When I meet a participant who has not saved enough for retirement, I often ask what is “Plan B” if they cannot continue to work for the rest of their life? After the usual jokes about winning the lottery or marrying rich, they are forced to admit that they don’t actually have a “Plan B.”
The daily expenses of living continue past one’s retirement date whether planned or not. Where you live, what you eat – these are costs that can be contained up to a point. But healthcare costs can be the great unknown and are sure to be one of the biggest expenses in retirement. Even after you qualify for Medicare the out-of-pocket costs of premiums, deductibles and copays can be staggering, and that does not even include long-term care or medigap coverage. According to a recent study by Fidelity, the average cost of healthcare for a healthy couple retiring at age 65 is $275,000 in retirement. Healthcare costs traditionally increase at a rate higher than that of inflation, so these costs will typically only increase over time.
That is one of the reasons that personal savings during an employee’s working years is so important. Putting money away in a tax-advantaged plan, such as a 401(k), to manage these future costs is one of the only ways many of us will be able to absorb them. Many of us have employers who will contribute to this plan on our behalf as well, but only if we save for ourselves. Companies that have High Deductible Health Plans (HDHP) may also offer a Health Savings Account (HSA), which allows employees to accumulate pre-tax payroll deductions and use them tax-free for qualified medical expenses.
Although employees may not be aware of the exact amount of their healthcare costs in retirement, they know this storm is approaching. By making them aware of how much they may need and giving them the tools to save on a tax-advantaged basis, we give them the best chance towards meeting that storm head on.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services offered through Global Retirement Partners, LLC, a registered investment advisor. Global Retirement Partners, LLC, Frenkel Benefits, LLC, and LPL Financial are separate and non-affiliated companies.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
Contributions to a traditional 401k may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
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