August 16, 2021

According to Fidelity, a 65-year-old, opposite-gendered couple retiring this year can expect to spend $300,000 in healthcare and medical expenses throughout retirement. For single retirees, it’s $157,000 for women and $143,000 for men.

That’s a lot of money, and it likely will increase. This year’s estimate marks a new high, up 30% from 10 years ago (though just 1.7% from 2020).

A solution for health costs in retirement is a health savings account (HSA).

HSAs can generate immense value while helping people save for healthcare expenses in retirement. This is especially true if you invest the funds (rather than keeping them in cash) and pay for ongoing health care expenses out-of-pocket instead of drawing down the HSA.

Fidelity’s study found that over a 30-year time horizon (age 35-65), assuming maximum annual contributions, a family with an HSA earning a hypothetical 7% return could accumulate $965,000, compared to $322,000 if the assets were kept in cash. If the HSA were drawn down by 50% of each year’s contribution to pay for ongoing medical expenses, it would still be worth $498,000 at the end of 30 years.

Some other key takeaways:

  • Healthcare costs will likely rise
  • People spend more on healthcare in retirement than they think
  • Start saving for retirement healthcare expenses now, regardless of age

To be clear, an HSA must be paired with a high deductible health plan and contributions must cease when Medicare starts. This arrangement makes them ideal for healthy people who don’t get sick and can leave the HSA funds invested. That said, even when using half of the annual contribution, the account value can still grow.

The tax-free nature of the HSA makes it the best savings vehicle around for healthcare expenses. So, if you have one, contribute as much as possible.