Health in Retirement: 3 Ways To Prepare for a Major Expense

Alexander Raths /

There’s a common misconception that you don’t have to worry about healthcare costs when you retire because Medicare has you covered. Medicare certainly helps, but if you’re not budgeting for medical bills in retirement, you’re not budgeting enough — and a big chunk of America knows it.

Half of the people who participated in a new GOBankingRates survey cited a major unexpected healthcare expense as their No. 2 concern for retirement planning. In fact, the only fear that trumped unforeseen medical bills was running out of money too soon — and since the former is one of the chief causes of the latter, the two worries are hardly unrelated.

The Fear of Medical Bills Is an Equal-Opportunity Anxiety

The study revealed virtually no difference between the genders. Almost exactly half of both the men and women surveyed cited a surprise healthcare expense as their second-biggest concern behind running out of money, in general.

Interestingly, the oldest respondents were least likely to fret about a bank-busting health emergency in retirement while the youngest set was the most concerned. But the differences were negligible. Responses varied only within a dozen percentage points on both ends of the spectrum — 44% of those 65 and up and 55% of 18- to 24-year-olds. Every other age group fell somewhere in between.

Are You Retirement Ready?

In short, a high-priced run-in with the doctor is near the top of the list of worries for just about everyone saving for retirement — and in a country where a broken bone can lead to bankruptcy, those worries are hardly misplaced.

So, what’s the remedy? For most, saving more than they’re already saving just isn’t an option. But if they use the right investment vehicles to save the right way, the inevitable unplanned medical expense won’t be so daunting when it arrives.

Buy Life Insurance That Can Help With Medical Costs

Most people know that life insurance policies pay benefits to children, spouses, parents and other survivors after the death of a loved one. But some types of policies are much more versatile and can help retirees cope with the cost of unplanned healthcare costs.

“Invest in a permanent life insurance policy with a rider that supports unexpected medical emergencies,” said Stephan Baldwin, founder of Assisted Living, a healthcare agency that matches seniors with retirement facilities.

Baldwin explained that many permanent life insurance policies offer two main riders to help cover health expenses: the accelerated death benefit rider and the long-term care rider. They’re structured differently, but they both can go a long way to making surprise healthcare expenses more manageable.

“The accelerated death benefit rider allows you to use your insurance benefits to cover expenses from a terminal illness,” he said. “Cancers and neurodegenerative diseases can come on suddenly in retirement. The cost of treatment can be expensive. This add-on gives you the option of absorbing those costs using a percentage of the benefit from your policy. The long-term care rider will allow you to use part of your death benefits to cover monthly payments for nursing home services.”

Are You Retirement Ready?

Consider an HSA That You Can Carry Into Retirement

If your health insurance policy covers only preventative services before the deductible, you might be able to funnel pre-tax money into a versatile account that you can use to cover healthcare costs both now and later.

“For individuals with a high-deductible health plan, a health savings account (HSA) is the best way to save for major health expenses in retirement — and even before retirement,” said Stacy Mastrolia, a tenured faculty member in the Freeman College of Management at Bucknell University and founder of Prof Stacy The Money Teacher. “An HSA allows individuals and families to save pre-tax dollars, grow those savings tax-free, and pay any future medical expenses tax-free.

“Expenses approved to be paid with HSA funds are broadly defined to include medical, prescription, dental and vision expenses, as well as many over-the-counter expenses, including nursing home care. Another feature of an HSA is that the balance can be carried over from year to year and, usually, excess funds can be invested into a market-based investment.”

Dedicate a Roth IRA to Future Health Expenses

One type of self-directed retirement account is even more versatile than HSAs, but it lets you save for retirement expenses on an after-tax basis instead.

“Consider investing in Roth IRA accounts, which offer tax-free growth on earnings from your investments,” said Chel Gacrama of the personal development website Castnoble.

Because the money you sock away in a Roth IRA already has been taxed, the rules are much more flexible than those that govern standard IRAs. Most important: You can grow your money and make qualifying withdrawals tax-free both before and during retirement.

Are You Retirement Ready?

You also can keep contributing to a Roth IRA after you reach age 70 1/2, and you don’t have to make required minimum distributions (RMDs) the way you do with standard retirement accounts. You can leave money in a Roth IRA for life.

Finally, you’re not supposed to touch the contents of a Roth IRA until you’re 59 1/2, but there are several exceptions. One of those exceptions is for unreimbursed medical expenses, so a Roth IRA can help you save for unexpected healthcare costs both in retirement and while you’re still working.

Methodology: GOBankingRates surveyed 997 Americans aged 18 and older from across the country between Aug. 9 and Aug. 11, 2022, asking 16 questions: (1) How much money do you currently have saved for retirement?; (2) How much money do you think you’ll need to retire?; (3) Realistically, at what age do you want to be retired?; (4) At what age did you start saving for retirement?; (5) What worries you financially about retirement? (Select all that apply); (6) Do you plan to work in retirement?; (7) What assets do you have in your retirement portfolio? (select all that apply); (8) How has the current inflation impacted your retirement plans?; (9) How much of your retirement do you plan to fund with Social Security?; (10) How do you feel about the future of Social Security when you retire?; (11) What percentage of your salary are you currently investing for retirement?; (12) Are you planning to move after your retirement?; (13) Where is your ideal place to retire?; (14) What government programs do you plan to use for your retirement? (select all that apply); (15) Do you have a pension plan?; and (16) How much do you think the average American has saved at the time they retire? GOBankingRates used PureSpectrum’s survey platform to conduct the poll.

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