Health Savings Accounts Can Help Avert a Healthcare Catastrophe

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Healthcare costs continue to rise, and for those near or already in retirement, the single greatest expenditures they face are likely to be health-related.

This time on Financial Sense Newshour's Lifetime Income Series, Jim Puplava discusses how to plan for healthcare in retirement, and what workers and retirees can do to maximize their dollars before they face life-changing expenditures.

Navigating a Healthcare Catastrophe

The average retiree who is 65 years or older will spend $260,000 out of pocket for healthcare in retirement. Also, it’s important to note that Medicare premiums and deductibles are increasing.

The trend is clear: premiums and costs are rising, and are only going to get more expensive. Most of us have heard stories of someone going broke in retirement because of healthcare costs, and no one wants to run out of money as they get older.

“You can avoid this event of running out of money and finding yourself broke if you have a plan,” Puplava said. “That’s the key.”

The first step is to start with a budget. Retirees need to know what their expenses are going to be.

This is often left out of retirement plans, Puplava noted. Once you have your budget in place, you need to add an extra amount — a minimum of $6,000 to $8,000 in investments — to cover future healthcare costs.

Next, you need to understand your various savings options.

Health Savings Accounts

The best planning device, bar none, Puplava stated, is called a health savings account.

An HSA is a special program that allows you to put money into the plan tax-free. Right now the limit is $3,400 per person per year, $6,750 for a family, and an extra $1,000 as a catchup provision if you are age 55 and older. What this adds up to is, you can put almost $8,000 a year away from this account.

The best part is that when you use this money for qualified medical expenses, it is tax-free. Right now, if you are 20 years to 5 years away from retirement, this is the best planning vehicle possible for this reason. Also, included in the definition of qualified medical expenses are things such as dental care and vision care, expenses that are not covered by Medicare.

This is something that’s almost a must in good healthcare and retirement planning, Puplava stated. If you’re age 50 to 60, and you’re working, you need to talk to your adviser about setting up a health savings account vehicle, because nothing out there can beat it.

“I cannot think of a single vehicle for handling long-term care and medical expenses in retirement than a health savings account,” Puplava said. “It amazes me how few people take advantage of this and set up an account to pay their medical expenses tax-free.”

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