Originally Published on NewsMax
Planning for retirement has never been easy — but it’s never been more important than it is today.
With the cost of retirement on the rise, Millennials and Gen-Y are already looking ahead to stow away what little savings they can to prepare for their golden years.
Many boomers are seeing the fruits of their retirement planning efforts, but in today’s economy, the retirement money that once went a long way now seems almost unrealistically limited.
With the amount needed for retirement going nowhere but up, all generations must hope for the best and plan for the worst — part of that planning comes with understanding and taking advantage of the retirement investment tools at our disposal.
When it comes to retirement planning, 401(k)s get all the attention. But there’s one often-overlooked retirement tool that can help you save for one of the biggest expenses in retirement: medical costs. A Health Savings Account (HSA) allows you to set aside money pre-tax via payroll deductions to cover out-of-pocket health expenses. Designed to be paired with an HSA-qualified health plan, an HSA is a great way for individuals to help lower healthcare costs. However, what many people don’t realize is that an HSA can also be an invaluable retirement planning tool.
In fact, a recent article in the Wall Street Journal said “when saving for retirement, there is a place to put money that may be even better than your 401(k).”
That’s because an HSA offers three distinct advantages:
- Triple tax savings as HSA contributions are tax-free; interest on HSA balances accrue tax-free; and, withdrawals are tax-free, as long as HSA funds are used for eligible healthcare expenses;
- You can invest your HSA dollars once you reach a minimum account balance and research shows that HSA investors average a return of 11.3 percent on a three-year basis — which exceeds the typical 401(k) return;
- An HSA is yours to keep, even if you change healthcare plans, change jobs, or retire. In order to best prepare for retirement, understanding how an HSA can work for you is paramount.
A 401(k) for healthcare
Fidelity research estimates that the cost of healthcare for a couple retiring in 2015 is $245,000 throughout their retirement — a 29 percent increase since 2005 when a couple would pay only $190,000. Among the couples interviewed, nearly 75 percent were most concerned about being able to afford unexpected healthcare costs during retirement. In addition, only 22 percent of couples surveyed actually factored in healthcare costs when planning for retirement, which proves more awareness is needed.
It’s important to understand that there’s a place for both a 401(k) and an HSA.
Contributing to a 401(k) is a very smart retirement strategy, particularly if your employer matches contributions. If you’re already contributing, by all means, keep going. However, establishing an HSA, gives you the ability to amass savings to be used exclusively for healthcare expenses — taking advantage of HSAs triple tax advantages and preventing the need to dip into 401(k) funds for medical-related costs in retirement.
Save for today, tomorrow and in retirement
Part of the appeal of an HSA is the ability to use tax-free dollars to cover out-of-pocket medical expenses. You simply decide how much to contribute and funds are withdrawn from your paycheck for deposit into your HSA before taxes are deducted. You can then use your HSA to pay for everyday eligible healthcare expenses and any balance left builds a healthcare nest egg for retirement.
Let’s look at an example. An employee with family coverage in an HSA-qualified health plan may contribute a maximum of $6,750 to an HSA in 2016. As healthcare expenses arise throughout the year whether everyday costs such as copayments and prescriptions to big-ticket items, such as new glasses or orthodontia — those pre-tax dollars can be used to cover those expenses. Since the HSA contributions aren’t subject to taxes, the employee’s money goes farther, helping them save an average of 30 percent on healthcare expenses. The money that isn’t used stays in the HSA and accrues interest, growing year over year to be used five, 10, 20 or 30 years from now.
The time to start planning for retirement is now
A July 2015 report from the Employee Benefit Research Institute (EBRI) found that while 17 million people had HSA-eligible health plans, only 13.8 million people had opened an HSA. These individuals are missing out on an opportunity to ramp up savings for retirement. The beauty of an HSA is that it’s a great tool for individuals, couples and families of all ages. Whether you’re just getting started with retirement planning, have made some progress but are looking to ramp up your efforts, or are a serious investor, an HSA should not be overlooked. HSA funds can be accessed and utilized for eligible healthcare expenses at any time, or remain untouched until you retire.
It’s never too late to start planning for retirement and the triple tax advantages of an HSA make it a great choice. Rather than banking exclusively on a 401(k) to cover retirement spending needs, make your nest egg last longer by incorporating an HSA into the foundation of retirement planning. The sooner you start contributing, the better off you’ll be.