t’s no secret that health care is a major expense – and burden – for seniors. In a Nationwide survey, health care costs topped future retirees’ list of financial concerns. Yet many older Americans underestimate those costs in a very big way.
The average pre-retiree age 50 and over expects health care in retirement to cost $7,000 a year. In reality, that figure is $10,739, according to data cited by Nationwide.
The amount you spend on health care in retirement will depend on a number of factors, such as the specific state of your health, the type of Medicare plan you choose and whether you purchase supplemental insurance. Chances are, health care will cost more than you expect, so it pays to set aside dedicated funds to cover it once you’re no longer working.
The money you save in your IRA or 401(k) can be used for any purpose in retirement, health care included. If you sock away funds in a health savings account, or HSA, you’ll have a specific steam of income for your health care needs.
An HSA is similar to a flexible spending account, only you’re not required to use up your plan balance year after year. The point of an HSA is to put more money into your account than you expect to use in a given year. That way, you can invest the excess, grow it into a larger sum, then use it during retirement, when your health care costs are more likely to skyrocket.
The best part of HSAs? They’re triple tax-advantaged for maximum savings. The money you contribute goes in on a tax-free basis, then you don’t pay taxes on investment gains in your account. HSA withdrawals are tax-free, provided they’re used for qualified medical expenses. These include doctor visit co-pays, prescriptions and durable medical equipment. You can even use your HSA to pay your Medicare premiums in retirement.
The only drawback of HSAs is that not everyone qualifies for one. To be eligible, you must have a high-deductible health insurance plan, which means $1,350 or more for individual coverage, or $2,700 or more for family coverage. You must have an annual out-of-pocket maximum of $6,750 as an individual, or $13,500 as a family.