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Only 38% of Americans Are Saving for This Major Retirement Expense

By Maurie Backman – Jun 27, 2020 at 7:18AM

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If you're not part of that statistic, you're making a huge mistake.

Many seniors find that certain expenses go down once they retire. Transportation, for example, can be less costly in the absence of having to commute for a job. But if there's one expense that tends to go up in retirement, it's healthcare, and unfortunately, most Americans aren't preparing for it.

Though close to 72% of Americans are funding a retirement plan to prepare for their senior years, only about 38% are setting funds aside specifically for healthcare purposes, according to a recent survey by Medical Alert Buyers Guide. Given that the average retiree spends $4,300 per year on healthcare, that's a mistake worth correcting.

Smiling doctor holding older woman's hand

Image source: Getty Images.

What will your senior healthcare expenses look like?

Many people make the glaring mistake of assuming that their healthcare costs under Medicare will be minimal, or even free. But unfortunately, Medicare comes with a host of expenses, from premiums to deductibles to copays, which can eat away at a senior's limited income. And let's not forget that original Medicare doesn't cover a number of key health services that seniors tend to need, like dental care, eye exams, and hearing aids. Those are expenses retirees must often absorb completely out of pocket.

That's why it's crucial to set funds aside specifically for healthcare well ahead of retirement. If you don't, you might struggle to manage your income at a time when it's limited.

How to save efficiently for future healthcare costs

The best way to save money specifically for healthcare in retirement is to participate in a health savings account, or HSA, which is an account you contribute to while you're still working. But unlike a flexible spending account, where the funds expire from year to year, HSA money doesn't come with a time limit. You can use the funds in your HSA to pay for immediate healthcare expenses that come up from year to year, but you can also carry that money all the way into retirement and use it when you may need it the most.

Eligibility for an HSA, however, hinges on being enrolled in a high-deductible health insurance plan. For 2020, that means having an annual deductible of at least $1,400 at the individual level or at least $2,800 at the family level. Your annual out-of-pocket costs under your plan must also be capped at $6,900 for individuals and $13,800 for families.

Assuming you meet these criteria, you can contribute up to $3,550 to an HSA this year as an individual or up to $7,100 on behalf of a family. If you're 55 or older, you get a $1,000 catch-up contribution on top of whichever limit applies to you, similar to the catch-up provision that applies to retirement savings plans like IRAs and 401(k)s.

Best of all, any HSA funds you don't use immediately can be invested for added growth, and your withdrawals will be yours to keep tax-free provided they're used for qualifying healthcare expenses. Also, the money you put into an HSA goes in tax-free, so by funding one, you'll reap immediate savings, all the while setting yourself up with a dedicated source of healthcare funds for the future.

Don't underestimate your senior healthcare costs

Healthcare is a massive expense that many seniors end up unprepared for. Rather than risk financial struggles later in life, capitalize on an HSA if you're eligible to do so. It's a cost-effective way to set aside money for a retirement expense that's not only substantial, but pretty much unavoidable.

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