There's a good chance Social Security will play an important role in your retirement. After all, millions of seniors collect it today.
But you may be unpleasantly surprised to learn that Social Security only pays an average monthly benefit of $1,543 at present. Now if you're a higher earner, your benefit may be higher. And the age you land on for claiming benefits could also cause that number to change for the better.
But for the most part, Social Security doesn't pay seniors enough money to live on. Retirees who only have Social Security as an income source often struggle to manage their bills, especially since the program's annual raises have, in recent years, been less than generous.
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It's for this reason that supplementing your benefits is so important. And there's one account that can help you do just that.
Fund an HSA
Many people supplement their Social Security income with withdrawals from a retirement savings plan, like a 401(k) or IRA. But here's another option to consider -- a health savings account, or HSA.
The upside of funding a 401(k) or IRA is the tax benefits involved. Traditional 401(k)s and IRAs allow you to contribute money on a pre-tax basis, while Roth 401(k)s and IRAs give you tax-free gains in your account and tax-free withdrawals.
The beauty of HSAs is that they come with all three tax benefits. Contributions go in tax-free, investment gains in your account are tax-free, and withdrawals are tax-free as long as they're used to cover qualified medical expenses.
Now, let's talk about that aspect for a second. HSAs are more limiting than 401(k)s and IRAs because they're supposed to be used for healthcare expenses only.
But here's the thing -- once you retire, medical care could, in fact, become your single largest recurring expense. That holds true whether you have health issues or not, and so funding an HSA is a pretty low-risk prospect, because chances are, you'll use that money during retirement at some point.
Of course, the one catch with regard to HSAs is that you can't contribute to one unless you're enrolled in a high-deductible health insurance plan, the definition of which can change from one year to the next. But if you are eligible based on your insurance plan, then it pays to put money into an HSA while you can. That way, you'll have a dedicated source of income to pay for your healthcare costs down the line.
Another great feature of HSAs is that they allow you to take withdrawals for any reason starting at age 65 without penalty. If you remove HSA funds for non-medical purposes, you will be taxed on your withdrawals -- but the same holds true for a traditional 401(k) or IRA withdrawal. And this way, you get the added tax benefits.
While Social Security may end up being your main source of retirement income, it shouldn't be your only source. It pays to see if you qualify to contribute money to an HSA. Doing so could not only put more cash in your pocket as a senior, but also make one very costly expense a lot more manageable.
