How
Much Will Your Medical Expenses Be During Retirement?
Fidelity
Investments reports that the average couple retiring in
2006 will need $200,000 just to cover medical expenses during
retirement. This estimate, up an average of 5.8 percent
a year since 2002, includes the cost of Medicare premiums,
co-payments, deductibles, and out-of-pocket costs for prescription
drugs. It does not even include the cost of over-the-counter
medications, most dental services and, if needed, long-term
care. Add those, and the Employee Benefit Research
Institute reports that an average couple needs $295,000.
That's
for the average couple. Who knows if you're
going to be average, and who knows what the figure will
be by the time you retire. HSA owners know that it's
foolish to depend on the government, and realize that personal
responsibility is the only answer.
Maximize
Your Contributions
Contribute
The Maximum Amount Allowable
HSAs
are, without exception, the best way to build up money to
pay for medical expenses during retirement. You should
not contribute any money to your traditional IRA, 401(k),
or any other savings account until you have maximized your
contribution to your HSA. This is because only health
savings accounts allow you to make withdrawals tax-free
to pay for medical expenses. If you do withdraw money
from your HSA for non-medical expenses during retirement,
you pay income taxes on that withdrawal just as you would
with your IRA or 401(k).
To illustrate
the difference that leaving your money in the account can
make, I calculated that if I contribute $5,450 every year
until I retire, and I get a 10% return on my money, I'll
have $482,310 in my HSA when I reach age 65. (Of course,
the retirement age will probably be higher at that point,
but we'll use 65 for this example.) If I use this
only for medical expenses for my wife and myself from age
65 to 100 (sure, we're shooting for 100!), I'll never pay
any taxes on it. (And money in the account will continue
to grow tax-free during my retirement years).
If I
contribute the same amount in my IRA instead of an HSA,
I'll still have the same $482,310. But if I withdraw
that money for medical expenses, and assume I'm paying 35%
of that in income taxes, that money is now only worth $313,502.
So I'll have 154% more money for retirement medical expenses
by investing in an HSA rather than an IRA.
Of course,
if you want to have several hundred thousand dollars in
your HSA by the time you retire, you're going to need to
place the maximum amount in your account each year.
Depending on your deductible, you can place as much as $2,700
per year into your account as an individual, or $5,450 per
year for families. In 2007 that limit goes up to $2,850
for individuals, and $5,650 for families. If you're
55 and older, you can also put in an extra $700 catch-up
contribution in 2006, $800 in 2007, $900 in 2008, and an
additional $1,000 from 2009 onward.
Fully
Fund Your HSA Account Each January 1
You
should fully fund your HSA at the first of the year.
Though you actually have until April 15 of the following
year, making the deposit early in the year can make a significant
difference in the growth of your account. By making
your contribution on January 1, you benefit from 470 days
of additional tax-free interest compared to waiting until
April 15. In the book The New Health Insurance
Solution, Paul Pilzer points out that this can amount
to an additional $94,250 over a 30 year period.
Invest
With Growth In Mind
Most
insurance companies have teamed up with banks that will
act as your HSA administrator, so that you can pay for your
health insurance and HSA contribution with one check.
However, many of these banks only pay an interest rate of
1 - 3%. The only way to build up a sizable amount
in your HSA is to find an investment vehicle that allows
for higher growth rates. The U.S. stock market has
averaged an 11% annual return since 1926. I actually
have most of my HSA funds currently invested in an international
growth mutual fund that has done very well (though I'm certainly
not giving investment advice).
Minimize
Your HSA Withdrawals
HSAs
offer a triple advantage - a tax advantage, a premium advantage,
and a retirement advantage. You can leverage all three
of these, and set yourself up very well for retirement.
What is the retirement advantage? It is that if you
leave the money in the account until you retire, it has
time to grow tax-deferred.
To illustrate
the difference leaving your money in the account can make,
I calculated that if I take out just $100 per month to cover
medical expenses (a total of $28,800 over a 24 year period),
my account value will drop by over $100,000.
Delay
Reimbursement
One
way to minimize the withdrawals form your HSA is to spend
non-retirement funds for any medical expenses you incur
instead of taking money out of your HSA. Save all
your medical receipts in a folder marked "un-reimbursed
medical expenses". Because there is no time limit
on how long you can wait before reimbursing yourself, you
can allow your HSA account to grow tax-deferred, and reimburse
yourself at a later day for any medical expenses.
I wrote
about this strategy in Maximize
Your HSA, Volume
1, Issue 3. I now have over $10,000 in medical
receipts in my files, and can take that money out of my
HSA whenever I want, tax-free. These include charges
for an appendectomy I had last year, dental visits, my eyeglasses
and contacts, various receipts for cough syrup, aspirin,
and other household medical expenses, and even some nutritional
supplements that have been "prescribed" by a chiropractor
I know.
Avoid
Medical Expenses
Long-time
readers of this newsletter know that I am passionate about
health, and taking personal responsibility for your health.
That is why a couple years ago I went back to school and
got my master's degree in nutrition and exercise science,
and why I wrote about avoiding metabolic syndrome in the
last
issue of Maximize Your HSA.
Though one reader said I was "way off base" for
discussing these issues, the very best strategy for making
sure you have enough money to cover your medical expenses
during retirement is to stay healthy. Health savings
accounts are now giving people serious incentives to take
care of their health so that money will be there when they
need it in old age.
If you
have not yet fully funded your HSA for 2006, you should
do so today. If you still don't have an HSA, you should
get a qualified health insurance plan in place today, so
that you can fully fund your account come January 1.
It will not only help you plan for the future, but it will
give you some more incentive to take better care of yourself
today.
