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At age 65, some couples may need as much as $413,000 to cover their retirement health care costs, according to a January report from the Employee Benefits Institute. While this is an extreme example and represents two girlfriends with high prescription drug costs, it is not beyond the realm of possibility.
“Retirement spending is one of the most difficult things to predict,” says Nancy Naun, a certified financial planner in Cherry Hill, New Jersey.
Costs vary depending on the insurance you choose, your health status, prescription medications, and the city you live in. (Costs are higher in some areas than others.) As you near retirement, try these strategies to stay on top of your future health care costs.
save in a health savings account
If you have high-deductible health insurance and have access to a health savings account (HSA), make the most of it. The money you save has a triple tax benefit. You don't pay taxes on the money you save, the interest you earn, or the withdrawals you use for qualified medical expenses.
“I think most people just use it as is, and that's fine,” says Ed Snyder, a CFP in Carmel, Indiana. “But I think there are even more benefits to using investment accounts in these areas.” [and] It allows you to invest that money over many years, like a retirement account. ”
In 2024, you'll be able to save up to $4,150 in individual health savings accounts and up to $8,300 in family insurance. If he is over 55, he can donate an additional $1,000. (Note: Once you sign up for Medicare, you can't save it in an HSA.)
Choose the right Medicare plan
Once you turn 65, your advisor will usually recommend choosing Original Medicare with Medicare Supplement Insurance, or Medigap. Medigap plans cover many Medicare out-of-pocket costs, making your monthly medical expenses more predictable.
Many seniors are attracted to the $0 premiums on most Medicare Advantage plans, but these private health plans can limit coverage to in-network doctors and hospitals. there is. Melinda Cahill, co-founder and CEO of 65 Incorporated, says, “We've seen many situations where people have to go to a provider who doesn't have insurance and have to pay the entire bill themselves.'' .”Medicare.
Out-of-pocket maximums for Medicare Advantage plans could also reach $8,850 per year in 2024, which does not include Medicare Part B premiums. That said, if you can't afford a Medigap plan, Medicare Advantage may be a better option. Without Medigap, Original Medicare has no out-of-pocket limits.
Get tax planning help
If your income is above a certain threshold, you'll pay more each month for Medicare Part B and Medicare Part D prescription drug coverage (if you have it). This is where it's important to be strategic about your retirement income and make sure you have both pre-tax and post-tax accounts if you need them. (Withdrawals from your pre-tax account will increase your income.)
“If you saved a lot of money on a tax-deferred vehicle and didn't intend to do a Roth conversion or spend that money, you could end up paying a much higher monthly Medicare premium than you expected. “It's possible,” Naun said. .
pay off the mortgage
If you're 62 or older and have at least 50% equity in your home, you may be able to take out a reverse mortgage if you really need it later. This is a loan or line of credit against the appraised value of your home and you don't have to make any payments. The loan is repaid upon moving out or death.
While reverse mortgages once had a scary reputation, today's products are safer, Naun says. “There was abuse many years ago,” she says. “It's well maintained and a great tool to have in your back pocket.”
Keep in mind that reverse mortgages require at least one borrower to live in the home, and are more expensive than traditional mortgages in the long run. Consult with a product-savvy advisor before taking the plunge.
Consider a HELOC
If you're under 62 and still working, a home equity line of credit (HELOC) can give you a source of income that you can draw on later if you need it. (It's easier to qualify for a HELOC while you're still earning a paycheck.)
Pitfall: Unlike a reverse mortgage, a HELOC requires payments. “At some point in the future, you're going to have to pay it back,” Naun said.
put things in perspective
Finally, try not to lose too much sleep over the greats. Think about how scary it would be if an expert told you how much you should save to cover your food and utilities for 30 years in retirement. With proper planning, medical costs can be manageable.
“A reasonable cost for an individual is about $6,000 a year, which translates to $500 a month on a monthly basis,” says Dick Power, a CFP in Walpole, Massachusetts. “This $500 per month typically includes insurance coverage and copays.”
This article was written by NerdWallet and originally published by The Associated Press.
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Kate Ashford, CSA®, writes for NerdWallet. Email: kashford@nerdwallet.com. Twitter: @kateashford.
The article “Can You Afford Your Medical Expenses in Retirement?” originally appeared on NerdWallet.
