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
Health
Savings Accounts 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
Health
Savings Accounts 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.
