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Health Insurance

How to Plan for Healthcare Costs

4 min read • April 10, 2019
30 sec brief

Out-of-pocket health care expenses for the average household runs nearly $4,000 a year. And that’s just today. Creating a plan for how to handle health care costs is going to help you financially and deliver a big dose of peace of mind.

Out-of-pocket health care expenses for the average household runs nearly $4,000 a year. And that’s just today. The cost of medical care tends to increase at a rate that exceeds the regular inflation rate. And when you slide into retirement, the tendency is to need more care. Sure, Medicare covers plenty, but on average, about 30% of your costs under Medicare will be paid out of pocket.

Whether it’s handling today’s out of pocket costs or saving up for costs as you age, creating a plan for how to handle health care costs is going to help you financially and deliver a big dose of peace of mind.

Get. Health. Insurance. No excuses. There is no greater financial risk than to be walking around without health insurance. If you aren’t eligible for coverage through work, go to healthcare.gov to shop for health insurance in your state; you may qualify for subsidies that will reduce the cost of your monthly premium.

Build up your emergency savings. Your first line of defense is to have enough money in a savings account that you can pay for an unexpected medical bill; the co-insurance or tests when your kid wrenches her knee playing soccer, or a battery of tests your doctor advises. Your emergency fund is what helps you avoid running up credit card debt you can’t repay in full to cover medical one-offs.

Online savings banks tend to offer the highest interest rates, and you can set up a free periodic automatic deposit from your checking account into a high-rate bank savings account. Automating your contributions is the best way–and for many of us, the only  way–to stay committed to building savings.

Pay medical bills today with triple-tax free dollars. If you are enrolled in a high deductible health plan (HDHP) you can contribute to a health savings account (HSA). Money you contribute to an HSA is tax deductible, there is no tax on the money while it is in the HSA, and when you withdraw money from your HSA to pay for qualified medical expenses, there is no tax bill. Using tax-free dollars that netted you a tax break when you contributed to the account is a valuable way to reduce your net cost of health care.

Create tax-free savings to cover retirement health care expenses. Another option if you have an HSA is to not use it for current costs –pay those bills out of your regular cash flow – and keep your HSA growing for retirement. Then, as you need to pay for qualified health care expenses in retirement, you can use the money in your HSA, and your withdrawals will be 100% tax free.

Boost your retirement savings rate. Keep pushing yourself to save more in your 401(k), and IRAs, that’s where the bulk of your health care spending will come from. At a minimum you want to be saving 10% of your salary. A goal of 15% is even smarter, especially if you waited until your 30s to get serious about retirement saving.

Check if you must enroll in Medicare at age 65. Miss the initial enrollment deadlines and you can end up paying penalties that can increase certain Medicare premiums by 10%, or more, for the rest of your life. The general enrollment period runs for seven months, starting three months before you turn 65 and then four months past that birth date. If you are already claiming Social Security at 65 you are typically automatically enrolled in Medicare. But if you are delaying starting Social Security, or you are still working and covered by your workplace health plan, you still need to make sure you don’t run afoul of Medicare enrollment rules.

Consider Long-Term Care Insurance. Long-term care insurance can be used to pay for at-home care, as well as the cost of nursing home care. The annual premium cost isn’t cheap, if you buy in your 50s it might be around $2,000 a year. Wait until your 60s and the cost will be north of $3,500 for a couple (assuming you don’t have a preexisting condition that disqualifies you.) That is indeed a chunk of change, but keep in mind that the median monthly cost to have a home health aide last year was more than that.

Creating a plan for how you will cover later-life health care costs has plenty of moving pieces. Certified financial planners who are part of the Garrett Financial Network, work on an hourly or project basis. You can also find CFPs with flexible payment options through the XY Planning Network.

Invest in your well-being.  Going to the gym, getting out for that walk/hike/bike ride, making it to the yoga class, and following a healthy diet isn’t just about feeling better today. It’s doing the prep work that increases your chances of being healthier as you age. That may reduce your retirement health care needs. More importantly, it increases the odds you will be in great shape to enjoy retirement.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

About the author
Carla Fried

Carla translates business and personal finance concepts into engaging content that helps individuals make more confident choices in how they manage their money. Her work appears in The New York Times, Money Magazine, Barron's and Consumer Reports.

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