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Americans Are Dangerously Underestimating Healthcare Costs in Retirement, a Study Indicates

By Christy Bieber - Apr 12, 2021 at 9:39AM

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Are you making this big retirement planning mistake?

When preparing for retirement, it's important to make sure you have enough money to cover essentials. And medical care is one of the most essential of them all. 

Unfortunately, far too many people are dangerously underestimating how much their care will cost them. If you're one of them, you could find yourself draining your nest egg much faster than you imagined because you have out-of-pocket medical expenses you didn't plan for. 

Older man talking with doctor.

Image source: Getty Images.

Healthcare is probably going to cost way more than you think

Many future retirees have a very optimistic picture of their likely healthcare spending, according to a recent study conducted by Fidelity. It showed that 37% of non-retired adult financial decision-makers estimated healthcare spending for a senior couple in retirement would total $50,000 to $100,000.

Although this may seem like a lot of money, it's actually far less than two older seniors can expect to pay. In reality, Fidelity's estimate for out-of-pocket medical expenses was actually $295,000 for the average 65-year-old couple who retired last year. And healthcare costs only go up year over year, so future retirees are likely to spend even more. 

It's understandable to underestimate care expenses since many future retirees assume Medicare will cover more than it does. Or they don't anticipate getting sick as early as many seniors actually do.

But it can be incredibly damaging. If you have to spend a quarter-million dollars more than you planned on essential medical expenses, it's inevitable you'll deplete your nest egg much faster than anticipated.

That means failing to be realistic about retirement expenses could leave you and your spouse without funds you need later in life if you run your account dry. 

Start preparing for healthcare spending ASAP

If you're not yet retired, it's crucial to develop a realistic plan now for affording your care as a senior. That means increasing your retirement savings goal to account for the out-of-pocket expenditures you'll likely incur in your later years. 

If you are eligible for a health savings account (HSA), investing in one can be the best way to amass the money you need. That's because an HSA is the only account that provides three tax breaks instead of two.

Most tax-advantaged retirement accounts provide tax-free growth and the ability to either contribute with pre-tax dollars or make tax-free withdrawals. But HSAs allow you to invest with pre-tax funds, avoid taxes on gains as your money grows, and take money out for qualifying medical expenses without owing taxes. 

HSAs are also a good option because if you end up healthier than average, you can take money out penalty-free after age 65 and just be taxed at your ordinary rate -- the same as you would be with distributions from a 401(k) or IRA. 

Unfortunately, not everyone can invest in an HSA. If you aren't eligible, you still need to figure out a way to amass enough money to cover the realistic cost of healthcare as a senior. Increasing 401(k) contributions can work, or you could open a special IRA that you earmark for medical expenditures so you'll have the peace of mind of knowing there's a dedicated account for your care. 

Whichever approach you take, the important thing is to recalibrate your assessment of healthcare costs if you currently have an unrealistic picture of what your spending will look like. The sooner you do that, the more steps you can take now to ensure healthcare expenditures don't derail your financial security as a retiree. 

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