When we think about retirement planning, the same universal advice tends to apply -- pad your IRA or 401(k), figure out your expenses, and adjust your investments to reflect the level of risk you're willing to take on as your senior years near. But there's one giant risk that many people don't account for in the course of their retirement planning: healthcare.

The average healthy 65-year-old couple today is expected to spend an almost astonishing $387,644 on healthcare throughout retirement, reports HealthView Services, a cost-projection software provider. And that's for a healthy couple. Seniors entering their golden years with medical problems or preexisting conditions could easily see their costs skyrocket beyond that point.

A physician speaks to a woman seated on an exam table.


That's why you really can't overlook the importance of socking funds away for retirement in a health savings account, or HSA. Without dedicated healthcare savings, you'll risk struggling financially when medical bills eat up too much of your general retirement income for comfort.

The upside of HSAs

Many people are drawn to retirement savings plans like IRAs and 401(k)s because of the tax benefits involved. And in this regard, HSAs are actually quite difficult to match, because they're triple tax-advantaged. The money you contribute to an HSA goes in tax-free, the same way traditional IRAs and 401(k)s work. Once you have money in an HSA, you can use it to pay for near-term medical bills, or leave it alone and invest it for added growth. That growth is yours tax-free, and HSA withdrawals are tax-free as well, provided that money is used to pay for qualified medical expenses.

Now it's easy to confuse HSAs with flexible spending accounts, or FSAs, but remember, the two are very different. With an FSA, you must spend your entire plan balance year after year or risk forfeiting money you contributed. HSA funds, by contrast, never expire, so you can put money into one of these accounts during your working years and reserve as much as possible for your senior years.

HSA requirements

The one downside of HSAs is that not everyone is eligible to participate in one. To qualify, you must be enrolled in a high-deductible health insurance plan. The definition of that changes from year to year, but in 2020, it means having an individual deductible of $1,400 or more, or a family level deductible of $2,800 or more.

If you qualify to fund an HSA, you can put in up to $3,550 this year as an individual, or up to $7,100 on behalf of a family. And if you're 55 or older, you get an additional $1,000 on top of whichever limit you qualify for. That extra $1,000 is meant to serve as a catch-up contribution, similar to the catch-ups you'll find in IRAs and 401(k)s.

What can an HSA do for your senior years?

Let's run through an example of how an HSA might benefit you in retirement. Imagine you're a single 30-year-old who maxes out an HSA every year for the next 35 years at the current $3,550 limit. For the sake of simplicity, we'll assume that limit holds steady over the next three and a half decades, and that you don't take advantage of the $1,000 catch-up older savers are entitled to.

Now, let's imagine that your near-term medical costs amount to $1,350 per year, leaving you with $2,000 a year left over that you can invest and carry into retirement. If you manage to snag a somewhat conservative 6% average annual return on your unused HSA funds, you'll wind up with about $223,000. That's a nice chunk of money to then be able to dedicate to healthcare when you need it the most, and if your total tab in retirement mimics the $387,644 today's seniors are expected to rack up, it'll certainly make a nice dent.

Without a crystal ball, it's impossible to predict what healthcare will cost you down the line. But if you want to give yourself one less thing to worry about during retirement, open an HSA today and start contributing more than you need for near-term expenses. That way, you can invest the rest and access that money later in life, when you'll likely need it the most.