Many people expect their living costs in retirement to shrink, compared to their costs during their working years. While certain expenses might go down once your career comes to an end, there's one expense that has the potential to rise big time -- healthcare.
New research from the Employee Benefit Research Institute finds that some retired couples could need as much as $413,000 in savings to cover their senior healthcare costs. Granted, this figure applies to Medicare enrollees with particularly high prescription drug costs. Even so, couples enrolled in original Medicare who also have Medigap insurance with average premiums will need a whopping $351,000 in savings to have a 90% chance of covering their medical care throughout their senior years.
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One of the things that makes future medical costs so difficult to estimate is that they're health-dependent. The more medical issues that arise for you as a senior, the more money you'll potentially spend. If you want to put yourself in a better position to cover your future healthcare expenses, there's one specific account it pays to not only fund consistently, but also carry with you into retirement.
Keep pumping money into an HSA
A health savings account (HSA) is a health spending account you can tap at any time to cover qualified medical bills. But since those bills are likely to be higher in retirement than during your working years, you should not just contribute to your HSA, but also pledge to leave your balance alone from year to year while you're still working.
The upside of saving in an HSA is that you get three nice tax breaks:
- Contributions go in tax-free
- Investment gains are tax-free
- Withdrawals are tax-free when used to cover qualified medical expenses
To get the maximum benefit from your HSA -- and to help ensure that you're able to cover your medical bills as a senior -- you should aim to leave your account balance untouched while you're still working and pay for near-term expenses out of your checking or savings account. That way, your HSA can grow even more in a tax-free manner, setting the stage for you to have less financial stress once your senior healthcare bills start rolling in.
Let's say you contribute $300 a month to an HSA over a 30-year period and your investments in that account deliver an 8% average annual return, which is a bit below the stock market's long-term average. If you don't take withdrawals from your HSA along the way, you could end up with a balance of about $408,000. That's pretty darn close to the $413,000 estimate above.
Padding your regular savings in an option, too
It may be that you don't have health insurance that's compatible with an HSA. If that's the case, then your best bet may be to simply pad your 401(k) or IRA, instead. But if you're able to contribute to an HSA, it pays to do so -- not just for the added tax breaks, but for the ability to enter retirement knowing you'll have separate funds earmarked specifically for healthcare expenses.
