Retirement can be a daunting prospect in many regards, as it comes with a host of financial and emotional implications. But a recent report from T. Rowe Price found that retirees' top financial concerns all center on one key topic: healthcare.
Healthcare is perhaps the one expense that's most likely to go up, not down, in retirement. After all, as we age, health issues tend to come to a head, and when we factor in the cost of Medicare premiums, supplemental insurance, co-pays, deductibles, and services that just plain aren't covered, it's no wonder so many seniors are worried about being able to afford healthcare.
What's surprising, however, is that a large number of Americans aren't taking steps to save for healthcare in retirement. According to HSA Bank, 40% don't put funds aside for future healthcare despite the fact that workers have several easy options available to them. Seeing as how the average senior couple today might spend anywhere from $285,000 to nearly $364,000 on healthcare throughout retirement, that lack of vigilance is alarming. If you've been neglecting to save for future healthcare expenses, consider this your wake-up call to start doing better -- immediately.
Avoid financial stress later in life
You'll often see estimates (like the one mentioned above) on what healthcare will cost in retirement, but the truth is that pinpointing that number is next to impossible, as it'll depend heavily on your personal health and the specific coverage you obtain as a senior. Your best bet, therefore, is to save as much as possible for your future healthcare needs.
One way to go about that is to fund an IRA or 401(k). With the former, you can currently contribute up to $6,000 a year if you're under 50, or $7,000 a year if you're 50 or older. Employer-sponsored 401(k) plans offer much higher contribution limits: $19,000 if you're under 50, or $25,000 if you're 50 or older. When you save in one of these plans, your money is unrestricted in retirement -- you can use it for whatever purpose you desire.
Now, if you house your nest egg in a traditional IRA or 401(k), your contributions will go in tax-free, but your withdrawals will be taxed in retirement. With a Roth IRA or 401(k), the opposite is true -- you don't get an immediate tax break on your contributions, but withdrawals are taken tax-free down the line.
Saving in any type of IRA or 401(k) is a good bet for retirement in general, but if you really want to focus part of your efforts specifically on healthcare, you should consider a health savings account, or HSA. An HSA is a tax-advantaged account designed to help workers put away money for healthcare purposes. To qualify for one, you must have a high-deductible health insurance plan, which means an annual out-of-pocket deductible of $1,350 for single coverage, or $2,700 for family coverage.
The money you contribute to an HSA goes in tax-free -- just like with a traditional 401(k) or IRA -- and if you use that money for qualified medical expenses, your withdrawals are taken tax-free as well. In this regard, HSAs offer one major benefit over traditional IRAs and 401(k)s.
For the current year, you're allowed to contribute up to $3,500 to an HSA as an individual, or up to $7,000 for a family. If you're 55 or older, you get an additional $1,000 catch-up on top of these limits. And just as employers sometimes help fund employees' 401(k)s, so too is this option on the table with HSAs.
No matter how well you do health-wise as a senior, you can still expect to accumulate your fair share of medical bills in retirement. If you want to avoid the financial stress so many of today's retirees face, do yourself a favor and save for what might end up being your single greatest expense during your golden years. You'll be thankful for it later.