We all hope for a very long, healthy retirement, don’t we? And while it’s fun to plan for the trips and the travels, the hobbies and the time spent with family when we are no longer working, it’s not so pleasant to think about the health implications that naturally are associated with aging.
Unless you’ve discovered the elixir for eternal youth and good health, your healthcare expenses are realistically going to take up a larger portion of your budget during retirement than they did in your younger years.
But there are some cost effective ways to prepare for these extra costs. Health Savings Accounts (HSAs) are one of the very best tools available to give you added peace of mind in retirement.
The Importance of Health Savings Accounts for Women
HSAs are even more important for women than they are for men.
Did you know that a couple retiring today should really have $285,000 put aside to cover healthcare costs in retirement? Women are looking at $150,000 alone, and these are additional costs on top of those covered by Medicare or other programs. But why do women need more money to cover their healthcare costs?
A 2011 study found that, over their whole lifetime, healthcare spending was 32% more for women than it was for men. The greatest differences are seen during retirement years, and the study said that this can be partially explained by women’s longer life expectancy.
Women face a unique set of challenges with their health in old age. They can expect to live longer, and a study by the Public Policy Institute showed that women have higher rates of disability and chronic health problems.
They’re also more likely to have had lower incomes throughout their lives, leaving them with a smaller retirement pot than their male peers. And as women age, the likelihood of needing long term care increases drastically.
There are also differences in treatment and care and in the types of illnesses suffered by women than by men. For example, after age 65, women are more than twice as likely to develop Alzheimer’s. Currently, nearly two thirds of all Alzheimer’s sufferers in the US are women. Additionally, more than 70% of nursing home residents in the US are women.
So What Are Health Savings Accounts?
It’s estimated that 26 million Americans have an HSA, which is far fewer than the amount of people eligible for one, and it seems that a lot of people just don’t understand how they work. It’s important to be clear on what a Health Savings Account is and how to use them, because they can be an excellent option for saving towards retirement.
So what are they and how do they work?
Health Savings Accounts are in some ways similar to a regular savings account, but the money in there can only be used to cover healthcare costs if you want the money to retain its tax perks.
You can only open one if you have a High-Deductible Health Plan (HDHP), and so they’re generally recommended for people who are in good health and not expecting to have any significant, regular healthcare costs.
As soon as you open it, if you incur any qualified medical expenses you can use the money in your HSA to pay for those. Otherwise, you can just keep saving. If you use it as an investment account rather than a savings account (ask us about the best way of doing this), you’ll find that by the time you hit 65, your HSA could have accumulated quite a balance.
Health Savings Accounts 2020 Contributions
As of 2020, you can contribute $3,550 for a single person’s HSA or $7,100 for a family’s. Then, if you like, you can make catch-up contributions from age 55, of an extra $1,000 a year. You may also make a one time rollover (up to the annual limit) from your IRA into your HSA.
Once you enroll in Medicare, you won’t be able to contribute any more to the account and you officially can cash it out at this point, without withdrawal penalties. But if you leave it where it is until it’s needed for medical costs, it will continue to grow over time.
There’s lots of costs that the money in health savings accounts can be used to pay for. While it can’t cover costs of any medical expenses incurred before you opened the account, it can be used for substantial costs like surgery, nursing home services, in-home care and home improvements for medical reasons.
It can also be used to pay for incidental healthcare costs like contact lenses, eyeglasses or LASIK vision correction surgery, or orthopedic shoes, dentures and prescription medicines.
You may also use your HSA to pay for your Medicare premiums; however, HSAs cannot be used to pay for supplemental policies (Medigap). If you have a long term care insurance policy, the premiums can be withdrawn from the HSA tax free as well. The peace of mind that comes with having a stockpile of money for these purposes is invaluable.
Tax Benefits of Health Savings Accounts
Having what’s become known as a triple tax advantage, HSAs is the most tax-preferred account available so they are a very smart way to save extra money for your retirement. If you’re already making the maximum contributions to your 401k, use an HSA to add, tax-free, to your retirement savings.
First, as you save, it reduces your taxable income as you make contributions to it tax-free. For example, if you earn $60,000 and put $5,000 a year into the HSA, you’ll be taxed as if you earned $55,000.
Then your savings in your HSA will grow free of taxes as well. You don’t have to pay any tax on any gains in these accounts so a bit of wise investing could help the balance grow significantly.
Finally, any money withdrawn from your HSA to be used for qualified medical expenses can be withdrawn tax-free as well. Only if you decide to withdraw money other non-medical purposes will it be subject to income tax. You’d also be liable for a 20% tax penalty if you’re under 65 when you take the money out to spend on non-medical expenses.
Can You Afford Not to Have One?
Saving for your healthcare costs with a Health Savings Account is an extremely tax-efficient way to add to your retirement savings and to give you that absolutely priceless peace of mind, knowing that there are funds earmarked to offset medical surprises encountered in your later years.
Remember, while Medicare might go some way to cover your healthcare costs in your later years, it isn’t completely free and it’s not completely comprehensive either. So that’s why an HSA can be a huge help.
A relatively small initial investment, topped up annually with the maximum contributions, can go a long way to offset your healthcare costs in retirement, especially if you invest the funds aggressively when you are young.
Don’t forget that the annual average cost of a private room in a nursing home is $75,000. A well-prepared HSA could be the key to covering those costs in comfort.
If you’ve got any more questions about Health Savings Accounts, we found a fantastic guide to them. Otherwise, please do get in touch – we’ll be only too happy to have a chat and see if there’s a place for an HSA in your retirement plan.