Better together: Medicare and HSAs

With plenty of time to travel, spend with grandkids, or immerse yourself in hobbies you’ve sidelined for years, retirement can certainly be the bee’s knees — if you’ve planned right. 

The last thing anyone wants to spend their time on during retirement is fretting about healthcare and its costs. Minding your overall physical health during retirement can come with a hefty price tag, however. For a healthy 55-year-old couple retiring at age 65 and living to average projected longevity, national average total lifetime costs for unfunded medical insurance premiums and out-of-pocket expenses will be about $712,000 in future dollars. (Source: HealthView Services white paper, dated July 2023.) Those costs will likely go up as the cost of healthcare continues to rise.

Complicating things further is the fact that life expectancy is also going up. In fact, a recent study by the Institute for Health Metrics and Evaluation projects that global life expectancy will increase another 5 years by 2050. It becomes even more important to keep socking away money in tax-deferred accounts for use during retirement. Accounts like 401(k)s and health savings accounts (HSAs) have become key to retirement bliss.

Medicare doesn’t cover it all

Most folks can use the safety net of Medicare to offset some of their healthcare costs in their later years; however, there are numerous things Medicare doesn’t cover. Medicare alone won’t cover long-term or custodial care, dental procedures and dentures, or eye exams related to glasses prescriptions. It also won’t cover hearing aids and exams, or any medical care received outside the United States, naturally.

Of course, there are supplemental Medicare plans that cover more of these specific items, but it will cost you a monthly premium. Those premiums can be deducted from your Social Security, as can the premiums for Medicare Part D, which provides prescription drug coverage, or Medicare Part B, which provides certain coverage for outpatient medical care. With these supplemental Medicare plans, you’ll likely have some co-pays for services. 

HSAs can save the day

One tax-deferred account that pairs well with Medicare coverages is a health savings account, or HSA (Member FDIC). The HSA has become a popular retirement savings option for many folks due to its triple tax savings, portability, and ease of use.

Employees on a high-deductible health plan (HDHP) can defer pre-tax money from their paychecks into an HSA to use for a wide range of healthcare expenses. The money in the account can be invested,* grows tax-free, and can be spent on qualified medical expenses tax-free as well.

The HSA isn’t a use-it-or-lose-it option like its close counterpart, the flexible spending account (FSA). Money in an HSA can remain (and potentially grow, depending on your investments) in the account until it’s used for qualified medical expenses. As such, many people use these accounts as another nifty nest egg for medical expenses in retirement.

The wise money advice is to max out contributions to an HSA and try to save as much in the account as you can into retirement. After the age of 55, you get an increased amount you can contribute as well, called a catch-up contribution. Both spouses — assuming they’re both covered by HDHPs and have no other coverages — can contribute the $1,000 catch-up contribution into their separate HSAs. 

Using an HSA to chip away at healthcare costs is a great way to manage that dream retirement lifestyle while also keeping yourself on your fixed-income budget. Combining Medicare with an HSA can help you enjoy the finer things in life during your golden years — and fret less about healthcare.