Retiring is a scary concept for one big reason: It's hard to predict your costs ahead of time. Sure, you can set up a retirement budget and make certain assumptions about your spending in the course of your planning, but ultimately, you may not be able to predict today what you'll spend 10 or 20 years from now. And if there's one retirement expense that can be really unpredictable, it's medical expenses. Not only has healthcare skyrocketed cost-wise in recent years, but the extent to which you'll need to spend on it will hinge on how well your health holds up.

It's not surprising, then, to learn that 43% of Americans worry about paying medical bills during retirement, according to the May 2020 Simplywise Retirement Confidence Index. If you're concerned about healthcare costs during your senior years, there's one handy savings tool it really pays to put some money into: a health savings account.

A doctor talking to an older man


How health savings accounts work

A health savings account, or HSA, is a hybrid savings and investment account. Like a flexible spending account (FSA), it lets you put in money on a pre-tax basis to pay for medical expenses, but unlike an FSA, HSA funds don't expire. Rather, you can carry them into the future, which means if you're in your 30s or 40s today, you can put money into an HSA with the intent of using it during retirement.

In fact, the point of an HSA is actually to put in more money than you expect to need immediately, and the reason is that any funds you don't withdraw for near-term expenses can be invested for added growth, the same way you can invest the money in your 401(k) or IRA. Furthermore, any gains in that account will be yours to enjoy tax-free, and withdrawals will be tax-free, too, provided you use that money to cover qualified medical expenses.

The only catch associated with HSAs is that not everyone qualifies to participate in one. To be eligible, you must be enrolled in a high-deductible health insurance plan. For the current year, that's defined as having a deductible of $1,400 or more as an individual, or $2,800 or more at the family level. Your plan must also have an out-of-pocket maximum of $6,900 as an individual, or $13,800 for a family.

Assuming you qualify for an HSA, this year, you can contribute up to $3,550 if you're funding that account as an individual, or up to $7,100 if you're funding it on behalf of your family. And if you're 55 or older, you get a $1,000 catch-up contribution, similar to the catch-up provision that 401(k) plans and IRAs allow for. Keep in mind that these limits can change, just as retirement plan limits change.

An easy way to make one expense less daunting

In the absence of a crystal ball, it's impossible to predict what healthcare will cost you in retirement. But know this: The average healthy 65-year-old couple retiring last year was projected to spend $387,644 on medical costs throughout retirement. And clearly, that's not a small number. If you want to make that expense more manageable during your senior years, fund an HSA today if you're eligible. It's a good way to buy yourself a degree of financial security at a time when you might really need it.