How will you survive financially in retirement?
According to one estimate, a 65-year-old American couple retiring in 2017 will need a minimum of $13,000 per year for 20 years, $260,000 before inflation.
I don’t have to tell you what it would be like to live on $13,000 a year or $1,083 a month. I’m sure you can imagine it perfectly. Just start subtracting optional items and reduce essential items until you get to that figure.
Not a pretty picture, is it? Now add the health care expenses.
Thirteen thousand a year won’t cover much, if anything…especially if Republicans in Congress succeed in their longstanding goals of transforming Medicare into insurance vouchers and reducing Social Security benefits.
How about saving more for retirement? I hate when so-called “financial advice” columns tell me to do that. It’s like telling a hungry person to eat more. They would if they could.
Fortunately, there is a “trick” you can apply to existing tax and insurance rules that could allow you to avoid the threat of a poverty-stricken retirement…
If you don’t know what a health savings account (HSA) is, it’s time to find out.
If you have good health, good luck, and the financial means to pay most of your health costs out of pocket before you retire, an HSA could be a great way to save for the health care bills you’ll face when you retire. and therefore stretching your overall retirement kit even further.
An HSA is a tax-advantaged savings account that you contribute money to before taxes, like a 401(k) or IRA. It lowers your current tax bill, and when your HSA administrator invests the money, it grows tax-free just like any retirement account.
If you use HSA money for qualified medical expenses, you don’t owe any taxes on that money. Always. That makes an HSA even more advantageous than a 401(k) or IRA, where your post-retirement withdrawals are taxed as ordinary income.
And unlike those retirement plans, no minimum distributions are required for HSAs. If HSAs become hereditary, as the Trump administration is seeking, any balance could be transferred to your surviving spouse and/or heirs.
Pay and save now, withdraw later
However, there is a catch.
HSAs are only available to people with a high-deductible health insurance plan. Under IRS rules for 2017, that means plans with a deductible of at least $1,300 for singles, or at least $2,600 for family coverage. That’s what you have to pay annually before the insurance goes into effect.
In the real world, the average deductible for people with a high-deductible plan combined with an HSA is about $2,295 for single workers and $4,364 for family coverage. You must be able to spend at least that much on your own health care now to take advantage of an HSA. (Tea maximum out-of-pocket deductibles and copays for people with high-deductible plans is $6,550 for individuals and $13,100 for family coverage in 2017).
Of course, high deductible plans have lower premiums than traditional plans, which is a plus. But for an HSA to work for retirement, you need to take the money you save in lower premiums and put it into the HSA now.
That seems to be precisely the way people use HSAs. A study by the Congressional Budget Office found that most people with HSAs were paying current medical costs, including surgery and other major expenses, with current income so they could maximize their HSA contributions.
If you’re disciplined about saving and have enough monthly cash flow to cover your current health costs, letting your tax-free HSA money grow tax-free will give you another source of income when you retire… it will make it unnecessary to use your other retirement income for health care costs.
be ahead of the curve
With all those benefits, HSAs are a great hidden benefit of the current US tax code. The only drawback is the need to opt for the high deductible with current health insurance.
But we may not have much of a choice about it anyway. Republicans have been pushing for more high-deductible plans for years, and Trump says he wants to encourage them, too.
On top of that, Obamacare’s so-called “Cadillac tax,” which taxes the value of the most generous employer health plans, takes effect in 2020. That threat is already pushing employers toward high-deductible plans.
Of course, most companies, by and large, want to lower their healthcare costs regardless of Obamacare or any other legislation. That’s why a growing number of US employees are covered by a high-deductible health plan combined with an HSA — an increase of 25% between 2015 and 2016 alone.
But wait, there is more
Generally, the expenses that qualify for HSAs are the same as those for claiming the medical expense deduction on your 1040 tax return. But there is one allowable deduction that is a real winner for many of us… subject to a certain maximum. , the premiums you pay for long-term care insurance can come out of your HSA, tax-free.
That means you can increase your tax-free savings for retirement medical costs and lower those costs through insurance that covers the most expensive parts.