The idea of retiring can be daunting from a financial perspective, since it often entails moving over to a fixed income with variable expenses. And if there's one expense that has retirees worried, it's healthcare. Not only do medical issues tend to creep up with age, but often, Medicare will only cover a portion of them. Throw in the fact that many seniors enter retirement without a clue as to what healthcare will cost, and it's no wonder so many wind up struggling financially.
With that in mind, investment giant Fidelity recently shared some projections designed to help Americans get a better handle on their senior healthcare costs. A 65-year-old couple retiring this year can expect to spend $285,000 on medical expenses throughout retirement. For single retirees, that number is $150,000 for women (since they tend to live longer) and $135,000 for men.
These numbers might seem staggering -- but they also might be somewhat conservative. HealthView Services, a cost projection software provider, has a different take on healthcare costs in retirement. In a report released last year, it found that the average healthy 65-year-old couple retiring in 2018 should expect to pay $363,946 for medical care in retirement. That figure includes Medicare premiums as well as the cost of supplemental insurance. It's also meant to cover healthy seniors. For someone with preexisting medical issues, that number could get a lot higher.
Now clearly, there's a substantial discrepancy between Fidelity's estimates and those of HealthView. But no matter which number you choose to run with, know this: You'll need to save aggressively if you don't want healthcare to derail your finances in retirement.
Boost your savings
Though estimates like the ones referenced earlier can give you a general sense of what medical care might cost you as a senior, healthcare in retirement can be somewhat unpredictable, as it'll depend on the specific issues you encounter. Your best bet, therefore, is to assume the worst and save for it.
Currently, workers 50 and over can contribute up to $25,000 a year to a 401(k). If you have that option, maxing out for the next 15 years will add $628,000 to your savings if your investments deliver an average annual 7% return during that time (which is doable if you load up stocks, since the market has averaged a slightly higher return historically).
If you don't have access to a 401(k) plan, you can work on building savings in an IRA. Just know that the annual contribution limit for workers 50 and older is just $7,000, which means you won't see the same results as you would by maxing out a 401(k).
That said, there's another way to save for healthcare in retirement that doesn't involve a 401(k) or an IRA. If you're eligible for a health savings account, or HSA, you can set aside funds during your working years to pay for medical expenses in the future.
To qualify for an HSA, you must have a high-deductible plan -- $1,350 for single coverage, or $2,700 for family coverage. From there, you can contribute up to $3,500 this year if you have individual coverage, or $7,000 if you have family coverage. And if you're 55 or older, you can make an additional $1,000 catch-up contribution on top of the aforementioned figures.
HSA contributions, like those made in a traditional 401(k) or IRA, go in on a pre-tax basis, and once you fund your account, you can invest your money so that it grows over time. You'll then be eligible for tax-free withdrawals from your HSA provided you spend that money on qualified medical expenses. Though you can use your HSA to pay for healthcare year after year, if you manage to leave much of that money untouched, it can grow into a larger sum so that you're left with a sizable balance to access in retirement, when you might need that money the most.
No matter what steps you take to save for the whopping expense that is healthcare in retirement, make sure you're realistic about the costs you might one day face. While you may not manage to predict exactly what your medical needs will entail, you can bet on them eating up a substantial portion of your retirement budget.