35% of Americans Worry About Covering Medical Costs in Retirement. Do This if You're One of Them

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There are certain expenses that could shrink once you begin retirement. Your housing costs might drop, for example, if you make the decision to downsize, or if you manage to pay off your mortgage toward the end of your career.

Similarly, you might spend less on transportation once you stop working. In the absence of a daily commute, your gas and maintenance costs could shrink.

But if there’s one expense that’s more likely than not to increase during retirement, it’s healthcare. Not only do medical issues tend to arise with age, but Medicare often falls short in providing enrollees with the comprehensive coverage they need. And to be clear, Medicare also isn’t free, so even if it covers most of your health issues, you’ll still be on the hook for premiums and deductibles.

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Meanwhile, a good 35% of Americans worry about their ability to pay for medical care during retirement, according to a recent report by HSA Bank. And if you have similar concerns, there’s one important step to consider taking.

Have a dedicated account for future healthcare bills

If you’re already in the habit of funding an IRA or 401(k) plan, then you might assume you’ll just dip into that account as healthcare issues arise. But there’s another account worth funding if you’re eligible to do so: An HSA, or health savings account.

What makes HSAs so valuable is that they actually offer more tax benefits than IRAs and 401(k)s. With a traditional IRA or 401(k), your contributions are tax-free, but withdrawals are taxed. With a Roth IRA or 401(k), you get tax-free investment gains and withdrawals, but contributions are taxed.

HSAs combine these benefits to give you the best of every world. Not only are contributions tax-free, but investment gains and withdrawals are tax-free as well when used to pay for qualified medical expenses. And because HSA funds never expire, you can contribute to one of these accounts during your working years and carry that money into retirement, when you might face more expensive health issues.

Furthermore, if you happen to overfund your HSA, it’s not a problem. Come age 65, you can take HSA withdrawals for any purpose without facing penalties. You will, however, be taxed on non-medical withdrawals. But in that case, you’re no worse off than you would be with a traditional IRA or 401(k).

Of course, the one catch with an HSA is that you can only participate if you’re enrolled in a high-deductible health insurance plan. You also have to drop contributing to an HSA once you enroll in Medicare. But to be clear, you can absolutely use your existing HSA funds once you’re covered through Medicare.

Don’t leave things to chance

Although there are different estimates out there as to what healthcare might cost in retirement, ultimately, it can be tricky to predict what your expenses will look like. Much of that will depend on the state of your health going into retirement and how proactive you are in seeking out preventive care.

But no matter what, you should expect healthcare to be a big expense during your senior years. And having a dedicated means of paying for it could really take a big weight off your shoulders later in life.