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Don't let surprise medical bills drain your retirement

  • Consider a health savings account.
  • Bulk up emergency savings.
  • Check your insurance.

It doesn't take much to ruin years of careful retirement planning.

An unexpected accident or illness, especially when you're nearing retirement, could become a financial disaster.

"The number one reason for bankruptcy is actually medically related," said certified financial planner Stacy Francis of Francis Financial. "So, if you're not preparing, you could be putting yourself in a disastrous situation of having to use credit card debt, even go into your retirement plan."

Here are three tips to prevent medical bills from cracking your nest egg:

Open a health savings account

Use the health savings account to help you save for out-of-pocket medical expenses while you're working — or for health expenses in retirement. The money you put into it has some key tax advantages: It reduces your taxable income, allows money to grow tax-free and you can withdraw it tax-free when used for qualified health expenses.

In 2017, you can contribute up to $3,400 in an HSA if you're single and $6,750 for a family plan. Next year, the contribution limits increase $50 for an individual and $150 for family coverage.

Bulk up your emergency savings

Put away enough money to cover at least six months of living expenses in a "rainy day" fund.

Start small, and build it up one month at a time. Stash away 1 percent of your pay, then 5 percent, then 10 percent, until you reach your goal.

Insure your earnings

To protect your savings if you suffer an illness or injury that leaves you unable to work, make sure you have disability insurance.

A recent survey by BenefitsPro.com found that only one-third of Americans currently have a disability policy. Most disability policies that you get through your employer usually cover 40 percent to 60 percent of your salary. This kind of insurance provides steady payments if you become unable to work and keeps you from tapping your retirement savings.

"Think about how much time you think about reviewing your investment portfolio, how you make sure you have auto insurance," Francis said. "Disability insurance is even more important than both of those put together."

If you have no other option than to take money from your retirement accounts to pay for medical expenses, watch out for tax penalties. Normally you'll be hit with a 10 percent tax penalty, in addition to paying income taxes, on money you withdraw from tax-deferred retirement plans before reaching age 59½.

"What most people are aware of is that they will owe income taxes upfront (on early withdrawals) but come tax time if they're under 59½, they're going to add a 10 percent tax bill," said IRA consultant Denise Appleby of RetirementDictionary.com. "So at that time, you want to gather your medical bills and receipts for health care expenses and see if you qualify for any exceptions."

Consult with a financial advisor or accountant, or go to IRS.gov and look up Publication 590B to find the few medical exceptions that apply.

However, that's a last resort. Take the other steps first to help make sure unforeseen medical bills don't drain your retirement.

More from Retire Well:
What to do if your life insurance is about to expire
Pay down these three debts before you retire
Retirement tricks for the self-employed

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