How Will You Pay for Medical Expenses in Retirement?
For many clients, especially those in their 50s that have college-aged children, the focus of their savings plan becomes a little less complicated once college costs are paid. For those that had been socking away funds each month for tuition, they may wonder how to redeploy those future savings dollars. You could ramp up retirements savings. However, you may already be maxing out 401(k) contributions at work, including the “catch-up” amount. As I’ve written about previously, one strategy to consider is combining different types of savings vehicles to meet those needs.
One of the larger expenses retirees face as they age is health care costs. According to a recent article from the Boston College Center for Retirement Research, retirees can expect to pay anywhere over $5,000 per year per person in out-of-pocket medical expenses.* Typically, clients think about covering those costs from the money they have accumulated in their 401(k)/IRA/qualified retirement plans. But you may be overlooking another (tax-efficient) option.
While you are still working, consider funding a Health Savings Account (HSA) account. Unlike a Flexible Savings Account (FSA) that must be depleted each calendar year or forfeited, HSA contributions can roll over from year to year and can be invested like other tax deferred accounts in securities that have the potential to grow over time.
To open an HSA, you must enroll in a high-deductible health insurance plan, so you need to also consider if that type of plan is best for you and your family in the near term. However, if you are relatively healthy and don’t visit the doctor often other than annual check-ups and can pay the higher deductible if you need to, the long-term benefits of the HSA are clear.
The current maximum contribution for an HSA is $4,400 per year for singles and $8,750 for families. An added benefit is you can withdraw money tax-free if the funds are used to pay for medical expenses. So, you can earmark this pool of money to help cover large healthcare bills later in life without having to deplete other tax deferred accounts for that purpose.
A good strategy is to create a comprehensive plan that will cover your retirement cash flow needs by utilizing different account types to take advantage of benefits while avoiding the drawbacks of each. The chart below outlines the limits on various account types for 2026. Please reach out to your relationship manager to help you figure out a savings strategy that works well for your situation.
Account type | 2026 Contribution max | Contributions | Withdrawls |
|---|---|---|---|
401(k) | $24,500 (+$8k if 50-59 yrs) | Pre-tax | Taxable |
Traditional IRA | $7,500 ($8,600 if 50+) | Pre-tax | Taxable |
Roth IRA | $7,500 ($8,600 if 50+) | After-tax | Tax exempt |
HSA | $4,400 ($8,750 Family) | Pre-tax | Tax exempt** |
*https://crr.bc.edu/how-much-does-health-spending-eat-away-at-retirees-income-an-update/
**if used for healthcare/medical expenses
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