It's hardly a secret that healthcare can be a major expense for Americans in retirement. And unfortunately, many seniors enter retirement ill-prepared for the costs they're about to face.
A recent report by the Employee Benefit Research Institute found that a senior couple with particularly high prescription drug costs will need to have saved $383,000 to have a 90% chance of having enough money to cover their healthcare costs in retirement. And clearly, that's not a small amount of money.
Unfortunately, many seniors enter retirement with little savings and become heavily reliant on Social Security. But those benefits may not be nearly enough to cover a $383,000 healthcare tab, even if it's spread out across multiple decades.
That's why it's so important to do what you can to save for your future healthcare needs. And one specific account could make the process of saving for healthcare much easier.
Snag some tax breaks while you save for healthcare
If you're enrolled in a high-deductible health insurance plan, you may be eligible to participate in a health savings account (HSA), either independently or through your employer. What makes HSAs so valuable is that they're both flexible and triple tax-advantaged.
HSAs allow you to take near-term withdrawals to cover immediate healthcare costs. But they also allow you to carry your money forward as long as you need to. That means you can fund an HSA during your working years, invest that money while you're not using it, and then reserve it for retirement, when your healthcare costs might be higher than ever once you're enrolled in Medicare.
Meanwhile, when you fund an HSA, your contributions aren't taxable. Investment gains in an HSA aren't taxed, either, and neither are withdrawals, provided they're used to pay for qualified medical expenses.
Furthermore, while HSA withdrawals taken for non-medical purposes are usually subject to penalties, once you turn 65, you can tap an HSA for any purpose without being penalized.
Remember that earlier I stated that a couple with high prescription drug costs might spend $383,000 (or more) on healthcare throughout retirement. But what if your costs come in much lower?
With an HSA, the money you've saved isn't wasted. Once you turn 65, your HSA can effectively convert to a traditional retirement savings plan, like an IRA or 401(k). At that point, you'll pay taxes on your withdrawals but also have the option to use your money any way you please.
Don't let healthcare costs throw your retirement for a loop
Many people assume that healthcare under Medicare is far more affordable than it is with the private insurance they're used to. Often, that's not the case at all. So rather than struggle financially in the wake of healthcare bills during retirement, set yourself up to be able to cover them with ease.
Funding an HSA is a great step toward tackling your future healthcare needs. But make sure to also invest your HSA dollars and avoid taking withdrawals from your account while you're still working, if at all possible. That way, you might end up bringing a pretty massive pile of cash into retirement when you're apt to need it the most.