According to Bryan Lewis, a financial advisor with Vanguard Personal Advisor Services®, the answer is to budget for potential health care costs as part of your retirement savings plan.

“Health care costs are a major component of retirement expenses,” Lewis said. “The onus is on you to make sure you’re covered. There’s no rainy day fund that’s going to cover a catastrophic illness. Whatever coverage you need has to be factored in.”

Another retirement cost to consider

A major illness can be financially devastating if you’re not properly prepared, which is why you should bake health care costs into your retirement savings plan. If you’re near retirement, ask yourself some important questions, including:

  • What’s my health situation?
  • Do I have chronic (and costly) medical issues?
  • Are there risk factors in my family history?
  • Have I looked into long-term care insurance? (The older you get, the more it will cost.)

Answering these questions will give you a clearer idea of your future health care expenses—and enable you to save up front to meet them. If you hope to retire early, experts suggest you should begin planning for health care costs at least a year in advance.

If you have chronic health issues, that may impact when you retire, how much insurance you’ll need, or even the type of coverage that’s best for your situation.

“Can your retirement income sources—savings, Social Security, IRAs, pension, and/or 401(k) plan—support your living expenses plus your health care costs?” Lewis asked.

Insurance options

Your insurance costs depend on where you are on the retirement timeline. If you’re recently retired, and not yet 65, you can purchase insurance through the Affordable Care Act, but you’ll need to do some investigating.

For instance, you must determine what options, if any, are offered through your state or if you need to go through the federal exchange. Also, low-income retirees under age 65 might be eligible for premium subsidies. There’s also Medicare, but usually you can’t receive that benefit until you reach 65.

Lewis said even Medicare can be challenging. Most people don’t become eligible until age 65 and it doesn’t cover all eligible medical expenses. There are various supplemental plans that cover what Medicare doesn’t but they don’t always come cheaply and often carry copays, coinsurance, and deductibles.

“Once you become eligible for Medicare, you’re going to have a gap which isn’t covered,” Lewis said. “Then the question becomes, ‘what are my needs for supplemental insurance? Can my savings cover those expenses?'”

Some investors may also have temporary coverage through their former employer under the Consolidated Omnibus Budget Reconciliation Act, also known as COBRA, which could be cheaper than the individual health care coverage through the federal/state exchanges. COBRA is only available when coverage is lost due to certain “qualifying events.”

HSA: An option for younger workers

For younger Americans, a health savings account (HSA) may be something to consider. HSAs allow you to contribute using pre-tax dollars. Provided you use the money to cover qualified health expenses there are no taxes paid on the contributions or withdrawals. To utilize the HSA option you must be enrolled in a high-deductible insurance plan. So, only younger workers, who have no chronic health issues, should consider the option.

Unlike flexible spending accounts (FSAs), the money put into a HSA rolls over from year to year. Workers who contribute a set amount each year and remain healthy may be able to build up a sizeable nest egg that they can use in retirement to cover medical expenses.