The average adult will spend about $650 a month, or about 13% of their total household budget, on out-of-pocket health care costs. If something serious comes up, the costs continue to rise. You may think your retirement planning is all in place, but many seniors find themselves putting off travel and not enjoying retirement because they have to pay more to maintain their health. That said, many older adults fall back on starting a separate fund for health care expenses. Here’s what’s behind this trend and how it could be a game changer.
Health Care Costs Continue to Surprise Retirees
Many people think that Medicare will cover most of their health care costs during retirement. While Medicare provides valuable assistance, beneficiaries are still responsible for premiums, deductibles, copayments, coinsurance, and services that may not be fully covered.
According to estimates from the Employee Benefit Research Institute, many retirees will spend hundreds of thousands of dollars on health care costs during retirement. Even routine medical care can add up over time, especially when chronic conditions require ongoing treatment. A separate health care emergency fund provides retirees with a fund specifically designed to absorb these costs.
Abid Salahi, financial expert and founder of FinlyWealth, told GoBankingRates, “I advise my clients to add another 3 to 6 months of expenses to their emergency fund, especially for potential health care needs.”
Medical Emergencies Rarely Come at Good Times
One of the biggest challenges of retirement is managing unexpected expenses on a fixed income. A sudden hospitalization, referral to a specialist, or an outpatient procedure can create debts long before insurance coverage is finalized. Even relatively minor health problems can result in multiple appointments, tests, and follow-up treatments.
When these expenses occur, many retirees find themselves dipping into the typical emergency fund intended for home repairs or car expenses. Maintaining a dedicated emergency health care fund helps prevent a medical event from disrupting all other aspects of the retirement plan.
Physician Fees Subject to Change Without Notice
Most seniors budget carefully for their current medications, but prescription costs are not always predictable. Insurance formulas change, new drugs may be prescribed, and some treatments require more out-of-pocket costs before coverage is fully effective. A retiree with diabetes, heart disease, or arthritis may face suddenly higher costs if a drug changes categories or becomes out of stock. This increase can happen with little warning and can last for months.
Dental, Vision, and Hearing Expenses Often Fall in the Gap
One of the reasons that emergency health care funds have become so popular is that some of the most common health care needs receive limited coverage. Dental procedures, hearing aids, dentures, eyeglasses, and eye care often require large out-of-pocket expenses. For example, a single hearing aid can cost thousands of dollars, while major dental work can quickly exceed a retiree’s monthly budget. Many seniors do not expect these expenses until the problem becomes urgent.
Long Term Concerns Drive New Savings Habits
The likelihood of needing long-term care is another factor that affects retirement savings strategies. While not all retirees will need assisted living, home health care, or skilled nursing care, many recognize the financial risks involved. Even temporary home care after surgery can cause unexpected expenses.
How Much Should a Health Care Emergency Fund Contain?
There is no one-size-fits-all amount that applies to every retiree. As mentioned above, some financial planners suggest setting aside a certain number of months of expenses.
Some may recommend setting aside enough to cover out-of-pocket maximums, deductibles, and several months of doctor’s fees, while others suggest keeping between $5,000 and $15,000 in a dedicated health care fund.
Your decision will depend on your health status, insurance coverage, and your overall retirement savings. A person with multiple chronic conditions may need more referrals than a healthy retiree with minimal medical expenses.
A Little Cushion Today Can Prevent Big Problems Tomorrow
Health care costs remain one of the biggest unknowns in retirement planning. While no savings plan can eliminate all financial risks, a health care emergency fund helps retirees prepare for the often unexpected expenses. Cash can provide flexibility during medical situations and reduce the need to rely on credit cards or retirement account withdrawals. It is important to put money aside before you face a major health problem.
Do you keep a separate emergency health care fund, or are all your emergency funds combined into one account? Share your thoughts and experiences in the comments below.
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