Early retirement is the dream. You get to spend more time with your family and enjoy your hobbies while you’re healthy enough to do so. You can say goodbye to the workaday world and begin your permanent vacation.
Maybe it’s less of a dream and more of a necessity. Maybe health problems like chronic pain or arthritis are forcing you to consider giving up your career before age 65. Perhaps your children need you to help with caring for your grandchildren.
Whatever your reason for early retirement, it will cost you in ways you might not expect. Early retirees can expect to pay an extra $17,000 per year in medical expenses.
The reason? Medicare coverage gaps. You give up your employer-provided health insurance when you retire, and Medicare doesn’t kick in until age 65. This means you’re on your own at a time when your healthcare costs are near their peak. Insurance companies charge older policyholders higher premiums, which means they’ll claim a bigger chunk of your retirement money.
There are advantages to planning ahead for your golden years. Let’s look at a few ways you can avoid sticker shock at your early retirement party:
1.) Short-term insurance in early retirement
One popular option is to look for an emergency-only or high-deductible insurance plan (HDHP). These plans feature inexpensive monthly premiums but offer little in the way of coverage. These budget-friendly insurance options are great if private health insurance is too expensive.
You can expect to pay for a variety of costs out-of-pocket. Routine, preventative, and non-emergency medical procedures will be your responsibility. A regular checkup will cost at least $75 and the costs can escalate if your doctor orders a test or other procedures. You may also pay full price for prescription drugs.
This option is best if you’re retiring just before age 65. You can afford a few months of risk before Medicare coverage starts. However, you’ll still want another savings option to help with large medical bills.
2.) Open a share certificate for major medical expenses
You likely use certificates (similar to CDs at a bank) to keep an emergency fund on hand. These savings instruments are ideal for building up money in case of a rainy day. You may want to create one specifically for your healthcare costs.
You’ll want to keep this money separate since you’ll have different needs for it. A sudden, unexpected medical bill is different than needing a new car. You’ll likely have a little more time to pay your medical bill. Many hospitals are willing to work around your financial situation.
A 6- or 12-month certificate provides the perfect combination of accessibility and growth. Once you turn 65, you can add your remaining funds to your other retirement savings or even use them to finance a vacation!
3.) Open (and use) a Health Savings Account
A Health Savings Account (HSA) is a special tax-advantaged account for your savings that allows you to defer taxation on the money. The idea is that the money you spend on healthcare costs shouldn’t be taxed. So, you can save money to pay premiums, deductibles, and other healthcare-related expenses.
These accounts have been growing in popularity. If your family insurance plan has a deductible of $3,000 or more, you can open an HSA. You can contribute up to $7,750 to your HSA per year, tax-free. Many employers also provide matching contributions to HSAs as part of their benefits package.
While withdrawals from your HSA are allowed only for medical expenses, this rule is waived for people 65 or older. While non-medical withdrawals are taxed, the money still grows tax-free. Many financial planners are advocating the use of HSAs as a kind of “shadow IRA.” With them, you reduce your current tax burden while saving for retirement.
Planning for your future healthcare costs can be scary, but it’ll be much scarier to go into early retirement unprepared. Sit down with a United Texas Credit Union representative to discuss how you can save for your healthcare in retirement. You’ll thank yourself later.
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