Overspending in retirement can be a problem for many people. In fact, a report from the Employee Benefit Research Institute (EBRI) found that among retired individuals, median spending exceeded median income by an average of $3,000. The main cause of that overspending? Medical costs.
The EBRI report showed that 85 percent of seniors who spent at least 20 percent of their income on medical expenses suffered from overspending. Meanwhile, just 20 percent of seniors who spent 5 percent or less of their income on medical costs suffered from overspending. Clearly, budgeting for medical expenses during retirement should be a priority.
One easy way to save for medical expenses is to fund a Health Savings Account (HSA) if you qualify due to the fact that you have a high deductible health insurance policy. As USA Today reports, contributions to a HSA are tax deductible (up to a certain amount), you have the ability to invest the money for growth, and you can make tax-free withdrawals at any time for medical expenses. Look into an HSA to see if you qualify. If you don’t, make sure you’re maxing your 401(k) contributions and consider opening an IRA that will be used specifically for medical costs.
Separate studies have shown that a retired couple could spend anywhere from $285,000 to $369,000 on out-of-pocket health care costs. That’s a big chunk of change. And a good reason to make sure you’re planning for those expenses now.