Healthcare Could Be Your Greatest Retirement Expense. Here’s a Great Way to Save for It

Once you retire, you may find that some of your living costs manage to shrink. You might, for example, spend less on housing if you manage to pay off your mortgage ahead of retirement, or if you downsize once you become an empty-nester. And you might save some money during retirement by virtue of dumping an expensive commute.

But if there's one expense that you're likely to spend more on during retirement, it's healthcare. In fact, the average healthy 65-year-old couple retiring in 2021 could spend as much as $662,156 on healthcare throughout their senior years, according to recent projections from HealthView Services. That figure accounts for general healthcare inflation as well as rising Medicare costs.

If you're worried about affording healthcare once you stop working, then it pays to allocate money specifically for that expense during your working years. And there's one account that's the ideal place to park and invest that cash.

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Are you eligible for a health savings account?

With a health savings account, or HSA, you can set aside pre-tax funds to pay for near-term and future healthcare expenses. But to be clear, it makes sense to use your HSA for future medical expenses and pay for near-term expenses out of pocket.

That's because HSAs allow you to invest the funds you aren't using immediately and grow your money into a larger sum. Just as importantly, with an HSA, you're not taxed on your investment gains, similar to how you don't pay taxes on investment gains in a Roth IRA. And HSA withdrawals are also tax-free provided they're used for qualified healthcare expenses.

Now there is one catch when it comes to funding an HSA. To participate in one, you must be enrolled in a high-deductible health insurance plan. This year, that means having a minimum deductible of $1,400 for self-only coverage and a minimum $2,800 deductible for family-level coverage. These thresholds can also change from year to year, so it's possible that you may not be allowed to fund an HSA now, but you will be allowed in the future.

You should also know that if you're enrolled in Medicare, you can't contribute to an HSA. This applies even if you're solely signed up for Part A as secondary insurance in conjunction with an existing group plan.

However, if you are eligible for an HSA, this year, you can contribute up to $3,650 for self-only coverage and up to $7,300 for family-level coverage. If you're 55 or older, you also get a $1,000 catch-up contribution, similar to the catch-ups offered by IRAs and 401(k) plans.

Make sure you're covered

Healthcare is an unavoidable expense at any age, but it can be notably burdensome during retirement. If you want to avoid financial stress later in life, do your part to fund an HSA if that option is on the table. Having a dedicated source of healthcare funds could help you better manage your money in retirement while creating a scenario where skimping on medical care is never even a thought.

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