Rising health care costs can derail the best-laid plans for retirement. A couple, both of them 65, who stop working in 2017 will need an average of $275,000 to cover medical costs throughout the rest of their lives, according to a Fidelity analysis.
Cutting such costs is crucial. The new year is the perfect time to look for ways to trim your health care tab, or to build up savings to help pay for future health care expenses.
Following are three bold ways retirees can tame health care costs in 2018. These ideas might not work for everyone, but many taxpayers will find they offer the potential for big savings.
Deduct more of your medical expenses
It’s no secret that retirees are more likely to need medical care than younger Americans. In the past, the government allowed taxpayers of all ages to deduct the cost of qualified medical expenses on their tax returns once those costs exceeded 7.5 percent of adjusted gross income.
In 2018, the amount you can contribute to an HSA rises modestly — by $50 for individuals, and $150 for families. That takes the new limits to $3,450 for individuals, and $6,900 for families. Plus, if you are 55 or older, you can add another $1,000 to those limits.
RELATED: Here are some foolproof ways to ensure you'll retire with at least $1 million:
11 ways to retire with $1M
11 ways to retire with $1M
Make a Commitment to Save for Retirement
If saving for retirement isn’t a priority for you, consider this: If you’re struggling to get by now on a small paycheck, how will you get by in retirement without savings and no paycheck? You don’t want to retire broke and live on Social Security benefits alone.
“It can certainly be challenging to build up a good-sized nest egg, but it will certainly be impossible if you never try,” said Belinda Rosenblum, a certified public accountant and president of Own Your Money. “It all starts with a commitment.”
To ensure you follow through on your commitment to saving, let your family or friends know about your financial goals, said Polly Scott, spokeswoman for the 2017 National Retirement Security Week promoted by the National Association of Government Defined Contribution Administrators.
“If you talk about it … you’re more likely to do it,” she said.
“One million dollars isn’t the magic number,” Scott said. “In most cases, it doesn’t even have to be close to that number.”
So, the first thing you need to do is calculate how much you need to have to retire and how much you should save each month to reach that goal. There are plenty of free online retirement calculators — such as ones at Fidelity, Schwab and Vanguard — that can help.
Once you know how much you need to set aside each month to reach your savings goal, you can create a plan to make it happen.
“Even if you don’t get to $1 million and you only get to $100,000, at least you’re not retiring on just Social Security,” Scott said.
Start Saving as Soon as Possible
The sooner you start saving, the less you’ll have to set aside each month to save $1 million for retirement — which is good news if your income is low.
“If you are age 30 today and invest $600 a month from now to age 65, if your investments earn an average return of 7 percent a year, by age 65 you’ll have $1 million,” said Dana Anspach, founder and CEO of financial planning firm Sensible Money. “If you’re starting at age 40, you’ll need to be able to put away about $1,300 a month to get to $1 million by age 65 — still assuming a 7 percent return.”
If you start saving at age 20, you could set aside less than $300 a month and have $1 million by age 65, assuming a 7 percent annual return. By starting at this younger age, you’d need to save half as much each month as you would have to if you waited until 30 and about one-fourth as much if you waited until 40 to start building a $1 million nest egg.
“First, you have to want financial freedom just as much as you want other things in life,” Anspach said. Focusing on that goal helps you see the payoff from cutting costs from your budget, which can range from finding less-expensive housing to buying things used rather than new, she said.
“Even something as small as giving up soft drinks in favor of water can lead to big savings,” Anspach said. “Suppose you spend an average of $12 a week on soft drinks and tea. That’s $624 a year.”
Rosenblum said you can cut $250 out of your monthly budget easily to put into savings by opting for a lower-cost cable TV package, slashing your grocery bill by planning meals to eliminate food waste, and eating out or getting take-out less often. Resources such as 5 Dollar Dinners can help you make low-cost meals at home, she said.
In reality, “becoming a millionaire is less about how much you make and more about consistency,” said Deacon Hayes, founder of WellKeptWallet.com and author of the forthcoming book, “You Can Retire Early!”
“One way to ensure that you actually invest consistently is by setting up an automatic transfer from your bank to your investing account," he said. "This way, you can stick to your investing strategy without much thought required each month.”
If your employer offers a workplace retirement plan such as a 401k, you can have contributions automatically deducted from your paycheck. If you were automatically enrolled in your employer’s plan, check your contribution amount to make sure you’re saving enough each month to reach your savings goal. “You need to be contributing a minimum of 10 percent of pay,” Scott said.
If you don’t have access to a workplace retirement plan, you can save for retirement on your own by setting up automatic transfers from your checking account to an individual retirement account, such as a Roth IRA or a solo 401k if you’re self-employed.
“Make [the] commitment to pay yourself first then work your lifestyle around what’s left,” Scott said.
