Many older people find that certain expenses decrease once they retire. Transportation, for example, can be less expensive in the absence of having to travel for a job. But if there is one spending that tends to increase in retirement, it is health care and, unfortunately, most Americans are not preparing for it.
Although about 72% of Americans are funding a retirement plan to prepare for their final years, only 38% are setting aside funds specifically for health care purposes, according to a recent survey by the Medical Alert Buyers Guide. Since the average retiree spends $ 4,300 per year on health care, it is a mistake worth correcting.
What will your healthcare costs for seniors be like?
Many people make the blatant mistake of assuming that their Medicare health care costs will be minimal or even free. But unfortunately, Medicare comes with a number of expenses, from premiums to deductibles and copays, that can reduce an older person’s limited income. And let’s not forget that Original Medicare doesn’t cover a number of key health services that older people tend to need, like dental care, eye exams, and hearing aids. Those are expenses that retirees must often absorb entirely out of pocket.
That is why it is crucial to reserve funds specifically for medical care well in advance of retirement. If you don’t, you might have a hard time managing your income at a time when you’re limited.
How to save efficiently for future health care costs
The best way to save money specifically for retirement health care is to participate in a health savings account, or HSA, which is an account you contribute to while you are still working. But unlike a flexible spending account, where funds expire from year to year, HSA money does not have a time limit. You can use the funds in your HSA to pay for immediate health care expenses that come from year to year, but you can also take that money into retirement and use it when you need it most.
Eligibility for an HSA, however, depends on being enrolled in a high deductible health insurance plan. By 2020, that means having an annual deductible of at least $ 1,400 at the individual level or at least $ 2,800 at the family level. Your annual out-of-pocket costs under your plan must also be capped at $ 6,900 for individuals and $ 13,800 for families.
Assuming you meet these criteria, you can contribute up to $ 3,550 to an HSA this year as an individual or up to $ 7,100 on behalf of a family. If you’re 55 or older, you get a $ 1,000 recovery contribution in addition to the limit that applies to you, similar to the recovery provision that applies to retirement savings plans like IRAs and 401 (k) .
Best of all, any HSA funds you don’t immediately use can be invested for further growth, and your withdrawals will be yours to keep tax-free as long as they’re used for qualified healthcare expenses. Plus, the money you invest in an HSA is tax-free, so by financing one you will get immediate savings, while preparing with a dedicated source of healthcare funds for the future.
Don’t underestimate your health care costs for seniors
Medical care is a huge expense that many older people are not prepared for. Instead of risking financial problems later in life, capitalize on an HSA if you’re eligible to do so. It’s a cost-effective way to set aside money for a retirement expense that is not only substantial, but almost inevitable.