Experts say that healthcare alone could cost the average couple hundreds of thousands of dollars during their retirement. That high amount doesn’t even include other bills such as groceries, mortgage payments, and everyday living expenses.
According to Psychology Today, the average life expectancy for baby boomers is 79. If you retire at 65, you must be able to afford to live for at least 14 more years. You’ll need savings for your basic living essentials, but you probably also want to be able to enjoy your retirement as well.
Odds are, you don’t want to live Social Security check to Social Security check, which is minimal. You’ll want fun money too. Most retirees look forward to being able to travel internationally, visit their family, and more. All of this costs money.
If you think your Social Security check will cover your bills and your entertainment and travel, you’re sadly mistaken.
The Average Social Security Check in 2019
The average Social Security check amount in 2019 is around $1,461. Now let’s say that annual income in your early 60s is about $55,000, which breaks down to about $4,600 a month. Can you imagine living on nearly one-third of what you were living on before retirement?
To prove that counting on your Social Security check as your sole means of retirement income is one of the biggest financial mistakes you can make, we will calculate how much Part B will cost the average boomer in 2019.
This year, Medicare Part B costs most people $135.50 per month. Over a twelve-month period, Part B will cost you $1,626. If the average annual income from Social Security is $17,532, after Part B premium payments, you’ll be left with $15,906. Now your income has gone from $55,000 to $15,906, and that’s only factoring in your base Medicare premiums. It doesn’t include the cost of supplemental coverage which you’ll need to fill in the gaps in Medicare.
Therefore, planning to rely solely on your Social Security check as a means of retirement income is simply a huge mistake.
How to Avoid this Mistake
Of course, to prepare financially for retirement, one must save a lot. When it comes to saving for retirement, not all types of savings accounts are equal. One of the best types of savings for retirement is the health savings account (HSA).
Those who have a qualified, usually high deductible, health plan, may be eligible to open a health savings account. An HSA is a type of savings account that allows you to save tax-free money to be used on qualified medical expenses. One of the qualified medical expenses you can use your HSA funds for is insurance premiums.
That’s right, you can use the money from your HSA to help cover that Medicare Part B premium we were discussing earlier.
As of 2019, the maximum allowed contribution into an HSA for an individual is $3,500, while the maximum for a family is $7,000. Those who are at least 55 years old are allowed to contribute $1,000 extra each year as well.
HSAs are perfect for helping you to build a retirement nest egg. Instead of having to use your small Social Security check for all things medical, you will have an account dedicated to that. Another great thing about HSAs is that if you ever need some cash for non-medical expenses, you can withdraw money from your health savings account after age 65 without penalty. All you’ll have to do is pay regular federal taxes on it.
Health Savings Accounts with Medicare
Once you become 65 and enroll in Medicare, you will no longer be able to contribute to your own health savings account. The reason for this is that the IRS won’t allow HSA contributions if you have any other insurance (besides the high deductible plan) in force.
However, if you have a spouse who isn’t yet on Medicare and has an HSA, they can still contribute up to the family amount even while you’re on Medicare.
Retirement Can Come Fast
If you are within your retirement year and find that you haven’t adequately prepared for retirement expenses, pick up a side hustle. Find a part-time job that you can do from home that way you can both earn some extra money and still enjoy your retirement outside of an office.