Take Advantage of Matching Contributions From Your Employer
A great way to boost your retirement savings is to find out if your employer will match your contributions to your workplace retirement account. The most common match is a dollar-for-dollar match. But, typically, you have to save a certain percentage of your income to get the full match.
Twenty-five percent of employees miss out on this free money because they don’t contribute enough to their retirement plan to get their employer’s full matching contribution, according to Financial Engines, an independent investment adviser website.
“If you work for an employer that offers a retirement plan and a company match, be sure to contribute enough to receive the full employer match,” Anspach said. “Many employers match up to 3 percent of your pay. At $50,000 a year of income, that adds up to $1,500 a year of employer-provided funds.”
Save Your Tax Refund
If you get a big tax refund, you should put that money into retirement savings, Rosenblum said. The average refund for the 2017 filing season was $2,782, according to the IRS. If you earn $50,000 a year, stashing a refund of that size would be equivalent to saving about 6 percent of your income, she said.
Or, you could adjust your tax withholding by filling out a new Form W-4 to put more money back into your paycheck each month rather than get a big refund each spring. Then, use that extra money in your paycheck to boost your automatic contribution to your 401k or workplace retirement account.
Get a Side Gig to Boost Savings
Another way to come up with more cash to retire with $1 million is to get a side gig to boost your income. Both Scott and Rosenblum recommend finding a second job and stashing those earnings into a retirement or investment account.
You could open a Roth IRA and contribute up to $5,500 a year if you’re single and your modified adjusted gross income is less than $118,000 or married with a modified AGI of less than $186,000. The big benefit of this account is that you can withdraw money tax-free in retirement. Withdrawals in retirement from a 401k or traditional IRA are taxed as regular income.
“No one gets rich by saving in the bank,” said Byrke Sestok, a certified financial planner and president of Rightirement Wealth Partners in White Plains, N.Y. “If you have 30 years before retirement and 30 years during retirement, then you have the time to participate heavily or totally in the stock market, and ignore the big drops and focus on the fact that stocks have historically proved to be a better-performing asset class over bonds and cash.”
That doesn’t necessarily mean it’s up to you to pick the right stocks, though. See if your 401k or workplace retirement plan offers index funds, which track the performance of a broad stock market index such as the S&P 500. Or, Scott recommends target-date funds, which have managers who shift your portfolio allocation over time from stocks to more conservative investments as you near retirement age.
Opt for Alternative Investments
If you make less than $50,000 a year, there’s only so much you can afford to set aside in savings each month. So rather than save your way to $1 million, build your net worth through investing in real estate or starting a business, said Todd Tresidder, wealth coach at Financial Mentor.
“Think outside the traditional model — go to alternative assets,” he said.
Don’t assume your lower income limits your ability to pursue either of these alternative assets. You don’t necessarily have to have money to start a business, Tresidder said. You just need an idea, and you have to be willing to put in the hard work to make it happen.
If you want to invest in real estate, Tresidder said you can get a loan for a small, inexpensive property, fix it up on your own and flip it for a small profit. Then you can use that equity to buy your first rental property that will generate a stream of income.
Don’t Tap Retirement Savings Before You Retire
You can cash out a 401k when changing jobs, but that will seriously hurt your chances of saving $1 million for retirement.
“Don’t ever do that,” Scott said. “That is very destructive to your retirement security.”
Not only will you have to pay state and federal income taxes, but also you will have to pay a 10 percent early withdrawal penalty on the money you withdraw. Plus, most people don’t go back and replace what is withdrawn, Scott said. So, they miss out on investment earnings.
To avoid having to tap retirement savings — whether it’s to get you through a period of unemployment or to pay for emergencies — Scott recommends that you build an emergency fund. Set aside cash in a savings account each month so you can access if you’re hit with an unexpected expense.
“You don’t want to be in a situation where you’re in an emergency and raid your retirement account,” she said. “That’s counterproductive.”
Obviously, the strategy of funding an HSA in retirement works best if you have enough savings — or new income from part-time work — to funnel into the HSA.
Just remember that once you turn 65 and qualify for Medicare, you no longer can contribute to an HSA. However, you can still tap your HSA to pay for qualified medical expenses.
Slash your income to qualify for Obamacare help
Obamacare can be a blessing for anyone who plans to retire early. In the past, health insurance costs were a significant hurdle for many people who hoped to stop working before age 65, when Americans become eligible for Medicare.
But thanks to Obamacare rules, you can get financial help to cover health insurance premium costs in the years before you sign up for Medicare. By retiring early — and slashing your income — you might qualify for tax credits and subsidies that can dramatically reduce the sting of health insurance costs.
Are you worried that you are too wealthy to qualify for these cost breaks? Don’t be so sure. According to news reports, some high-net-worth individuals have found ways to reduce their income and legally get a share of these tax breaks and subsidies.