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January 5, 2018

Early Retirement Costs You Might Have Missed (and How to Save for Them)


Retiring early 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.

Or 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 retiring early, a study released in June 2014 by Fidelity Investments warns it will cost you in ways you might not expect. According to the study, 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 health care costs are near their peak. Insurance companies charge older policyholders higher premiums, which means they’ll claim a bigger chunk of your retirement money.

Let’s look at a few ways you can avoid sticker shock at your retirement party:

Short-Term Insurance

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.

But note: 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 tests or other procedures. You may also pay full price for prescription drugs.

This option is best if you’re retiring just before you turn 65. You can afford a few months of risk before Medicare coverage starts. However, you’ll still want another savings option to help with massive medical bills. And, try another option if you have a few years before Medicare will kick in for you.

Savings Certificates for Health Costs

You likely use savings 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 health care 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 it to finance a vacation!

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 health care 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 $2,500 or more, you can open an HSA and contribute up to $6,450 to your HSA per year, tax-free. If you open the account before you retire, 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 health care costs can be scary, but it’ll be much scarier to go into retirement unprepared.

This article is for educational purposes only. Tulsa FCU makes no representations as to the accuracy, completeness, or specific suitability of any information presented. Information provided should not be relied on or interpreted as legal, tax or financial advice. Nor does the information directly relate to our products and/or services terms and conditions.