How To Avoid Not Having Enough Money For Healthcare in Retirement

How To Avoid Not Having Enough Money For Healthcare in Retirement

Retirement is an exciting time. The last thing you want is to start off on the wrong foot. Avoiding one of the biggest retirement mistakes could help you transition smoothly into retirement. 

The mistake we are referring to is not having enough money saved up specifically for healthcare in retirement. Although many finance experts say you don’t need a million dollars to enjoy your retirement, you do need a substantial amount to pay for your healthcare expenses in retirement. 

Now, we aren’t saying you need hundreds of thousands for retirement healthcare either. However, the more, the better. To get a better understanding of how much you may need, let’s look at some of the costs of Medicare

The cost of Medicare

Many people believe Medicare will cost nothing and pay for everything. We’re sorry to burst your bubble, but that couldn’t be further from the truth. Medicare isn’t free, nor does it pay 100 percent of your costs for everything. 

Within Medicare, you pay premiums, deductibles, copays, and coinsurance. Part A is premium-free for most people; however, Part B is not. Part B costs most people $135.50/month in 2019. Let’s look at how much someone could spend on the Part B premium alone in retirement. 

The average life expectancy is about 80 years old. If you retire and start Medicare at age 65, that’s 15 years you would have to pay for Medicare. It would cost you a total of $24,390 to pay for Part B for 15 years. With the average Social Security check being $1,400/month, Part B alone digs a decent size hole in your retirement income. 

That’s why it’s important you have at least a little put away for healthcare costs in retirement. One of the best ways, if not the best way, to save for healthcare costs in retirement is by setting up a health savings account.

What is a Health Savings Account?

A Health Savings Account (HSA) is an account you can contribute a certain amount of money to every year that can be used for qualified medical expenses. Some examples of qualified medical expenses you can use the money to pay for are deductibles, premiums, copays, and coinsurance. 

As of 2019, the maximum amount an individual can contribute to an HSA is $3,500 a year. If you are able to contribute the maximum family amount, you can contribute up to $7,000 a year. The money you contribute to this account is on a pre-tax basis, meaning no taxes are taken out of your contributions. Once you reach 55 years old, you can start contributing an additional grand to your HSA every year as well.

Let’s do the math. A 50-year-old open an HSA account this year. At the 2019 rates, they can save up to $17,500 as an individual by the time they are 55. Once they are 55, they can save an additional $45,000, making the grand total $62,500. That is more than enough to cover your Part B premium in retirement.  

Another great thing about HSAs is that you can invest the money and earn returns. This is just another reason why an HSA is something you can consider to help you save for retirement. 

How do you enroll in an HSA?

To enroll in an HSA, you first have to qualify. To qualify for an HSA, you have to enroll in a high deductible health plan (HDHP). Usually, health plans that have a deductible of $1,350 or above for an individual or $2,700 or above for a family qualify as an HDHP. 

Once you’re enrolled in an HDHP, you can enroll in an HSA through a bank or even your employer (if they offer an HSA). When looking for the most cost-effective HSA, be sure to evaluate the administrative fees. You’ll also want to make sure you can easily manage your HSA and access it when you need to. 

After you have found your HSA, set up an auto-draft from your checking account that deposits money into each month. This will make the whole process that much easier. 

When Medicare enrollment time gets closer, you’ll need to stop contributing to your HSA, as it is illegal to contribute to an HSA with Medicare active. However, by then, you should have plenty to help you cover your retirement healthcare costs.

Interested in learning more about how to avoid not having enough money saved up for healthcare in retirement? Leave us a message in the comments below.

Guest author: Danielle K Roberts is the co-founder of Boomer Benefits where she and her team help baby boomers navigate their Medicare insurance options. She is a member of the Forbes Finance Council and writes frequently about Medicare, retirement and personal finance.