Americans expect to spend 40% of their retirement savings on health care. Are they right?
There’s a reason we’re told to take money for the future and not just rely on Social Security in retirement. Seniors’ cost of living may be more expensive than expected, so having money in savings could be the difference between struggling and paying the bills with relative ease.
Of the various costs that seniors face, health care is the only expense that is likely to increase during retirement. Not only do health problems tend to emerge with age, Medicare has a number of shortcomings that leave seniors bearing enormous costs.
So it’s no surprise to learn that Americans plan to spend 40% of their retirement savings solely on medical expenses, according to provider HSA Lively. But are they there?
A substantial expense
Each year, Fidelity publishes an estimate of the cost of health care throughout retirement. For the average male-female couple retiring this year, that figure is a staggering $ 300,000. So it goes without saying that the typical elderly person could end up spending 40% of their nest egg on medical bills alone.
How can seniors meet these expenses? Increasing savings is one option. If you are not currently maximizing your IRA or 401 (k), try increasing your contribution rate.
Another option is to maximize a health savings account, or HSA. HSAs offer even more tax benefits than IRAs and 401 (k) s. HSA contributions are tax-free, investment gains are tax-free, and withdrawals are tax-free, as long as they are used to pay for qualifying health care expenses.
In fact, many people view HSAs as a short-term savings account because funds can be withdrawn at any time to pay immediate medical bills. But in fact, HSAs offer even more value as a retirement savings plan, as funds that are not used in the short term can be invested in tax-efficient ways.
The only catch with HSAs is that eligibility to participate in one depends on enrollment in a high deductible health insurance plan. For the current year, as well as in 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 which has the potential to grow over time.
Here is where the HSA contribution limits currently lie:
- $ 3,600 if you’re saving as an individual and you’re under 55
- $ 4,600 if you’re saving as an individual and you’re 55 or older
- $ 7,200 if you’re saving at the family level and you’re under 55
- $ 8,200 if you’re saving at the family level and you’re 55 or over
Next year, those limits will increase by $ 50 for individuals and $ 100 for families, so there are even more opportunities to set aside funds for future health care spending.
Don’t be caught off guard
Between deductibles, copayments, and services Medicare just doesn’t cover, healthcare can be a hefty expense for seniors, to the point where you could end up spending a large chunk of your savings. Maximizing an HSA in addition to funding an IRA or 401 (k) could help you better manage those costs – and avoid a world of stress and financial turmoil in your later years.