Avoid the healthcare cost roller-coaster with an HSA

Fidelity Investments has some tough news for soon-to-be retirees.

A recent study showed that healthcare expenses for a healthy 65-year old couple over the course of their retirement can get to $280,000 or even higher. 

That’s a scary number. It’s not surprising that healthcare costs are one of the top financial concerns for both pre-retirees and retirees.

What if I told you that there might be a tool to help you avoid your personal healthcare savings crisis?

No, it isn’t a magic wand. But there is an account that’s custom-made to help you save money to cover medical expenses – and save money on taxes in the process.

Yes, I am talking about the Health Savings Account (or the HSA for short).  When used strategically over time, this can become your secret weapon.  

Do you have an HSA?

If you have a high-deductible health plan with a deductible of at least $1,350 if you’re single (or $2,700 for families), then you are eligible to open an HSA. Many employers offer it as a benefit. If your company doesn’t, you can open one yourself. 

Do you use an HSA?

I hope so! Between restrictive use rules and relatively low contribution maximums, Health Savings Accounts are under-appreciated and underused.  Believe it or not, only one out of four HSA-eligible employees actually use it!  

HSAs are also easy to confuse with their close cousin FSAs (or the Flexible Spending Accounts). An FSA can’t be used to accumulate savings, and people worry about losing the account balance if they happen to not need it during any given year. HSAs don’t work the same way, but if you don’t understand the difference you can’t take advantage of them.  

How much can you contribute?

This year, the HSA contribution limit is $3,500 for individuals and $7,000 for families. If you’re 55 or older, you may contribute an additional $1,000 per year.  And, if your employer offers an HSA match, your account balance can grow even faster. If you are enrolled in Medicare Part A or Part B, you can’t contribute to an HSA. 

Why should you consider using an HSA?

There are three reasons.

  • One, any contributions you make are tax-free. HSAs are like 401(k) plans in that any money you put in will lower your taxable income. 
  • Two, your account will grow tax-free. Unlike a “use it or lose it” healthcare Flexible Spending Account, the balance in your HSA will roll over from each year to the next. 
  • Three, any withdrawals you take for qualified medical expenses are tax-free. That includes deductibles, dental and vision care, prescriptions, co-pays, and more. If you use this money for a non-qualified reason, the withdrawal will be taxed as income and you will have to pay a 20% penalty. 

What happens when you retire?

Once you enroll in Medicare, you can’t contribute to your HSA any more. But you can use the money you’ve saved to pay for any out-of-pocket healthcare expenses (like copays, deductibles, hearing aids, nursing home care, in-home care, and more). 

There is one other hidden benefit, and the reason why some financial planners refer to HSAs as “a secret IRA”. After you turn 65, the 20% penalty on non-qualified withdrawals goes away. So, you will only pay income taxes on any non-medical withdrawals. 

If you worry about the cost of healthcare in retirement, consider an HSA. If you’re not sure whether an HSA is right for you, our team at Independence Wealth can help you figure it out.

Is Social Security enough for retirement?

There’s no nice way to say it. But many baby boomers are going to have a tough time in retirement.  If they can retire at all.

Why do I say that?

I just read a few statistics about baby boomers and their retirement.  And it wasn’t good news.

Here’s some of what I found:

78% of people age 50+ are behind on saving for retirement.

And on top of that… 24% of baby boomers have no retirement savings at all. 

Many pre-retirees and retirees have no savings.  Because they’re banking on Social Security alone to fund their retirement. 

Let me tell you why that’s a bad idea… 

There’s this little thing called inflation.  And it will erode your retirement funds quicker than almost anything.  Yes, you will get cost of living adjustments (COLA) for Social Security.  But it may not be enough to offset the increases in cost of living from inflation.

More specifically… your health care costs. 

Each year Social Security payments may get a cost of living (COLA) adjustment.  This is to keep up with rising prices (inflation). 

The government bases that COLA adjustment on the consumer price index.  It’s a basket that reflects overall price increases. 

The problem is, health care costs are rising faster than overall prices.

Many retirees underestimate how much health care costs will impact their Social Security. 

According to a Nationwide study, retirees could spend up to 64% of their social security benefit on health care costs alone. 

That doesn’t leave much left over.   It will be hard to live on 36% of your Social Security benefit… even if you qualify for the maximum benefit.

You need to factor in health care costs when planning your retirement.  Costs have been increasing year after year… with no sign of slowing down.  But there are ways to ease the pain of health care cost increases. 

These can include..

  • Increasing savings to cover health care costs
  • Utilizing an Health Savings Account (HSA) to save money
  • Working longer into your retirement years

Planning your retirement can seem daunting.  You have so many options to consider. Health care costs are just one piece of the retirement puzzle.  But you can set yourself up so you don’t get blindsided by rising health care costs.

And if Social Security is your only plan for retirement… you should consider other options so you can live more comfortably.  There’s lots of ways to build your retirement savings. That way, you don’t rely solely on Social Security.