While certain living expenses tend to go down during retirement, one is statistically likely to climb: healthcare. Estimates on what healthcare will cost in retirement vary tremendously, making it difficult to save appropriately. Investing giant Fidelity, for example, estimates healthcare in retirement at $295,000 for the average healthy 65-year-old couple today. HealthView Services, a provider of cost-projection software, on the other hand, estimates that healthcare will cost $606,337 for the typical 65-year-old couple retiring now.
Clearly, that's a substantial divide. It's not surprising, then, to learn that 46% of workers today are worried about their ability to pay medical bills in retirement, as per the SimplyWise November 2020 Retirement Confidence Index.
If you're not sure how you'll cover future healthcare expenses, there's a savings plan you ought to look at: the health savings account, or HSA. Having an HSA could mean the difference between covering your medical expenses during retirement with ease versus struggling to keep up with them.
Why HSAs pay off
If you don't qualify for an HSA because you're not enrolled in a high-deductible health insurance plan -- the definition of which is subject to change every year -- then padding your 401(k) or IRA is a good bet. But if you have the option to fund an HSA, it makes sense to do so.
HSAs are particularly valuable because they're triply tax advantaged. HSA contributions are made with pretax dollars, resulting in an immediate tax break. Funds not used in the near term can be invested, and gains in an HSA are tax-free as well. Withdrawals from an HSA are also tax-free, provided they're used to pay for qualified medical expenses.
Retirement plans like 401(k)s and IRAs, on the other hand, don't offer as many tax breaks individually. A traditional 401(k) or IRA, for example, offers tax-free contributions, but gains in these accounts are only tax-deferred and withdrawals are taxable. And with Roth 401(k)s or IRAs, gains and withdrawals are tax-free, but contributions don't get a tax break at all.
Furthermore, HSAs are extremely flexible in that funds can be used immediately, as needed, or carried forward indefinitely. And you can use an HSA to pay for a host of expenses in retirement -- Medicare premiums, deductibles, copays, and even long-term care insurance premiums.
Currently, HSAs max out at $3,550 for individual coverage and $7,100 for family coverage. In 2021, however, these limits are increasing to $3,600 and $7,200, respectively. As with 401(k)s and IRAs, HSAs allow for catch-up contributions, so once you're 55, you can put an additional $1,000 a year into your account on top of the limit you qualify for.
Don't let healthcare costs wreck your retirement
It's an unfortunate fact that healthcare costs for seniors rise at a much faster rate than Social Security increases. If you want to improve your chances of managing your medical costs in retirement with ease, fund an HSA if that option is available to you. Having that dedicated account will give you one less thing to worry about later in life.