This one-time expense could cost you $662,156 in retirement | Smart Switch: Personal Finance

(Maurie Backman)

Many people like to assume that their costs of living will go down once they retire. And in some respects, they could.

Many seniors manage to pay for their homes by the time they retire, or are able to downsize to less expensive living space. That alone can result in big savings. And of course, not having to commute to work can result in lower transportation costs.

But if there is an expense that tends to increase during retirement, it is that of medical care. And unfortunately, that is an expense that is unavoidable.

Image source: Getty Images.

Now there are different estimates about what you could spend to take care of your health after your degree is over. but a recent estimate from cost projection software provider HealthView Services could leave you reeling.

An astonishingly large number

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The average healthy couple of 65-year-old men and women retiring in 2021 can expect to spend a whopping $662,156 on health care in retirement, HealthView reports. That represents an estimated annual inflation rate of 5.9%.

It also assumes that the average man will live to be 87 years old and the average woman will live to be 89 years old. Couples who live longer could end up spending more.

Meanwhile, HealthView provides a range of costs that most 65-year-old couples retiring in 2021 can anticipate in retirement. That range reaches a low of $156,208 and a high of $1,022,997.

Clearly, these are staggering numbers. And they also underscore the importance of saving for future medical expenses.

Use the right saving tool

If you are saving money for retirement in an IRA or 401(k) plan, you can increase your contribution rate to cover higher health care costs than you might have anticipated. But it is also worth contributing to a health savings accountor HSA, if eligible.

HSAs actually offer more tax benefits than IRAs and 401(k)s. That’s because they effectively combine the benefits of traditional and Roth savings plans.

With an HSA, the funds you contribute are tax-free. Any money you don’t need to withdraw for short-term health care expenses can be invested for further growth. Investment earnings in an HSA are tax-free, and withdrawals are tax-free, as long as the money is used to cover the cost of qualified health care expenses.

Now, the downside of HSAs is that not everyone is eligible to participate in one. To qualify, you must be enrolled in a high-deductible health insurance plan, the definition of which changes each year. Right now, that means a $1,400 minimum deductible for individual coverage and a $2,800 minimum deductible for family-level coverage.

Don’t Underestimate Senior Health Care Costs

HealthView’s recent estimate is higher than some of the other figures out there. But that’s not necessarily a bad thing, because it’s better to err on the side of saving more for health care in retirement than less.

If you have an HSA, do your best to maximize it so health care is less of a financial concern in the future. And if you don’t qualify for an HSA, be sure to put extra money into your IRA or 401(k) to make up for it.

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