Expect the unexpected

There's no such thing as a good time for a bad thing to happen. That's why it's important to set aside funds for unexpected expenses that may result from an accident, temporary unemployment or major health related expenses.

Building an emergency fund

Start small. Add to it when you get a raise—or when you receive a tax refund, a gift of cash or a rebate. Experts say that you should aim to set aside up to six months in living expenses in an emergency account. That seems ambitious when you're just starting out, but over time you'll gain ground as the account benefits from any earnings.

Choose a money market fund for the stability it offers—and easy access. In an emergency, you can write a check against a money market fund just like you can with a checking account.

An emergency fund may also help you protect your retirement investments.
When you have a source of funds to lean on, you won't have to borrow against your retirement account or withdraw funds, which would be taxable and may also be subject to a 10% early withdrawal penalty.

Planning ahead for health matters

As you grow older, you may be increasingly vulnerable to illness or injury, so it pays to plan ahead on health matters. You need comprehensive health insurance to pay medical bills. In addition, consider other types of insurance that may affect your financial security.

For example, disability insurance is especially important if you are self-employed. It pays you a percentage of your salary if you are unable to work because of illness or accident.

Long-term care insurance is designed to cover nursing care over an extended period of time. If you do not have the financial resources to pay for up to three years of care at the current going rate of approximately $70,000 a year, consider buying a policy when you are still in your 50s when premiums are relatively affordable. Look for a contract that builds inflation protection into the benefits.

Here's another strategy: you may buy an annuity that you could convert to income if you need to cover the costs of long-term care or disability. You'll need a substantial lump sum to start with for this strategy to be effective. And be sure that you choose your annuity carefully. Avoid high annual fees and don't buy an annuity that charges a surrender fee. You may also want to consider the financial stability of the insurance company providing the annuity.

If you have a high deductible health insurance policy, consider opening a tax-free Health Savings Account (HSA), which allows you to build up money to pay for medical expenses during retirement. The money you set aside is tax deductible. Any earnings on your account accumulate tax deferred. As long as you use the money for qualified medical expenses, withdrawals are tax free.

Federal Limits

There are federal limits on the amount you can contribute to an HSA each year, but you can roll over the money you don't spend for medical costs in the year you make the contribution so that it's available in future years.

For more information about HSAs, go to http://www.ustreas.gov/offices/public-affairs/hsa/.

AARP Financial Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.

The Financial Advisors are investment adviser representatives of AARP Financial Inc., an investment adviser.

While AARP endorses the services provided by AARP Financial Inc., AARP does not offer financial products or services itself and cannot recommend that you or any specific individual should purchase any particular product or service. AARP Financial Inc. is an investment adviser and a subsidiary of AARP.