Your Healthcare Could Cost $165,000 in Retirement. Here's How to Prepare

Image source: Getty Images

If you're worried about how you'll pay for healthcare when you get older, you are not alone. Research by Fidelity shows the average 65-year-old will need $165,000 in after-tax savings to pay for health expenses during retirement. That can come from individual retirement accounts (IRAs), investments, health savings accounts (HSAs), and more.

Unfortunately, many Americans will fall short of that amount. One AARP survey showed that 20% of Americans over 50 have no retirement savings at all.

Understanding your medical costs

The increasing cost of medical care is a considerable concern for many Americans. A survey by Nationwide shows that two-thirds of adults are terrified that healthcare costs could disrupt their retirement plans.

It's understandable. Many people's retirement funds aren't where they want them to be and the idea of not being able to afford the medical care you need is frightening.

When you're mapping out your retirement costs, know that healthcare is going to eat up a sizable portion of your fund. Medicare will help, but it has limits -- you will still need to pay for your premiums, copays, and deductibles. Plus, it doesn't cover dental, hearing, and optical care.

Merrill estimates that Medicare will cover about two-thirds of your medical costs. It is important to understand how Medicare works, what is covered, and what you'll need to pay for. Research the pros and cons of Medicare Advantage and Medigap. Both provide additional coverage, but they do it in different ways.

For the most part, the federal health program covers people once they reach 65. If you're planning on retiring before then, think about how you'll manage your health insurance in between.

For example, if you have a partner who is still working, you may be able to join their plan. In some cases, you could also pay to continue with your employer's health insurance for 18 months after you finish work.

How to build up your healthcare fund

When planning for your old age, there are specific steps you can take to save for health costs. But to a large extent, the money for retirement and healthcare go hand in hand. As such, the important thing is saving as much as possible and making the most of tax-advantaged accounts and other benefits.

Here are three accounts to pay attention to.

1. HSAs

Health savings accounts can be a powerful way to put money aside specifically for medical expenses. If you have a high-deductible health plan and are not yet enrolled in Medicare, they offer an extremely tax-efficient way to save.

You can contribute pre-tax dollars, which means your contributions can lower your tax bill today. You can then invest that money through your HSA and let it grow tax free. Finally, you can withdraw the money tax free -- as long as you're using it for health purposes. That's an incredible combination of tax benefits.

The maximum an individual can contribute to their HSA in 2024 is $4,150. Those over 50 can make catch-up contributions of an extra $1,000.

To give you a very simplified scenario, let's say you're 40 and you put $300 a month ($3,600 a year) in your HSA. You invest that in, say, an S&P 500 index fund and are able to earn a return of 8% a year. By the time you are 65, you could have over $260,000 in your HSA. And you'll have reduced your tax bill a little each year as well.

2. IRAs

IRAs are retirement accounts that come with tax benefits, but not as many as an HSA. If you opt for a traditional IRA, you can reduce your tax bill today, but you'll pay tax on the withdrawals you make in retirement. A Roth IRA works the other way around. You pay taxes on the money you put in today, but you can withdraw it tax free once you retire.

There is an IRA to suit everybody and most top brokerages offer a mix of IRA accounts. If you're self-employed or own a small business, see whether a SEP or SIMPLE IRA would make sense for you.

3. 401(k)s

401(k)s are workplace retirement plans, which means they won't be an option for everybody. The Pensions Rights Center says about 45% of Americans participate in a workplace retirement plan, such as a 401(k).

If your employer offers one, find out whether it will match some of your contributions. 401(k)s come with tax benefits, but employer-matching is even more powerful because it is extra money that goes directly into your retirement fund.

Final thought

The financial side of healthcare is important. If you can build up enough savings, you'll be able to sleep easier with the knowledge that you can pay for the majority of medical issues that might arise. It also means you could potentially afford additional insurance, such as long-term care insurance.

Another way you might ease some of the healthcare pressure is by keeping healthy today. That includes eating a varied diet that is low in saturated fat, exercising regularly, and avoiding excess alcohol consumption. If you are having trouble meeting your retirement goals financially, a healthy lifestyle can at least reduce your health risks in later life.

Alert: highest cash back card we've seen now has 0% intro APR until nearly 2026

This credit card is not just good – it's so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!

Click here to read our full review for free and apply in just 2 minutes.

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.