By Jill Schlesinger

One of the big misconceptions about those who are contemplating retirement is that as long as they are 65, Medicare will cover their health care needs. If only! According to the 2025 Fidelity Investments® State of Retirement Planning study, those assumptions quickly fade away when new retirees are smacked in the face with the reality that health care costs are higher than they anticipated and Medicare is not the panacea that they had hoped it would be. Fidelity found that 57 percent of respondents who were already retired said that they did not adequately plan for health care costs, and 43 percent found that Medicare covered less than they thought it would. 

That gibes with a separate survey from Fidelity, which estimated that “a 65-year-old retiring this year can expect to spend an average of $165,000 in health care and medical expenses throughout retirement,” not including potential long-term care expenses. (The number is DOUBLED if you are married.) The number breaks down as follows: Medicare, Parts A and B premiums (43 percent), prescription drug costs (10 percent), and all other health care costs, like co-payments, co-insurance and deductibles (47 percent). 

For those thinking about retirement, one way to prepare for the onslaught of future health care expenses is to consider a Health Savings Account (HSA), if one is available through your workplace. You may not be familiar with these accounts, because they have only been widely in existence for about two decades and they are often confused with their cousins, Flexible Spending Accounts (FSAs). FSA’s  are workplace savings vehicles that allow you to save up to $3,300 pre-tax to pay for unreimbursed health care costs in 2025. You generally must use the money in an FSA within the plan year, though some employers allow either a “grace period” of up to 2 ½ extra months to use FSA money or the ability to carry over up to $660 to use in the following year. 

The time limitation on an FSA makes it a nice benefit, but nothing compared to the powerhouse of a health savings account, which allows eligible employees to contribute to an investment and savings account that can be used to pay or reimburse certain medical expenses at any point in your life. In benefits-speak, an HSA is “portable”, which means it stays with you if you change employers or leave the work force and retire, making it a potent planning tool for decades in the future.

Health savings accounts were originally created as way to help employees save money for out of pocket expenses that they would have to shoulder if they had chosen to be covered by a high deductible health plan (HDHP) through their workplace. HDHPs were developed as an alternative form of health insurance coverage that would offer participants lower annual premiums in exchange for higher deductibles. For 2025, HDHP deductibles must be at least $1,650 for individual coverage or $3,300 for family. Annual out-of-pocket expense maximums (deductibles, co-pays, but not premiums) cannot exceed $8,300 for single coverage or $16,600 for family coverage. Pairing the HDHP with an HSA provided participants with a way to save money for those higher deductibles, as well as co-insurance, prescriptions, and dental and vision care, and a lot more.

Before you start worrying about how you would possibly switch from your current insurance coverage to a high deductible plan, you need to know that Health Savings Accounts have a stealth superpower in that they enjoy special tax treatment. When you contribute money into the account, you can claim a tax deduction, even if you don’t itemize your deductions (kind of like how a traditional 401(k) is treated). Next, the money invested in the account, whether it generates interest, dividends or if there is capital gain, is not taxable (again, like a retirement account). Finally, when you are ready to tap the account to pay for qualified medical expenses, the distributions from the account are tax free. In other words, HSAs are TRIPLE tax advantaged. 

Because of this magical tax treatment, financial planners have been encouraging people to use these accounts as a long-term investment vehicle that can be used to pay for future health care expenses. For 2025, individuals can contribute up to $4,300 and for families, the limit is $8,550. Those age 55 or older can save an additional $1,000 per year in “catch-up contributions”. While the dollar limits may not sound like a lot, like your 401(k) or IRA, compound interest can help fuel growth and without having to worry about taxes, the money can grow even faster. That’s why the HSA is a wonderful retirement gift to give yourself, one that can help meet those future health care expenses. 

Jill Schlesinger is an Emmy and Gracie Award-winning Business Analyst for CBS News, a weekly guest on NPR’s “Here and Now” and writes the nationally syndicated column “Jill on Money” for Tribune Media Services. Jill’s second book, The Great Money Reset, was published in January 2023. She is the host of the “Jill on Money” and the “MoneyWatch” podcasts and of the nationally syndicated radio show, “Jill on Money.”