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Americans Expect to Spend 40% of Their Retirement Savings on Healthcare. Are They Right?

By Maurie Backman - May 27, 2021 at 6:49AM

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It's no secret that medical care is expensive. But will it end up costing more than you anticipate during your senior years?

There's a reason we're told to sock away money for the future and not rely solely on Social Security during retirement. Senior living costs can be more expensive than anticipated, so having money in savings could spell the difference between struggling and paying the bills with relative ease.

Of the various costs seniors face, healthcare is the one expense that's likely to rise during retirement. Not only do health issues tend to emerge with age, but Medicare has a number of gaps that leave seniors on the hook for tremendous out-of-pocket costs.

It's not surprising, then, to learn that Americans expect to spend a whopping 40% of their retirement savings on medical expenses alone, according to HSA provider Lively. But are they spot on?

Gray-haired person adjusts eyeglasses while staring at pill bottle in hand

Image source: Getty Images.

A substantial expense

Each year, Fidelity releases an estimate of what healthcare will cost throughout retirement. For the average male-female couple retiring this year, that number is a whopping $300,000. It therefore stands to reason that the typical senior could end up spending 40% of his or her nest egg on medical bills alone.

How can seniors cope with that expense? Boosting savings is one option. If you're not currently maxing out your IRA or 401(k), aim to ramp up your contribution rate.

Another option is to max out a health savings account, or HSA. HSAs offer even more tax benefits than IRAs and 401(k)s. Contributions to HSAs are tax-free, investment gains are tax-free, and withdrawals are tax-free, provided they're used to pay for qualified healthcare expenses.

In fact, many people regard HSAs as a short-term savings account because funds can be withdrawn at any time to pay for immediate medical bills. But actually, HSAs offer even more value as a retirement savings plan, because funds that aren't used in the near term can be invested in a tax-advantaged fashion.

The only catch with HSAs is that eligibility to participate in one hinges on being enrolled in a high-deductible health insurance plan. For the current year, as well as 2022, that means having an individual deductible of $1,400 or more, or a family level deductible of $2,800 or more. But if you qualify for an HSA based on your health plan, you can contribute a fair amount of money to your account that has the potential to grow over time.

Here's where HSA contribution limits currently stand:

  • $3,600 if you're saving as an individual and are under 55
  • $4,600 if you're saving as an individual behalf and are 55 or over
  • $7,200 if you're saving at the family level and are under 55
  • $8,200 if you're saving at the family level and are 55 or over

Next year, these limits are increasing by $50 for individuals and $100 for families, so there's even more opportunity to set funds aside for future healthcare expenses.

Don't get caught off guard

Between deductibles, copays, and services that Medicare just doesn't cover, healthcare can be a burdensome expense for seniors, to the point where you may end up spending quite a large chunk of your savings on it. Maxing out an HSA on top of funding an IRA or 401(k) could help you better manage those costs -- and avoid a world of financial stress and upheaval during your senior years.

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