It's a big misconception that living costs drop drastically in retirement. The reality is that some of your expenses might get lower, but some might also rise.
Healthcare is likely to fall into the latter category. That's because medical issues tend to arise as we age, and also, because Medicare, which seniors commonly rely on starting at age 65, has its limitations.
In fact, Fidelity recently ran some numbers, and it found that the average 65-year-old male-female couple retiring now should expect to spend a whopping $315,000 on medical costs. That figure assumes enrollment in Medicare Parts A, B, and D.
When we break that figure down further, we see that the average 65-year-old male should expect to spend $150,000 on healthcare costs throughout retirement, while the average 65-year-old woman should anticipate spending $165,000. Since women tend to live longer than men, that higher number makes sense.
It's also worth noting that last year's Fidelity estimate had the average opposite-gendered 65-year-old couple spending $300,000 on healthcare in retirement. That means that figure jumped $15,000 in a single year. It also underscores the importance of saving for future healthcare costs to avoid a financial crunch later in life.
The best way to save for healthcare in retirement
When it comes to covering healthcare costs later in life, you have options. You could pad your IRA or 401(k) plan so you're better equipped to pay your future medical bills, or you could dedicate funds to healthcare in a health savings account, or HSA.
The latter route is worth exploring if you're enrolled in a high-deductible health insurance plan and are therefore eligible to fund an HSA. That's because HSAs offer more tax benefits than IRAs and 401(k)s.
HSAs are triple tax-advantaged:
- The money you contribute goes in tax-free
- Investment gains in your account are tax-free
- Withdrawals from your account are tax-free, provided they're used to cover qualified healthcare expenses
Meanwhile, HSA limits change from year to year, but this year, you can contribute up to $3,650 if you have self-only coverage, or up to $7,300 if you have family level coverage. If you're 55 or older, you can make catch-up contributions in your HSA, adding $1,000 to whichever limit applies to you.
Next year, those limits are increasing. For self-only coverage, you'll get to contribute $3,850 to your HSA. For family level coverage, you'll get to contribute $7,750. And that $1,000 catch-up will still be in play.
Another thing you should know about HSAs is that come age 65, they effectively convert to a traditional retirement plan. Normally, the penalty for taking a non-medical HSA withdrawal is steep -- 20%. But once you turn 65, you can take non-medical withdrawals without being penalized. In that scenario, you'll simply pay taxes on your withdrawals, the same way you would with a traditional IRA or 401(k).
Spare yourself unwanted stress
Healthcare costs are a burden for many seniors -- but that doesn't have to be the case for you. If you set yourself up with a nice chunk of money to cover your future medical bills, you'll have one less thing to concern yourself with at a time in life when you're trying to enjoy your newfound freedom.