How an HSA Can Help with Healthcare Costs in Retirement

Written by: Michael Shea, CFP®, EA | Dec 8, 2022

Retirement can seem elusive and far off. It is easy to put savings on the back burner and say I’ll get to it later. To help with this, I encourage people to think about retirement savings in a bucket strategy.

I always recommend saving at least 15% of your gross income into retirement if you can. This is a good starting place. This will obviously change depending on your age and how much you’ve already saved. Establishing a savings rate is the first step.

Whether you’re planning on retiring within the next few years or decades from now, below are some important considerations with it comes to healthcare, HSAs, and saving for retirement.

Scenario Planning & Expenses

After determining a saving rate, the next step of retirement planning gets into more detail and more assumptions (guesses) need to be made in order to plan (guess) appropriately. The best thing we can do is think through different scenarios and be ready for them if they happen.

I like to consider conservative, moderate, and risky scenarios to help paint a picture of retirement. This can provide peace of mind by knowing you’re taken care of if the worst thing happens but also shows the average or likely scenario during retirement. I discuss below some of the tools to better prepare yourself for retirement and healthcare expenses.

Healthcare Inflation

One of the most important things to think about prior to retirement is long-term care and healthcare costs.

Preparing for retirement requires consistent savings, investing that savings, and managing expenses and lifestyle in retirement.

The two biggest expenses in retirement can be healthcare and long-term care costs. These expenses can be a major risk to a family’s financial life.

The average inflation rate is around 5% for medical expenses which is much more aggressive than the typical inflation of goods and services.

For this reason, you should make saving for medical expenses a priority.

How to Manage Long Term Care Costs

If you can self-insure for long-term care (LTC), meaning you don’t have to rely on some form of insurance, this will provide flexibility in retirement. The reason I say this is because long-term care insurance premiums can be very expensive and they’e anything but fixed these days.

The premiums for long-term care policies have been increasing year over year due to the increase in healthcare and medical costs across the board. This makes it difficult to lock in a price for a policy during retirement.

Cost of LTC – Long-term care is usually needed at the end of someone’s life for the last 2 to 5 years. The average stay for a good facility is $5k to $10k per month to give you an idea of costs.

It’s not uncommon to spend a total of $60k to $120k a year. On the high-end, this could be over half a million dollars for one person.

Saving for LTC – A good strategy could be to designate an investment account for this goal or lump everything into your retirement portfolio.

Depending on your age, I’d recommend saving 15% to 20% of your gross household income into retirement. This could include long-term care, or you could allocate an additional 5% if you have the capacity to do so for example.

If you keep saving and investing over the course of your working years this will help you get to the point where you do not rely on insurance. This allows you to build flexibility should you not need the money for LTC but for something else.

How to Manage Healthcare Expenses

An HSA account can be a great tool to help with healthcare costs in retirement. You must have a high-deductible health plan to be eligible. I’ve listed the 2022 rules and limits below.

Deductibles – This means a medical plan that has a deductible of over $1,400 for individuals and $2,800 for family coverage.

Max out-of-pocket – Your max out-of-pocket amounts are $7,050 and $14,100 for individual and family coverage.

If you’re covered by an ACA compliant plan these are higher at $8,550 and $17,100 for individual and family coverage respectively.

HSA Contribution Limits – You can contribute up to $3,650 as an individual and $7,300 as a family into an HSA. If you’re over the age of 50 you are eligible for a $1,000 catch-up contribution.

Contribution Deadlines – The deadline for 2022 contributions is April 18th, 2023.

HSA Tax Benefits – They provide tax savings in three different ways:

  1. You receive a tax deduction for your contributions. These are accounted for when you go to file your taxes on the front of your 1040.
  2. If the funds are invested they will grow tax-free, or deferred, depending on how you use them upon withdrawal.
  3. If the funds are taken out for qualified medical expenses they will be withdrawn tax-free.

Qualified Medical ExpenseHSA Bank has a good breakdown of qualified medical expenses listed here.

As you can see, these are pretty liberal and cover a lot of different areas so you will likely find a need to use the funds on a tax-free basis. Click here to learn more about retirement and tax strategies.

Non-Qualified Medical Expenses

If funds are used for non-qualified medical expenses you will be taxed on the withdrawal AND receive a 20% penalty. Be sure you are spending these funds appropriately due to this hefty penalty.

The 20% penalty is waived if you’re over age 65, disabled, or the owner is deceased.

Investing in an HSA

You can invest the funds inside of an HSA. If you have a short-term need then usually you want to leave these funds in cash. Otherwise, it may make sense to invest the money.

A lot of custodians will have a self-directed brokerage option through a platform like TD-Ameritrade or Fidelity. You can build a portfolio through these platforms based on your needs and risk tolerance.

Overall Retirement Strategy

The main point here is to allocate a certain amount of your savings into an HSA account. If you can, max out your HSA each year.

Contribute and invest over your working years. This will help you build a balance that can accumulate to fund the specific goal of healthcare costs.

If you max out an HSA at $7,200/year for 30 years and you get an 8% return this would result in a balance of roughly $815,000.

This would help considerably with healthcare during retirement years.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER™ and owner of True Equity Wealth Management LLC. Email him at michael.shea@trueequitywealth.com or fill out a contact form.

This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.

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