The average couple may need $285,000 to cover healthcare in retirement.¹ While this estimate is shocking, it’s important to understand that it doesn’t factor in additional needs, such as dental services or long-term care, if such care is needed. If you deduct that money from your retirement plan assets, you’d have to factor in taxation as well.

The good news is that you may have access to a tool to help cover healthcare expenses in retirement, a health savings account (HSA). An HSA is a tax-favored savings vehicle that can accompany high deductible health insurance. Traditionally, it’s used to help employees fund their deductibles. However, HSAs can also be used for retirement purposes:

• You may be able to invest it. As you accumulate HSA dollars, you may be able to invest a portion of the account for growth potential, just like you would a traditional retirement account. Your HSA provider may have different options to choose from, so you may want to log into your HSA website or contact your HSA provider for more details.

• The timing of reimbursements is flexible. It may be to your advantage to pay out-of-pocket healthcare costs you can afford now, so you can keep saving and investing an HSA balance for the future. If your circumstances change, you can reimburse yourself for any qualified medical costs later – just make sure to keep your receipts.

• There’s a tax advantage.² With an HSA, there’s the potential for three tax benefits:
  • Pre-tax contributions can lower your taxable income for the current year
  • Tax-deferred growth opportunity
  • Tax-free withdrawals on qualified medical expenses

HSAs are specific to high deductible health insurance, so if your health plan doesn’t qualify or you’ve chosen not to enroll in that particular option, you would not be able to utilize an HSA. However, there are still other ways to plan for healthcare in retirement:

• Understand the numbers. Since healthcare may be your largest expense in retirement, it’s important that you factor healthcare into your overall retirement savings goals. Some retirement plan provider websites can help estimate how much you’ll need.

• Save more in your retirement account. If your retirement plan account is your sole source of retirement savings, you may want to consider bumping up your contribution to maximize this account as best you can.

• Prevention is the best medicine. Keeping up on your regular wellness screenings and check-ups can help keep you healthy and avoid larger expenses later.

¹Fidelity Investments, 2019. Estimate is based on a hypothetical couple retiring in the year 2019 at 65-years old with life expectancies that align with data from the Society of Actuaries. Actual costs may be more or less depending on your personal needs and other factors. Estimate assumes Medicare coverage and takes into account cost sharing provisions, premiums, and costs associated with Parts A, B, and D.  
²Certain states may tax HSA contributions and/or earnings.