The average American underestimates how much it will cost to pay for healthcare in retirement by an enormous sum.
According to Fidelity, a couple that was 65 years old in 2023 can expect to spend $315,000 on healthcare the rest of their lives. That number should only grow in the future. And that’s just the average. (By contrast, American couples estimated they’d need just $41,000.)
Remember, that’s the average amount for someone 65 in 2023. If you’re decades away from 65, you can expect the average to be much more expensive.
According to 2021 data from the Administration for Community Living, a federal agency, about 60% of people eventually need some type of long-term care (LTC).
What is the best way to save for all these future medical costs?
Is an HSA the Best Way To Save for Future Medical Expenses?
Is contributing to an HSA now the best way for me to fund my medical expenses in retirement?
That’s what a Clark Howard podcast listener recently asked.
Asked Peter in Pennsylvania: “I’m 46. I consider myself to be a decent saver as I max out my 401(k) and contribute to a Roth IRA. HOWEVER, one aspect of retirement planning that really scares me is adequate healthcare coverage.
“Will Medicare be enough? Should I automatically assume that I will need a Supplemental Plan? My parents have a Supplemental Plan, but this sounds SO EXPENSIVE. I often wonder if an HSA is the best option for planning now?”
An HSA, or Health Savings Account, offers what Clark considers a triple tax savings. Money you contribute reduces your taxable income. You can invest inside of an HSA and the money grows tax-free. And if you spend it on eligible health expenses in the future, you won’t have to pay taxes then either.
Not everyone has access to a workplace HSA. But if you do, and if you’re already doing a great job of funding your 401(k), it’s a good next step.
Investing in an HSA in your 30s, 40s, 50s and even 60s can go a long way toward mitigating the risk of financial ruin due to health-related expenses as you age.
“The HSA is the fair-weather, all-weather plan,” Clark says. “If you are HSA-eligible because of the health insurance you have now in your 40s, regardless of what the rules are down the road, you want an HSA plan. Because it is the greatest savings plan ever.
“I’m not even going to fathom to guess what eligible medical expenses will be in your 60s, 70s and 80s. I can tell you the HSA will play a great role for you and I love them.”
Clark on Medicare: Avoid “Disadvantage” Plans If You Can
Medicare and Social Security are two critical federal programs for retirees. But because we’re an aging population, they aren’t sustainable as currently constituted.
Clark says that we’ll either need to raise taxes, change the terms of the benefits or both.
“At 46, who knows what the rules are going to be at 65 if that’s still the Medicare-eligible age by the time you would hit your 60s,” Clark says.
“But it is something that a lot of people aren’t aware of is that in addition to being given Medicare Part A, which is for hospitals, Medicare Part B you have a premium for. And the premium adjusts based on your income in retirement. And can be a substantial sum.
About half of the population goes into a Medicare Advantage plan. Clark calls them “Disadvantage” Plans and says they stink. Medigap policies from private insurers and Medicare Part D prescription drug plans are expensive as well, Clark points out.
“You’re going to be pitched advantage plans all the time if you’re approaching age 65,” Clark says. “They claim to be absolutely wonderful. There’s so many scandals involving people being denied care or proper care in disadvantage plans. You need to know that.
“And maybe in your financial situation, your only viable option is to go into a disadvantage plan. But know they come with extreme limits on care that do not exist on traditional Medicare. If you can afford the premiums on Part B, Part D and a Medigap plan, do it. Don’t do a disadvantage plan.”
Final Thoughts
Fund an HSA for future medical expenses if you can. It can be the equivalent of a 401(k) for healthcare in retirement — with even more tax advantages.
In any case, expect to pay big bucks for healthcare in retirement. Probably far more than you estimate on your own.
