Why You Should Wait Until You Retire to Dig into Your HSA

You have access to a variety of benefits as part of your employee benefits package, including health insurance, a 401(k) plan, and possibly even stock options. However, the most beneficial option may also be the most underutilized: a health savings account (HSA).

A health savings account (HSA) is a type of savings account that allows you to put money aside before taxes to pay for qualified medical expenses. They also have special tax advantages that make them work as a second retirement account. So, while you may have been told that your HSA should only be used for medical expenses (which is correct), there are several advantages to simply waiting until your HSA funds are depleted to retire.

How Do HSAs Work

HSAs are tax-advantaged medical savings accounts that combine the best features of both a Traditional and Roth IRA to save you money on a wide range of health-care expenses—including many that aren’t covered by insurance. You get an immediate tax deduction on contributions, just like a Traditional IRA. Any earnings and distributions are tax-free, just like a Roth IRA, as long as they’re used for qualified healthcare expenses. Those distributions are subject to a 10% penalty if they aren’t used for qualified medical expenses.

Because HSA contributions are made before taxes, you are effectively putting a portion of your tax bill into your health savings account. Assume you’re in the 24 per cent tax bracket and want to contribute $100 to your HSA every month. That $100 would normally result in a $24 tax bill, leaving a net of $76. You can think of your $100 contribution as a $76 contribution, with the remaining $24 being a tax bill. You won’t have to pay that bill as long as you use the account’s distributions to pay for qualified medical expenses.

The money you save in an HSA can accumulate from year to year, unlike a flexible spending account (FSA), which is another type of medical savings account offered in conjunction with your health care plan. This allows you to build up your account balance during years when your medical expenses are lower. Furthermore, because you, not your employer, own the HSA, the money in it is yours to keep for the rest of your life. Even if you don’t have a lot of medical expenses right now, the benefits are so great that there’s no reason not to open an HSA and contribute to it if you’re eligible and the contributions fit into your budget.

How Do I Know If I’m Eligible for an HSA?

You must be enrolled in a high-deductible health plan (HDHP) to contribute to an HSA, and you cannot be claimed as a dependent on someone else’s tax returns. You won’t be able to contribute to your HSA after you enroll in Medicare because it isn’t classified as an HDHP, but you will still be able to use the funds from your HSA for medical expenses.

Why Should I Wait Until Retirement to Use My HSA?

The ability to save more through compounding interest and the ability to be better prepared to pay for your expenses in retirement are the two main reasons why you should wait to use your HSA until your retirement years.

Save More by Compounding Interest

Consider the following scenario: Person A contributes $1,500 to an HSA each year, but only uses $500 for medical expenses, resulting in a net contribution of $1,000. Person B also contributes $1,500 per year but pays the $500 in annual medical expenses with money from a checking account. Person A would have about $36,800 in an HSA after 20 years if we assume a 6% rate of return, while Person B would have about $55,200. While this is a hypothetical scenario, it demonstrates the importance of allowing your money to grow for as long as possible.

Be Better Prepared to Pay for Expenses

Perhaps even more important than the ability to save more, keeping your money in your HSA will better prepare you for the road ahead. Many people consistently underestimate the cost of health care. According to the Employee Benefits Research Institute, retirees’ healthcare costs are typically much higher than they anticipated, with estimates for healthcare spending in retirement approaching $200,000—and which does not include the costs of long-term care. These figures demonstrate the importance of putting money aside for post-retirement medical expenses, and by not using your HSA during your working years, you can save that money for a time when health care costs are likely to be a much larger part of your budget.

Even if your medical bills are unusually low in retirement, the money in your HSA can be used to cover other living expenses. The 10% penalty for non-qualified medical expenses is eliminated once you reach the age of 65. So, if your furnace breaks down or your roof needs to be replaced, you can use your HSA to cover the costs. Those distributions that aren’t used for medical expenses, however, will be subject to regular income taxes. In essence, your HSA can be compared to a Traditional IRA with the added benefit of tax benefits during retirement.

How We Can Help

It’s critical to assess your financial situation and ensure that you can afford to wait until retirement to use your HSA funds. If you have medical expenses and don’t have any disposable income, using your HSA to pay for them is a great idea. Saving money in an HSA while neglecting your health or amassing debt will almost certainly result in increased expenses in the future. Many employers offer an HSA as part of their benefits package. As a self-employed individual, you can also access an HSA through companies such as: Lively.

However, if you have the financial flexibility to wait until retirement to touch your HSA, you may reap the financial benefits later. We can connect you to a retirement planner who can assist you in determining where you stand in your retirement savings plan and how much a fully funded HSA can help. Reach out to a RetireMentor here.

