Why Healthcare Costs Should Be Central to Your Retirement Strategy
Healthcare is one of the largest, and most underestimated, expenses retirees face. According to Fidelity’s 2025 Retiree Health Care Cost Estimate, a 65-year-old couple retiring in 2025 will need approximately $345,000 saved to cover healthcare expenses throughout retirement, a figure that has more than doubled since 2002. A 65-year-old individual, by the same estimate, can expect to spend an average of $172,500, up over 4% from 2024.
These estimates account for Medicare Parts A, B, and D premiums and cost-sharing, but do not include long-term care, dental, vision, or over-the-counter medications, meaning the true out-of-pocket burden is likely higher.
Healthcare costs have consistently risen faster than general inflation, making it harder each year for workers, even those with employer coverage, to manage premiums, copays, coinsurance, and deductibles, let alone plan ahead. The stakes are especially high for early retirees (under 65) and self-employed individuals, who must purchase their own coverage and bear the full cost themselves.
A Health Savings Account (HSA), when used strategically, can help address this challenge both now and in retirement.
What Is an HSA?
A Health Savings Account (HSA) is a tax-advantaged savings account linked to a qualifying High-Deductible Health Plan (HDHP). HSAs are designed to help you cover current out-of-pocket healthcare costs while also building a long-term reserve for future medical expenses, including in retirement.
To be eligible to open or contribute to an HSA, you must be enrolled in a qualifying HDHP and not yet enrolled in Medicare.
The HSA Tax Trifecta
HSAs are one of the only accounts in the U.S. tax code that offer a triple tax advantage:
- Contributions are tax-deductible. Pre-tax contributions can be made through payroll deduction via your employer, or you can contribute on your own and take a deduction when you file — whether or not you itemize. Either way, contributions reduce your adjusted gross income and your federal income tax for the year.
- Growth is tax-deferred. Any interest or investment earnings inside your HSA compound on a tax-deferred basis.
- Withdrawals are tax-free when used for qualified medical expenses.
When HSA funds are used for non-medical purposes, the withdrawal is taxed as ordinary income, and a 20% penalty applies if you are under age 65. After age 65, non-medical withdrawals are simply taxed as ordinary income, similar to a traditional IRA, with no penalty. Depending on your state, HSA contributions and earnings may or may not also be subject to state taxes.
HSA Contribution Limits for 2025 and 2026
The IRS adjusts HSA contribution limits annually. According to IRS Revenue Procedure 2025-19, the current and upcoming limits are:
| 2025 | 2026 | |
| Self-only coverage | $4,300 | $4,400 |
| Family coverage | $8,550 | $8,750 |
| Age 55+ catch-up | $1,000 | $1,000 |
These limits apply to all contributions combined, from you, your employer, or any family members. Once you enroll in Medicare, you can no longer contribute to an HSA, though you can continue to use existing funds.
Unused HSA funds roll over from year to year and remain yours permanently. There is no “use it or lose it” rule.
What Qualifies as an HDHP?
To contribute to an HSA, your health plan must meet IRS requirements for a High-Deductible Health Plan. For 2025 and 2026, qualifying HDHPs must have:
| 2025 | 2026 | |
| Minimum deductible (self-only) | $1,650 | $1,700 |
| Minimum deductible (family) | $3,300 | $3,400 |
| Out-of-pocket maximum (self-only) | $8,300 | $8,500 |
| Out-of-pocket maximum (family) | $16,600 | $17,000 |
HDHPs typically carry lower premiums than traditional plans, but members pay more out-of-pocket before the deductible is met. Some preventive care, such as routine physicals and cancer screenings, may be covered without applying to the deductible. Under IRS guidance, HDHPs may also cover certain medications and treatments for chronic conditions like asthma, diabetes, depression, heart disease, and kidney disease before the deductible is satisfied, encouraging patients to manage ongoing health issues before they become more serious and costly.
Important: HDHPs come with higher deductibles by design. If you’re anticipating a major medical procedure or significant health expenses in the near future, a lower-deductible plan may be more cost-effective despite the loss of HSA benefits.
Pros and Cons of HDHPs
Potential benefits:
- Lower monthly premiums than traditional plans
- Encourages cost-conscious healthcare decisions, which can reduce unnecessary spending
- Eligibility to contribute to an HSA
Potential drawbacks:
- High upfront costs before the deductible is met can deter people from seeking needed care
- A large deductible can be difficult to absorb if your HSA balance is still small
- May not be the right fit if you anticipate significant medical expenses in a given year
HSAs as a Retirement Strategy
One of the most underutilized aspects of HSAs is their potential as a long-term retirement savings vehicle.
After age 65, HSA funds can be used for any purpose, not just qualified medical expenses, making the account function similarly to a traditional IRA. More specifically, HSA funds can be used tax-free for:
- Medicare Part B and Part D premiums
- Medicare Advantage premiums
- Qualified long-term care insurance premiums and services
If you can afford to fund your HSA generously during your working years while paying current medical expenses out of pocket, your HSA balance can accumulate and grow, potentially tax-free for decades. Keep your receipts: the IRS imposes no time limit on HSA reimbursements. You can pay a medical expense out of pocket today and reimburse yourself from your HSA years later, giving your account more time to grow.
When HSA balances reach a certain threshold, many plans allow you to invest the funds in options similar to those in a 401(k), further increasing growth potential.
Frequently Asked Questions About HSAs
Can I have an HSA and an FSA at the same time? Generally, no. You cannot contribute to both a standard HSA and a general-purpose Flexible Spending Account (FSA) in the same year. However, a limited-purpose FSA (covering only dental and vision) can sometimes be paired with an HSA.
What happens to my HSA if I switch to a non-HDHP plan? You lose the ability to make new contributions, but your existing balance remains yours and can still be used tax-free for qualified medical expenses. After age 65, you can use it for any purpose.
Can my employer contribute to my HSA? Yes. Employer contributions count toward the annual IRS limit.
What if I over-contribute to my HSA? Excess contributions are subject to a 6% excise tax and must be corrected before the tax filing deadline to avoid penalties.
When is the HSA contribution deadline? Similar to IRA contributions, HSA contributions for a given tax year can generally be made until the federal tax filing deadline, typically April 15 of the following year.
The Bottom Line
An HSA is more than a way to pay for doctor visits, it can be a meaningful component of long-term retirement planning. The triple tax advantage, unlimited rollover, and post-65 flexibility make it one of the most powerful savings tools available to eligible workers.
Choosing between a HDHP with an HSA versus a traditional plan depends on your health, financial situation, and how much you can realistically contribute. Open enrollment is the right time to evaluate your options carefully.
A financial professional at Barnum Financial can help you determine whether an HSA-eligible plan makes sense for your situation, and how to incorporate it into your broader retirement and financial strategy.
