Paying Your Health Costs In Retirement

In October’s article, Unexpected Expenses During Retirement, we discussed the importance of considering the inflation of health care costs while planning for your retirement, but didn’t discuss specifics on how to save or budget for those expenses.  Let’s do that today.

The January 2012 edition of Kiplinger’s Retirement Report asserts, “a 65-year-old couple who lives until 92 can expect to spend nearly $400,000 in out-of-pocket medical costs, assuming a 6% annual health care inflation rate.”  And that number doesn’t include long-term-care expenses!  You might think there is no hope for you now, but there are ways to reduce and pay for your medical costs, if you are prepared.

• Getting Started in a Financially Secure Retirement, by former Boeing executive Henry “Bud” Hebeler, recommends “all retirees keep a liquid reserve for all emergency expenses, which could include unexpected medical costs.”  A Money Market account would work well for this type of savings.  Kiplinger’s Retirement Report reminds us this reserve should not be included in your retirement investment total when calculating your annual retirement spending.  It truly is only for emergencies.
  

• Another way to build savings for health care costs in retirement is to open a health savings account, if you qualify.  Susan Garland, Kiplinger’s Retirement Report editor, says, “Although you can’t contribute to an HAS once you enroll in Medicare, you can withdraw the accumulated funds in the account tax-free for medical expenses, such as Medicare premiums, drugs and long-term-care insurance premiums.”  Contributions to these accounts are tax-deductible or can be made with pre-tax dollars.  To qualify, your health insurance policy must be deemed to be “HSA compatible” and have a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage.  For more information about these types of accounts, consult this Wikipedia site.
  

• Reduce your spending any way possible.  Take advantage of free Medicare services, which include annual wellness exams, some screenings and some vaccines.  Also, Garland suggests you “find savings each year during Medicare open enrollment by scrutinizing Part D drug and Medicare Advantage plans.”
  

• Using home equity is an option, but tread lightly.  Once you burn through loan money, you may have no other options.  The best bet is to pay medical expenses by using the money as a line of credit.  This way, you are only paying interest on actual expenses and drawing upon your equity slowly.

If paying for health costs during retirement still feels like an overwhelming task, be sure to ask your financial adviser, and other qualified professional about how you can best be prepared.

Unexpected Expenses During Retirement

You’ve spent most of your adult life preparing for retirement, or maybe you’ve just begun, either way it’s important to consider all expenses during your golden years – even ones you might not have thought about. Because people often underestimate their life expectancy, they tend to deplete their nest egg faster than anticipated.

MSN Money reports, “Cars, home appliances and the rising cost of college tuition are among the savings-depleting expenses that many people in retirement, or approaching retirement, may not be adequately preparing for.”  Retirees also tend to make big ticket purchases right before they retire and don’t consider replacement costs later down the road.  Instead of one brand new car, you might end up purchasing a few new cars.

SmartMoney’s article, “How to Minimize Retirement’s Hidden Costs” lists the following items as other unexpected expenses:

• Taking required distributions after reaching 70½ might propel you into a higher tax bracket, which could unexpectedly decrease your annual income.

• Health care inflation.  Basic retirement calculators probably don’t account for a rise in health care costs.

• Adult children with financial needs, whether they were laid off, got divorced or help with grandchildren tuition.

How do you account for such hidden costs later in life?  Glenn Ruffenach of SmartMoney suggests looking “for tools and calculators that let you incorporate variables like maintenance costs and health care inflation.”  And remember, you might be in retirement for 20-25 years.  Think back to how many cars or large appliances you bought during the past 25 years to have a better estimation of possible expenses.  This will help in determining what you will need for the lifestyle you want.

>> Have you considered the unexpected during retirement?  Did you run into any of the above mentioned expenses during your own retirement?  Let the community know and share your experiences.

Is a Self-Funded Retirement Plan Right For You?

Kiplinger’s Retirement Report recently published an article in its August 2011 titled, “A Pension Plan For the Self-Employed” by Susan Garland.  The article delved into the benefits of a solo pension plan, especially for entrepreneurs, doctors and real estate agents who want tax advantages and increase their retirement savings.  Today, if you are self-employed, your options for retirement savings are not limited to only IRAs or individual 401(k) plans – you can earn more with a solo pension plan.

Garland goes on to explain, “With a defined-contribution plan, such as a SEP IRA or a solo 401(k), you set aside a percentage of your income each year.  The size of your nest egg will depend on the amount you sock away and how well your investments perform.  With a self-funded, defined-benefit plan, an actuary will help you project an annual retirement payout and then figure out a yearly contribution to meet the target.”  You could potentially save up to 75 percent of your annual earnings, tax-deferred.

This type of plan is an excellent way to revamp your savings and retire early, but it’s important to keep in mind the upfront costs of these plans are high.  An actuary and plan administrator can cost between $1,500 and $2,000, and each year you might have to pay $1,500 to update calculations and to file reports with the IRS.

It’s also important to keep in mind that once you set your future annual benefit, federal law requires you fully fund the plan to meet the target.  So, it’s essential to be sure your income won’t fluctuate much year after year.

“At retirement, you can take the lump sum and roll it into an IRA,” said Garland.

If you would like more information about this type of retirement option, seek the advice of a qualified financial advisor.  Or click here for a short overview.

>> What pitfalls can you see with this type of retirement plan? Or do the benefits greatly outweigh the cost?  Let the community know by replying to this post.