Why Simply Saving for Retirement Isn’t Enough? Part 2

As I mentioned in part 1 of this multi-part blog post, simply saving for retirement isn’t enough. There’s a myriad of things that can go wrong in retirement. And you MUST be prepared. Preparedness is the key to many of life’s challenges. Unfortunately, many simply “put off” planning for another day. Days turn into weeks, weeks into months and months into years and before you know it, BOOM, retirement is right around the corner. And you’re not ready. This bring me to our first and most important retirement threat:

Neglecting to prepare, either on your own or with a retirement specialist, a comprehensive plan that addresses all the potential threats and risks we all could face in retirement, as well as your income needs and income projection. Will you have enough to last throughout retirement and how will you fund the emergencies of retirement? Her Retirement offers a full “Are You Ready” assessment to determine any gaps in your plan, or to create a plan for you.

Here’s 5 other threats to consider. We’ll cover several more in part 3 of this blog series.

  1. Death of a spouse (without life insurance). While it’s true many pre-retirees are over-insured, the opposite is true as well. Life insurance is certainly critical while you still have a mortgage or other debt obligations, as well as young children to support. But we also feel that you do need life insurance as you are nearing retirement.  The threat is that you or your spouse could die without insurance and you would need to take from your retirement savings to cover your living expenses.  More than 2 in 5 Americans say they would feel a financial impact within six months of the death of a primary wage-earner, according to a 2015 report from the industry group LIMRA and the nonprofit group Life Happens. In addition, 30% of Americans think they don’t have enough life insurance, the report said. Term life insurance policies can be aligned with your retirement age so that it can cover you and your spouse during those important wage earning years and replace the earnings in the event of a pre-mature death of either partner. Her Retirement offers a full life insurance assessment to determine if you’re under-insured or over-insured, and then we can help match you with the right insurance based on your circumstances.
  2. A healthcare crisis. Unfortunately, medical debt is a leading cause of bankruptcy for many. For those that can afford to cover illness or medical emergencies with their savings, it can prevent you or your spouse from working in the final stretch before retirement. In addition, covering these expenses significantly impacts your retirement nest egg. There’s several types of insurance to consider including disability insurance and long-term care insurance.  Her Retirement offers a long term care/medical insurance assessment, as well as some unique ways to fund these expenses outside of insurance.
  3. Scams and more scams. Retirees are a big target for scammers. We’ve all heard the nightmare stories. These scammers take advantage of people’s fears. A perfect example are life insurance policies marketed at 702 retirement accounts. Scammers will sometimes use early retirement seminars as a forum to sell these policies. Financial Industry Regulatory Authority (FINRA), the industry oversight organization, advises buyer beware for any scheme or program, like these that promises unrealistic returns of 12% or more, as well as anything promising that you can retire early and/or make more money in retirement than you did in your working years. Here’s a link to the more scams and how to protect yourself and your loved ones
  4. The kid(s) that come back. Some call these boomerang children. Just when you think you have an empty nest, some one of them or worse yet, all of them return!  I just experienced this myself with the return home of my 24 year old son. While a part of me was excited to have him in the house again, the other part of me was calculating the cost to have him back home. Many pre-retirees continue to support children who are considered adults. According to the March 2015 study by Hearts & Wallets, an investment and retirement research firm, those 65 years or older with financially independent children are more than twice as likely to be retired than people of the same age group who financially support their adult children. That’s because those who are still supporting their kids are often putting off retirement to do so,said Hearts & Wallets co-founder Chris Brown. Ideally, we want to help our children become independent from the get go so they can avoid ending up on your doorstep, but we know this isn’t always the case, especially in these times. My son attended one of the best colleges in the world and he’s in my spare bedroom as I write this. The best way to protect your retirement savings from the kids that come back is to help them get financially independent as quickly as possible and ask for them to pay their fare share of the household expenses. Read these tips for surviving your child’s return home (I think I need to read this a couple times!)
  5. Giving grandma a hand out and a hand up. The statistics are pretty convincing that baby boomers are caring for their aging parents and giving up some of their retirement savings in the process. My mother used to say, “I never want to be a burden to my children.” And so far she hasn’t been a burden at all. But, she was properly prepared and to her credit worked as a teacher for 35 years and has a good pension and a good medical plan. Some 11% of adult children under 65 provide financial assistance to their parents, according to the National Institute on Aging’s 2015 Health and Retirement Study. Further, 25% of adult children under age 65 help parents with things like chores and personal care, often at the expense of having their own paying job. In fact, people age 50 and older who care for parents lose an average of $303,880 in pay, Social Security and pension benefits, according to a 2011 MetLife report! Here’s some resources for caring for your elderly parents

While it’s unrealistic to avoid these and many other retirement threats, it’s best to consider what you may face just before retirement and in retirement and make sure you have a Plan A…and a Plan B. This plan, as we discussed above, needs to include not just you, but your spouse and your entire family.

