Americans Are Sorely Underestimating This Key Retirement Expense

Many people go into retirement assuming that their living costs will magically drop. And that might happen, to some degree.

If you manage to pay off your home ahead of retirement, you may not have a mortgage to contend with by the time your stint in the workforce comes to an end. Similarly, if you’re not commuting to a job, you may not need to own a car — and even if you do keep one around, your transportation costs might easily shrink.

But if there’s one expense that tends to rise during retirement, it’s healthcare. And unfortunately, many Americans may be ill-prepared for that.

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Do you realize what healthcare in retirement might cost?

Fidelity recently conducted research on healthcare in retirement and found that the average male-female couple retiring today could expect to spend $315,000 on medical care throughout their senior years. Yet when they conducted a survey on healthcare costs in retirement, respondents thought that, on average, a 65-year-old opposite-gendered couple leaving the labor force this year would spend $41,000 on senior healthcare costs.

That estimate is $274,000 shy of what Fidelity anticipates. And it could also lead a lot of people to enter retirement with inadequate savings to cover their future healthcare needs.

Preparing for future healthcare costs

The amount of money you end up spending on healthcare in retirement will hinge on a number of factors. Those include your lifestyle, your pre-existing conditions, and the extent to which you do a good job of following up on health issues.

But all told, healthcare is the one expense that might increase once you retire. So it’s important to go in prepared.

In that regard, you have some options. If you’re eligible to contribute funds to a health savings account (HSA), it pays to do so. The great thing about HSAs is that there’s no deadline to use up your money (unlike flexible spending accounts, which force you to spend down your plan balance year after year or risk forfeiting funds). As such, you can pump money into an HSA during your working years, invest it, and then reserve it for retirement, when you’re likely to need it the most.

Padding your IRA or 401(k) plan also works. Remember, not everyone is eligible to participate in an HSA, and if you’re not enrolled in a high-deductible health insurance plan, that option will be off the table. But that’s OK, because you don’t necessarily need a dedicated health savings plan if you do a good job of funding your IRA or 401(k) consistently.

In fact, let’s imagine you’re able to contribute $500 a month to an IRA or 401(k) over a 35-year period. If you invest your savings at an average annual 8% return (which is a bit below the stock market’s average), you’ll end up with just over $1 million. And that could help cover your healthcare bills, while leaving you with a decent sum to live on.

Know what you’re in for

No matter what savings option you take advantage of, don’t make the mistake of sorely underestimating your future healthcare costs. Doing so could put you in a really tight spot once retirement rolls around.

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