Worried That Healthcare Costs Will Wreck Your Retirement? Here's What to Do.

Many people are wired to assume that their general spending will decline in retirement. And often, that is indeed what happens.

But there's one specific expense category that tends to increase in retirement rather than decrease, and it's healthcare. Aging tends to bring about different health issues, leaving many seniors to grapple with higher bills than ever at a time when their income has dropped. That has the makings of a very financially stressful situation.

In a recent survey by Empower, 44% of respondents said that healthcare costs were a major retirement concern of theirs. If you feel similarly, then there's one savings plan it pays to take advantage of.

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Image source: Getty Images.

Fund an HSA if you're eligible

HSAs don't tend to be as well-known as popular retirement savings plans like IRAs and 401(k)s. And to be fair, part of the reason may be that HSAs are more restrictive in terms of who can contribute.

To participate in an HSA, you must be enrolled in a high-deductible health insurance plan. And the definition of what that is can change from one year to the next.

As such, HSAs aren't necessarily on everyone's radar because they're not open to everyone. But if your health insurance plan is compatible with an HSA, then it pays to fund that account to the best of your ability.

Like traditional IRAs and 401(k)s, HSAs offer the benefit of tax-free contributions. And like Roth IRAs and 401(k)s, HSAs offer the benefit of tax-free investment gains and withdrawals, provided that money is used to pay for qualifying healthcare expenses.

Because HSAs allow you to carry your money forward indefinitely, it's a good idea to contribute to one of these plans during your working years while paying for near-term medical bills out of your own pocket. That way, you can keep your HSA funds invested in a tax-free manner -- and potentially enter retirement with a large sum of money earmarked for healthcare expenses.

Have dedicated savings either way

Of course, as mentioned, not everyone is eligible to participate in an HSA, so that option may not be on the table for you. If that's the case, though, one thing you can do instead is take the money you would've wanted to put into an HSA and house it in a regular brokerage account. You won't get any tax breaks, but you'll have the option to invest that money and, ideally, grow it into a larger sum over time.

You could also just pad your general savings so you're better able to cover healthcare expenses down the line. But it can be comforting to know that you have money sitting in an account that's expressly earmarked for senior medical bills. For that reason alone, you may want to keep those funds separate.

All told, it's easy to see why the idea of covering healthcare costs in retirement can be so daunting. If it's something you're worried about, take advantage of an HSA if that option is available to you. And if not, make your own version, even if there are no tax breaks to be reaped.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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