To chat about your plan with an affiliated advisor, please request any one of our assessments here.

Health Insurance in Retirement

At any age, health care is a priority. When you retire, however, you will probably focus more on health care than ever before. Staying healthy is your goal, and this can mean more visits to the doctor for preventive tests and routine checkups. There’s also a chance that your health will decline as you grow older, increasing your need for costly prescription drugs or medical treatments. That’s why having health insurance is extremely important.

Retirement–your changing health insurance needs

If you are 65 or older when you retire, your worries may lessen when it comes to paying for health care–you are most likely eligible for certain health benefits from Medicare, a federal health insurance program, upon your 65th birthday. But if you retire before age 65, you’ll need some way to pay for your health care until Medicare kicks in. Generous employers may offer extensive health insurance coverage to their retiring employees, but this is the exception rather than the rule. If your employer doesn’t extend health benefits to you, you may need to buy a private health insurance policy (which may be costly), extend your employer-sponsored coverage through COBRA, or purchase an individual health insurance policy through either a state-based or federal health insurance Exchange Marketplace.

But remember, Medicare won’t pay for long-term care if you ever need it. You’ll need to pay for that out of pocket or rely on benefits from long-term care insurance (LTCI) or, if your assets and/or income are low enough to allow you to qualify, Medicaid.

More about Medicare

As mentioned, most Americans automatically become entitled to Medicare when they turn 65. In fact, if you’re already receiving Social Security benefits, you won’t even have to apply–you’ll be automatically enrolled in Medicare. However, you will have to decide whether you need only Part A coverage (which is premium-free for most retirees) or if you want to also purchase Part B coverage. Part A, commonly referred to as the hospital insurance portion of Medicare, can help pay for your home health care, hospice care, and inpatient hospital care. Part B helps cover other medical care such as physician care, laboratory tests, and physical therapy. You may also choose to enroll in a managed care plan or private fee-for-service plan under Medicare Part C (Medicare Advantage) if you want to pay fewer out-of-pocket health-care costs. If you don’t already have adequate prescription drug coverage, you should also consider joining a Medicare prescription drug plan offered in your area by a private company or insurer that has been approved by Medicare.

Unfortunately, Medicare won’t cover all of your health-care expenses. For some types of care, you’ll have to satisfy a deductible and make co-payments. That’s why many retirees purchase a Medigap policy.

What is Medigap?

Unless you can afford to pay for the things that Medicare doesn’t cover, including the annual co-payments and deductibles that apply to certain types of care, you may want to buy some type of Medigap policy when you sign up for Medicare Part B. There are 10 standard Medigap policies available. Each of these policies offers certain basic core benefits, and all but the most basic policy (Plan A) offer various combinations of additional benefits designed to cover what Medicare does not. Although not all Medigap plans are available in every state, you should be able to find a plan that best meets your needs and your budget.

When you first enroll in Medicare Part B at age 65 or older, you have a six-month Medigap open enrollment period. During that time, you have a right to buy the Medigap policy of your choice from a private insurance company, regardless of any health problems you may have. The company cannot refuse you a policy or charge you more than other open enrollment applicants.

Thinking about the future–long-term care insurance and Medicaid

The possibility of a prolonged stay in a nursing home weighs heavily on the minds of many older Americans and their families. That’s hardly surprising, especially considering the high cost of long-term care.

Many people in their 50s and 60s look into purchasing LTCI. A good LTCI policy can cover the cost of care in a nursing home, an assisted-living facility, or even your own home. But if you’re interested, don’t wait too long to buy it–you’ll need to be in good health. In addition, the older you are, the higher the premium you’ll pay.

You may also be able to rely on Medicaid to pay for long-term care if your assets and/or income are low enough to allow you to qualify. But check first with a financial professional or an attorney experienced in Medicaid planning. The rules surrounding this issue are numerous and complicated and can affect you, your spouse, and your beneficiaries and/or heirs. Visit our Medicare page in the Knowledge Center for more information.

Her Retirement offers a complimentary Medicare assessment to help you determine your strategy for claiming Medicare benefits and to make sure your health is protected in retirement.  Request an assessment with us today