long-term health-care expenses.
But creating savings for possible health issues should be an essential part of retirement planning, experts say.
About 70% of people over age 65 will need some type of long-term care for some period of time, according to the U.S. Department of Health and Human Services. And that figure, which describes assistance with everyday tasks, doesn't include other out-of-pocket medical care expenses like hospital visits, home nursing, surgeries, copays or medications. In some cases, Medicare may pay only 50 to 80% of costs, according to online legal guide Nolo.
“It takes decades to accumulate the assets you’ll need to retire comfortably and just a few years of paying for [high medical and long-term care] costs may threaten a lifetime of savings,” says Christina Pinto, a certified financial planner with MPC Wealth Management. “One year of [full-time, long-term] care today in a nursing home is $75,000. In 30 years, it will cost $250,000.”
If you haven’t established a plan to save for your future health-care needs, don’t panic. Here are a few expert tips for planning for care and other out-of-pocket medical costs, while also minimizing their impact on your nest egg. They begin while you're working, and require evaluation often:
Open a Health Savings Account (HAS). An HSA account is available to taxpayers enrolled in a high deductible health plan. You can contribute up to $3,100 in pre-tax income – spread out over the year – to cover any medical expenses under the deductible.
The funds accumulate and roll over from year to year (unlike a flexible spending account), so if you can afford to contribute to the account for unforeseen future health crises, you will also get a tax break, says Cameron Keng, a New York Based CPA and enrolled agent.
Consider a Flexible Spending Account (FSA). FSA contributions offer a similar tax break to HSAs, but if you don't use the funds in the account in the year you add them you lose them, Keng says.
Only use this option if you can expect a certain level of medical expenses for yourself, spouse or dependent in any given year, and not for future planning. In that case, it's a great way to save hundreds of dollars on your tax bill while also paying for any eligible medical expenses.
Bulk up your IRA and 401(k). “Most people don't realize that saving money for your IRA or 401(k) is also a great way to plan for your future emergency medical needs,” Keng says.
Using funds from these accounts before age 59.5 for medical expenses is an exception to the 10% early withdrawal penalty, but you still received the tax benefit over time, Keng says. If you can afford it, increase your contributions for a bigger tax benefit and to cover future out-of-pocket health-care costs.
Get the best insurance you can afford. Evaluate your insurance coverage and medical needs annually. If you retire before Medicare kicks in, see if you can purchase a policy from your former employer at a group rate. If not, shop for appropriate individual coverage at an affordable price.
Check with several licensed companies and agents, advises Martin Rosen, co-founder of Health Advocate, a health care advocacy and assistance program. Ask them about policies specifically for home care or assisted living care, which are less expensive than typical long-term care policies.
Buy long-term care insurance before turning 65. You'll get a better price, and you're less likely to have a health problem that could disqualify you from coverage, Rosen says.
Look for a guarantee that the policy can't be cancelled because of your age or health status. Various policies may include compounding interest to cover rising costs, death benefits, and money-back guarantees in case you don't need it later. Long-term care insurance premiums are tax deductible when over 7.5% of your adjusted gross income, and when self-employed you can deduct 100% of your premium, says Adam Koos, a certified financial planner at Libertas Wealth Management Group. Keep in mind that for those with less than $250,000 in their retirement portfolios, there's a chance that paying for insurance might not be worth the cost.
Examine your life insurance policy. Some life insurance policies may cover long-term care, ”but this would only make sense for someone who plans to keep the life policy in question throughout their retirement years,” Koos says. Perform a cost-benefit analysis.
Consider a state long-term care partnership program to protect your assets. It's a joint effort between private insurers and Medicaid, allowing you to buy a basic longterm care policy that covers some needs, Rosen says. When the policy runs out, you can qualify for Medicaid without having spent all of your savings.