How much should you have in HSA when you retire? Planning for future healthcare costs

According to a 2025 estimate from Fidelity, a 65-year-old individual retiring this year may need an estimated $172,500 in after-tax savings to cover healthcare expenses. Figuring out how much should you have in HSA when you retire is a crucial step for a financially secure and healthy retirement.

Quick Summary

Planning for retirement healthcare costs is essential, and an HSA provides a powerful triple-tax-advantaged tool to help. The ideal amount depends on factors like longevity, health, and location, but strategic saving and investing can build a significant nest egg.

Key Points

• Estimate your needs: Average healthcare costs for a 65-year-old couple can reach hundreds of thousands, a strong argument for dedicated savings.

• Maximize contributions: Contribute the maximum allowable amount annually, including catch-up contributions starting at age 55, while eligible.

• Invest for growth: Treat your HSA as a long-term investment vehicle to maximize tax-free growth potential over decades.

• Use HSA funds strategically: Pay for current medical costs out-of-pocket and save receipts for future tax-free reimbursement, maximizing investment time.

• Plan for Medicare enrollment: Stop contributing to your HSA six months before enrolling in Medicare to avoid penalties from retroactive coverage.

• Post-65 flexibility: After age 65, the 20% penalty for non-qualified withdrawals is waived, and the account can be used like a traditional IRA (though taxed).

• Use funds for Medicare premiums: After retirement, you can use HSA funds tax-free to cover Medicare premiums (Parts B and D, and Medicare Advantage).

Understanding the High Cost of Healthcare in Retirement

Healthcare is a major expense for retirees, and while Medicare covers some costs, out-of-pocket expenses for premiums, deductibles, and other services can be substantial. Costs can vary based on location, health, and longevity, with some estimates suggesting a couple might need hundreds of thousands for medical expenses throughout retirement. Early preparation, especially through an HSA, can protect other retirement savings.

The Power of the Triple-Tax Advantage

An HSA offers a unique triple-tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. This makes it an excellent savings vehicle for those with a high-deductible health plan (HDHP) who are saving for healthcare. Unlike FSAs, HSA funds roll over annually and are owned by you, offering portability and long-term growth potential.

Estimating Your Retirement HSA Needs

Determining the exact amount needed in your HSA for retirement is personal, but several factors can help you estimate:

• Healthcare Costs: Start with general estimates and adjust based on your family situation. A couple will generally require more savings than an individual.
• Health and Longevity: Consider your personal and family health history to gauge potential future needs.
• Location: Healthcare costs differ by region, so factor in costs specific to your area.
• Inflation: Account for the expected rise in healthcare costs over time.

Working backward from a target amount to determine necessary annual contributions and investment growth can help you reach your goal. Consistent contributions, even if not the maximum, can significantly grow over time when invested wisely.

Investment Strategies for Your Long-Term HSA

Maximize your HSA's growth potential by investing the funds. Keep enough cash on hand to cover immediate medical expenses, but invest the rest in a diversified portfolio. If possible, pay for current medical costs with other funds and save your HSA receipts to reimburse yourself tax-free later, allowing your HSA to grow undisturbed.

Using Your HSA in Retirement

In retirement, your HSA offers flexibility:

• Tax-Free Medical Expenses: Pay for qualified medical costs, including dental, vision, and prescriptions, tax-free.
• Medicare Premiums: Use your HSA to cover premiums for Medicare Parts B, D, and Medicare Advantage plans tax-free. Medigap premiums are not eligible.
• Post-65 Flexibility: After age 65, the 20% penalty on non-qualified withdrawals is waived. These withdrawals are taxed as ordinary income, similar to a traditional 401(k).

HSA vs. Flexible Spending Account (FSA) Comparison

Feature	Health Savings Account (HSA)	Flexible Spending Account (FSA)
Eligibility	Must be enrolled in a high-deductible health plan (HDHP).	Available with most employer-sponsored health plans.
Portability	Account is owned by you and is portable if you change employers or retire.	Owned by the employer; not portable.
Rollover	Unused funds roll over year-to-year indefinitely.	Most funds are forfeited at year-end, though employers may offer a small grace period or rollover.
Contributions	Can be made by you, your employer, or both.	Can be made by you, your employer, or both.
Investment	Funds can be invested for tax-free growth.	No investment options available.
Use in Retirement	Funds can be used for qualified medical expenses tax-free. After 65, non-qualified withdrawals are taxed but not penalized.	Not available in retirement; must be used while actively employed.

Important Medicare and HSA Considerations

Enrolling in any part of Medicare stops your eligibility to contribute to an HSA. This includes premium-free Part A, which can activate automatically upon starting Social Security benefits. To avoid tax penalties from retroactive Medicare coverage, stop HSA contributions at least six months before you plan to enroll in Medicare or begin receiving Social Security. For further reading on leveraging an HSA for retirement, authoritative resources like AARP provide valuable guidance. AARP: HSA May Be Your Secret Tax Weapon for Retirement Saving.

Conclusion

Creating an HSA savings goal for retirement involves estimating future healthcare expenses based on personal factors like health, inflation, and longevity. Utilizing the HSA's triple-tax benefits, consistently contributing while eligible, and investing wisely can create a significant financial resource for medical needs in retirement. This proactive strategy helps ensure healthcare costs don't disrupt your overall retirement plan, contributing to financial security and peace of mind.

Frequently Asked Questions

How do I calculate how much I need in my HSA for retirement?

There is no exact figure, as it depends on your health, location, and longevity. However, you can use resources like Fidelity's Retiree Health Care Cost Estimate (e.g., $172,500 for a 65-year-old individual in 2025) as a starting point. Adjust this figure based on your personal health outlook and projected healthcare inflation to create a personalized target.

What happens to my HSA when I enroll in Medicare?

Once you enroll in Medicare (including premium-free Part A), you are no longer eligible to contribute to your HSA. You can, however, continue to withdraw funds tax-free for qualified medical expenses. Because Medicare coverage can be retroactive, it is important to stop HSA contributions at least six months before enrolling.

Can I use my HSA to pay for Medicare premiums?

Yes. Once you are enrolled in Medicare, you can use your HSA funds to pay for Medicare Parts B and D premiums, as well as Medicare Advantage plan premiums, on a tax-free basis. However, you cannot use your HSA for Medigap (Supplemental) policy premiums.

Can I use my HSA for things other than medical expenses in retirement?

Yes, after you turn 65, you can withdraw money from your HSA for any reason without incurring the 20% tax penalty. You will still have to pay ordinary income tax on these withdrawals, just like a traditional IRA.

Should I invest the money in my HSA?

For long-term retirement savings, investing your HSA funds is highly recommended. By investing, you take advantage of the tax-free growth potential. Many HSA providers allow you to invest a portion of your funds in mutual funds or other assets, similar to a 401(k).

What if I can't afford to pay for current medical expenses out-of-pocket and also invest my HSA?

If you cannot pay current medical expenses out-of-pocket, it is still wise to use your HSA for those costs to receive the tax-free benefit. The most crucial step is to consistently contribute as much as you can reasonably afford each year to build your balance over time.

Are catch-up contributions available for HSAs?

Yes. If you are age 55 or older, you can make an additional $1,000 'catch-up' contribution annually to your HSA. If your spouse is also over 55 and has their own HSA, they can make a catch-up contribution as well.