Personal Finance

Early Retirement Costs You Might Have Missed And How To Save For Them

 

Early Retirement

Retiring early is the dream for many people. You get to spend more time with your family and enjoy your hobbies while you’re healthy enough to do so. Early Retirement means 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 retiring early, a retirement survey 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. Medicare is one of the most overlooked retirement expenses since many assume it’s all they’ll need for health insurance. This is not the case. 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 may be peaking. Insurance companies charge older policyholders higher premiums, which means they’ll claim a bigger chunk of your retirement money. Plus, Medicare isn’t free like some believe. You may have to pay a monthly premium based on income.  The most basic Medicare plan does not cover certain out-of-pocket costs such as deductibles, copayments, and supplemental insurance. These things add up. Quick.

How much money do you need saved to retire comfortably? It’s not a simple question to answer, but the good news is individuals sometimes overestimate how much income they will need to maintain their current standard of living in retirement. If you don’t have a handle on where your money goes now (e.g. the ‘miscellaneous’ category), it is possible that a comfortable retirement isn’t as unattainable as you think.

In general, we tackle retirement expenses in one of two ways: projecting current spending into retirement or backing into a sustainable level of annual income based on current assets and savings rate.

As a savvy credit union member, you know the advantages of planning ahead for your golden years. Let’s look at a few ways you can avoid sticker shock at your retirement party:

1) 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.

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 reach 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 potential massive medical bills.

2) Open a 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 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, 12, or 18 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!

3) Open a Roth IRA

A Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied.

Roth IRAs are similar to traditional IRAs, with the biggest distinction between the two being how they’re taxed. Roth IRAs are funded with after-tax dollars; the contributions are not tax-deductible. But once you start withdrawing funds, the money is tax-free. Conversely, traditional IRA deposits are generally made with pretax dollars; you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during retirement. This and other key differences make Roth IRAs a better choice than traditional IRAs for some retirement savers.

If you have any questions or need further assistance, please call us at (888) 777-9982 or visit a branch. We’re here to help in your retirement needs.