Now more than ever, retirement can be fraught with the uncertainty of outliving savings. What is discussed less frequently, however, is how unexpected medical and related expenses in connection with car accidents can have a devastating impact on retirement accounts. Years of careful retirement planning can be ruined in an instant.
In this article, we’re exploring the challenges that come with unexpected accidents and what it takes to be prepared for what comes next.
As an example, most of us are aware that a car accident can happen, although we tend to believe it will not happen to us. Yet, 36,096 people were killed in motor vehicle accidents on the United States roads in 2019, according to the U.S. Department of Transportation. This underscores how dangerous they are.
Also, as you age, your chances of having accidents on the road skyrocket. In fact, according to the Insurance Institute for Highway Safety, the rate of fatal car accidents increases noticeably once drivers hit age 70.
Generally speaking, the most common cause of bankruptcy is medically related. And many accident victims find themselves in the disastrous situation of having to go into investments earmarked for their retirement. This often means paying penalties for tapping into qualified accounts.
Financial experts say you should think twice before making withdrawals from retirement savings. However, you may have no other option to pay for medical expenses. In general, in addition to paying income taxes on the money you withdraw from your retirement plan before reaching age 59½, you’ll also have to pay a 10% penalty. You can look up Distributions from Individual Retirement Arrangements (IRAs) to find out if you qualify for the few medical exceptions that apply.
Sean M. Cleary, Miami car accidents attorney, explains how retirement funds can be easily drained in cases of car crashes. “Imagine you’re driving home from work one day when an uninsured motorist plows into your car after running a traffic light, and as a result of the accident, you’re severely injured. Most likely you’ll be rushed to the hospital, may require surgery, and even go to a rehab facility for physical therapy after being released.”
Fortunately, your auto insurance policy or your medical insurance at work will cover your hospitalization and rehab stays, as well as at-home nursing care during your recuperation.
However, the recovery process may render you unable to work for a long period. Even when you’re lucky to have additional savings, you’ll have to stop making contributions to your investments, which means fewer funds for future retirement.
And while your employer-paid short-term disability insurance may cover your lost income for a few months, when you have no long-term coverage, you’ll have to pay many health-related expenses out of pocket.
Here’s a detailed look at the key types of costs incurred after suffering a serious car accident injury.
Following a car accident, the healthcare costs are going to be your most immediate and prominent expenses. These costs may include:
- Emergency on-site stabilization procedures
- Ambulance rides
- ER treatment
- Imaging scans
- Medical tests
- Medical devices
- Doctor visits
- Follow-up appointments
- Physical therapy
- Medical monitoring
You also have to deal with the mental health concerns that result from the accident and may require medium- to long-term counseling and therapy.
Cost of changing jobs
Your current employer is expected to take reasonable steps to accommodate your changed physical circumstances and could redeploy you to a different role within the organization. This might mean a radical shift in your career path and may require you to pursue a new degree or enroll in a professional course. Were it not for the accident, you wouldn’t have incurred this expenditure.
Loss of wages and employment
Loss of employment could be a huge disruption to your income. This may occur because, in more serious car accidents, the extent of your injury could make it impossible for you to contribute meaningfully at your existing workplace, in any role. In the end, employers are under no obligation to keep you on their payroll.
In all, after a serious car accident, you may have to pay tens of thousands of dollars in medical expenses not covered by your plan, spend other tens of thousands of dollars for at-home assistance during your recuperation, and probably have to forego more than a hundred thousand dollars in income.
How can you protect yourself? Right off the bat, you need to make sure your auto insurance provides the maximum protection to you and your family. In the unfortunate event of a car accident, you can seek out personal injury compensation to cover all of your costs. Additionally, here are three steps that could help protect your retirement savings.
Plan for health care costs
Cutting costs is important for everyone, but scrimping on insurance might not be the best place to do it. In particular, adequate health insurance that covers everything is essential to prevent the scenario that complications after a medical emergency will put you into bankruptcy.
If your job offers it, you should get employer-based medical insurance. Or get health coverage through the individual health insurance marketplace if you are a contractor, freelancer, or self-employed.
While you’re working, use the health savings account. The money you put into it can help you save for out-of-pocket medical expenses or health expenses in retirement. The health savings account also has some key tax advantages: You can withdraw money tax-free when used for qualified health expenses, it reduces your taxable income, and also allows money to grow tax-free.
If you are a retiree, having Medicare Part A, which covers hospital services, is a good start. It’s generally free in retirement, starting at age 65. But you’ll need to pay extra for doctor visits, outpatient services, and prescription drugs. Moreover, having a supplemental Medigap policy will help cover copayments and deductibles.
If your household income on your tax return is no more than 400 percent of the federal poverty line, you may be eligible for tax credits through the Affordable Care Act.
Build an emergency fund
Having a large stash of cash can help you save the day when you’re facing mounting health care expenses. Still, when you start small, building that emergency fund will take time.
You could start by living within your means, cutting some discretionary spending, and find you’re already saving. You could also put away a small percent of your pay.
Financial advisors suggest your “rainy day” fund should cover at least three to six months’ worth of living expenses. You can start by saving enough money to cover at least one month of living expenses, then work your way up gradually.
Get income protection insurance
If your ability to work is hampered by suffering an injury after a car accident, you need to be able to pay for your healthcare and living expenses, as well as maintain your lifestyle.
Thus, you should make sure you have disability insurance. This type of insurance provides steady payments if you become unable to work. Most disability policies that you get through your employer usually cover 40 to 60 percent of your income and individual policies can cover from 70 to 85 percent of your income.
About the author:
Sean M. Cleary is a car accident attorney, the principal, and founder of The Law Offices of Sean M. Cleary. Through his personal injury law firm based in Miami, Florida, Sean represents seriously injured accident victims.