Saving for health expenses in retirement

Saving for health expenses in retirement

Accounting for health care expenses in retirement may need to play a bigger role in your strategy than you realize. According to an estimate from Fidelity Investments1, an average 65-year-old retired couple will need about $280,000 saved (after taxes) to cover those costs – and that estimate doesn’t include other health-related expenses like over-the-counter medications, dental care, or long-term care needs.

And, when factors like the rising costs of health care and inflation are taken into consideration, the amount you need will likely go up the further you are from retirement.

Other factors will play a role too, like when you retire, your health, how long you live, and what government and employer benefits you’ll have access to in retirement. You’ll also need to consider what types of accounts you’ll be accessing to help cover out-of-pocket medical expenses. They may differ in how they’re taxed, and distributions may be considered income when you file taxes.

There may still be a gap

Even after private and government insurance benefits are considered, you may still find there’s a gap between the resources you’ll have and the resources you may need. And, for many of the reasons mentioned above, it will be hard to predict how large your gap may be.

Accounting for uncertainty with flexibility

A part of your solution for bridging this gap could be building up a flexible source of “just in case” assets for your retirement. That means having dedicated assets for your anticipated income and healthcare needs, and then having a separate pool of resources that can serve different purposes as your needs become clearer (or change) during retirement. A flexible planning tool to consider is permanent life insurance.

In addition to providing death benefit protection, the cash value in permanent life insurance can also help give you financial security when unexpected, or higher than expected expenses arise during retirement.

Some policies also have the ability to add an additional rider that can accelerate the payment of the death benefit if the insured needs care for a chronic or terminal illness. This benefit can provide you with additional financial resources at a time when you may need them the most. (Read more about the roles life insurance can play in retirement.)

Coordination is key

The reality is that health care expenses are just one of the things you’re trying to plan for when it comes to retirement. You’re making a series of interconnected decisions that impact how and where you should save for the future. (Read more in Making the pieces of your retirement puzzle fit.)

The sooner you talk to a financial professional about accounting for health care costs in retirement, the more options you may have to efficiently and flexibly plan for those needs.

 

1. Fidelity Benefits Consulting estimate; 2019

Life insurance cash values grow without being subject to current taxation. Cash values can be accessed by way of policy loans without being subject to taxation as long as the policy remains in force and the policy is not classified as a MEC.

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The optional Accelerated Benefit Rider provides for a partial acceleration of the policy death benefit in the event that the base policy insured is certified by a licensed physician as being chronically ill or terminally ill. By taking an accelerated death benefit payment, a lien is created against the policy death benefit. The lien accrues carrying charges at an adjustable rate we declare. The lien, including the lien carrying charges, will be deducted from the total death benefit otherwise payable to the policy beneficiary(ies) and will reduce the cash value available for policy loans, surrenders, or the exercise of any non-forfeiture option.

The required premium for the policy must still be paid even if an accelerated death benefit is taken. If an accelerated benefit is taken and the policy lapses or otherwise terminates, a taxable event may occur. Any death benefit provided by an optional Accidental Death Benefit Rider is not available for acceleration under this rider.

Any accelerated benefit you elect to take under this rider may be taxable. Consult your tax advisor on all tax matters. Adding the rider to a life insurance policy or the taking of rider benefits may affect eligibility for certain public assistance programs and government benefits.

The Accelerated Benefit Rider is not designed to be a substitute for long-term care insurance, health insurance, or nursing home insurance. Rider benefits and features may vary by state.

Products issued by The Ohio National Life Insurance Company and Ohio National Life Assurance Corporation. Registered products distributed by Ohio National Equities, Inc., Member FINRA. Product, product features and rider availability vary by state. Guarantees are based upon the claims-paying ability of the issuer. Issuers not licensed to conduct business in New York. Withdrawals and loans may reduce the death benefit, cash surrender value and any living benefit amount.

Consult your representative before taking a withdrawal or loan. Withdrawals and loans may cause loss of the no lapse guarantee. In addition, withdrawals may incur substantial charges and tax penalties. Withdrawals and loans will reduce the death benefit and cash surrender value. Surrender charges may apply to withdrawals. Consult your policy to see if surrender charges apply. 

Certain policy loans may result in currently taxable income and tax penalties. If tax-free loans are taken and the policy lapses, a taxable event may occur. Loans and withdrawals from life insurance policies that are classified as modified endowment contracts may be subject to tax at the time that the loan or withdrawal is taken and, if taken prior to age 59½, a 10 percent federal tax penalty may apply. 

If you are considering the use of policy loans as retirement income, you should consult your personal tax adviser regarding potential tax consequences that may arise if you do not make necessary payments to keep the policy from lapsing.

This provides general information that should not be construed as specific legal or tax advice nor the law of any particular state.  Please seek the advice of a qualified legal or tax professional for your specific situation.

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