How much will health care cost in retirement? Prepare to be shocked

It’s a big misconception that the cost of living drops dramatically in retirement. The reality is that some of your expenses might decrease, but some might also increase.

Health care is likely to fall into the latter category. This is because medical problems tend to arise with age, and also because health insurance, which older people usually rely on from the age of 65, has its limits.

In fact, Fidelity recently released numbers and found that the average 65-year-old male-female couple retiring now should expect to spend $315,000 on medical expenses. This figure assumes enrollment in Medicare Parts A, B, and D.

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When we break this number down further, we find that the average 65-year-old man should expect to spend $150,000 on healthcare costs throughout his retirement, while the average 65-year-old woman should expect to spend $165,000. Since women tend to live longer than men, this higher number makes sense.

It’s also worth noting that last year’s Fidelity estimate indicated that an average 65-year-old opposite-sex couple spent $300,000 on health care in retirement. That means that number jumped $15,000 in just one year. It also highlights the importance of saving for future health care costs to avoid a financial crisis later in life.

The best way to save for retirement health care

When it comes to covering healthcare costs later in life, you have options. You can supplement your IRA or 401(k) plan so you’re better equipped to pay future medical bills, or you can dedicate funds for health care in a health savings account, or HSA.

This latter avenue is worth exploring if you are enrolled in a high-deductible health insurance plan and therefore eligible to fund an HSA. This is because HSAs offer more tax advantages than IRAs and 401(k)s.

HSAs benefit from a triple tax advantage:

  • The money you contribute is tax exempt
  • Investment gains in your account are tax exempt
  • Withdrawals from your account are tax-free, provided they are used to cover eligible healthcare expenses

Meanwhile, HSA limits change from year to year, but this year you can contribute up to $3,650 if you have personal coverage, or up to $7,300 if you have family coverage. If you’re 55 or older, you can make catch-up contributions into your HSA, adding $1,000 to the limit that applies to you.

Next year, these limits will increase. For personal coverage, you can contribute $3,850 to your HSA. For family coverage, you will contribute $7,750. And that $1,000 catch-up will still be in play.

Another thing you should know about HSAs is that at age 65 they effectively convert to a traditional retirement plan. Normally the penalty for taking a non-medical HSA withdrawal is steep – 20%. But once you turn 65, you can take non-medical withdrawals without being penalized. In this scenario, you’ll simply pay taxes on your withdrawals, the same way you would with a traditional IRA or 401(k).

Save yourself unwanted stress

Health care costs are a burden for many seniors, but not necessarily for you. If you settle down with a nice sum of money to cover your future medical bills, you’ll have one less thing to worry about at a time in life when you’re trying to enjoy your newfound freedom.

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