Healthcare costs are one of the most expensive line items in a retiree’s budget, and yet not all Americans entering retirement are prepared for these expenses.
Nearly three in 10 adults 50 to 80 years old say they earmark savings specifically for future health costs, and 40% said they’d have enough money to pay for these expenses without setting any money aside for it, according to the University of Michigan’s Institute for Healthcare Policy and Innovation, which included the responses of more than 2,000 adults between 50 and 80 years old.
Another 27% of participants said they can’t afford future healthcare costs at all.
This poses a significant problem for retirees, many of whom are on fixed budgets. Healthcare becomes more expensive as a person ages, especially when taking into consideration a growing list of ailments naturally associated with getting older. An average American couple retiring at 65 could expect to spend $300,000 in healthcare alone — and that doesn’t include long-term care.
Already, 18% of people between the ages of 50 and 80 are “not at all confident” they’ll have enough money to pay for health costs, and 15% had trouble paying for this expense in the last year, according to the National Poll on Healthy Aging. This leads to delaying proper care, which can be dangerous to current and future health.
One solution: using the right savings vehicles for these bills.
Health Savings Accounts are a viable way to save and invest for current and future healthcare expenses. HSAs provide triple the tax benefits, as they can be funded, grown and withdrawn tax-free if used for qualified health expenses. Some workers use them for annual health costs, while others contribute to the plan each year with the intent to spend down the account assets for future health expenses. Although a benefit, these accounts aren’t an option for everyone — they are tied to high deductible health insurance plans, which may be too expensive for some individuals and families to own. Less than half (45%) of people who qualified for a HSA opened one because of these limitations.
About 12% of participants said they use a flexible spending account, or FSA, which also offers tax benefits. FSAs are helpful for paying for healthcare costs in a specific year, but the funds in the account must be used by year end or else they could be lost permanently. These accounts were common for people between 50 and 64 years old, who had incomes of more than $100,000 and obtained a four-year college degree, compared to their counterparts who were older than 65 with incomes of less than $30,000 and a high school diploma or less. This was true for accountholders of HSAs and Health Reimbursement Accounts as well, the poll found.
“Tax-free accounts can help people avoid getting shocked by a sudden healthcare expense or having to choose between healthcare and other demands for their dollars,” Jeffrey Kullgren, associate director of the poll and first author of the new report, said in a statement. “These findings suggest we have a way to go in encouraging the use of these accounts, especially by those most sensitive to out-of-pocket costs because of income or health status.”