There’s a reason so many people worry about not having enough money in retirement. The thought of foregoing a paycheck and having to live on a fixed income can be frightening given the possibility that the cost of living will rise over time.
Retirement is also a period of life when health problems tend to appear, making medical care even more expensive. Between that and the many costs seniors typically incur under Medicare, it’s a question of why future health care expenses worry many people.
That’s why it pays to contribute to a Health Savings Account, or HSA, if you qualify to do so. HSAs allow you to contribute pre-tax dollars toward medical expenses. You can invest funds you don’t need right away and grow your balance tax-free. And withdrawals are tax-free as long as they’re used for medical expenses.
Best of all, HSA funds never expire, so you can invest in one of these plans during your working years and set aside all that money for retirement. If you are able to go this route, it is worth doing. Here’s why.
1. Your healthcare costs could be really huge
Last year, Fidelity estimated that the average 65-year-old couple retiring would need $315,000 in savings to cover health costs through their old age. But you might end up spending even more than that if health issues arise.
If you fund your HSA and leave that money alone over the years, while investing it, it could become a sum large enough to cover several hundred thousand dollars of expenses. But if you keep making HSA withdrawals as you go, you’ll have less money to take with you until retirement.
2. You can withdraw without penalty for any purpose once you reach age 65
You could end up accumulating a very large sum of money in your HSA. And if you find yourself in the very lucky position of not needing all of that for medical expenses, you have options there as well.
Once you reach age 65, HSAs allow you to make withdrawals for non-medical expenses without incurring a penalty. Before age 65, a financial penalty will apply.
Now, if you take a non-healthcare related HSA withdrawal at age 65 or older, you will have to pay taxes on it. But in this case, you’re in no worse shape than if you were using a 401(k) or a traditional IRA.
While not everyone can contribute to an HSA, since eligibility is based on enrollment in a compatible, high-deductible health insurance plan, it is beneficial to fund one of these plans consistently. if you can. But more than that, do your best not to touch your HSA so you can bring as much money as possible into retirement for health care spending purposes.
Having some money earmarked for medical expenses could make the idea of ending your career a lot less stressful, not to mention give you more leeway once you retire and possibly have to exist on a more limited budget.
The $21,756 Social Security premium that most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help boost your retirement income. For example: an easy trick could earn you up to $21,756 more…every year! Once you learn how to maximize your Social Security benefits, we believe you can retire confidently with the peace of mind we all seek. Just click here to find out how to learn more about these strategies.
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.