(Stefon Walters)
Outside of housing and maybe transportation costs, health care It will probably be your biggest retirement expense. It’s unfortunate, but doctor visits become more frequent and more health problems tend to crop up as you get older. Before you reach retirement age, it is very important to understand the likelihood of increased health care costs and plan accordingly.
According to Fidelity, the average couple retiring at age 65 in 2022 will need approximately $315,000 in after-tax savings to cover retirement health care expenses. Even for people who can save $1 million for retirement, $315,000 after taxes is a good chunk of total savings. One way to help prepare for this is to take advantage of a health savings account (HSA) if eligible.
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Using an HSA for health care expenses
If you are enrolled in a high deductible health plan (HDHP), you are eligible to contribute to an HSA, which is designed to help you save and invest money before taxes to use for eligible medical, dental and vision expenses. Saving money before taxes (or deducting contributions) not only reduces your taxable income for the year, but the money in your HSA grows and accumulates with tax-free withdrawals if used for eligible health expenses.
For 2022, the most you can contribute to an HSA is $3,650 if you’re enrolled in a self-employed health plan and $7,300 if you’re enrolled in a family plan. Seniors age 55 and older can add an additional $1,000 to their annual contributions. If you’re going to spend money on medical expenses, and you probably will, you might as well save for them and get tax-exempt in the process.
Given enough time, your HSA can carry the load
Imagine you’re enrolled in an HDHP alone and contribute $300 a month to an HSA, investing it in an index fund that returns, on average, 8% per year for 25 years. During that time, you would have personally invested $90,000, but the investment would be worth more than $263,100. If you have more time and can do it for 30 years with those returns, it would be worth more than $407,800.
And since it’s in an HSA, the money would be tax-free, compared to a regular brokerage account where you owe capital gains taxes on any gains made. That could potentially cost tens of thousands of dollars over time.
If you’re enrolled in a family HDHP plan and can contribute $600 per month, you could exceed estimated retirement health care costs in 20 years with an average annual return of 8%. However, the one thing you need to be careful about is having too much of your HSA invested in stocks as you near retirement. The goal should always be to grow your money as much as possible while you’re younger because you have time to recover from market downturns, but as you get closer to using your money, you don’t want a scenario where stocks, and the value of your HSA plummets with little time to recover before you need the money.
Using an HSA is a win-win situation: you’ll get the present benefit of tax relief and the future benefit of money that has had time to grow and compound tax-free. Take advantage of it if you can.
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