Outside of housing and possibly transportation costs, health care is likely to be your biggest retirement expense. It’s unfortunate, but visits to the doctor become more frequent and more health problems tend to appear with age. Before reaching retirement age, it is very important to understand the likelihood of rising health care costs and plan accordingly.
According to Fidelity, the average couple retiring at age 65 in 2022 will need about $315,000 in after-tax savings to cover retirement health care expenses. Even for people able to save $1 million for retirement, $315,000 after taxes is a good chunk of total savings. One way to prepare for this is to take advantage of a Health Savings Account (HSA) if you are eligible.
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Using an HSA for healthcare expenditures
If you are enrolled in a High Deductible Health Insurance Plan (HDHP), you can contribute to an HSA, which is designed to help you save and invest pre-tax money to use for medical, dental, and eligible visuals. . Not only does the pre-tax savings (or contribution deduction) reduce your taxable income for the year, but your HSA money increases and consists of tax-free withdrawals if used for eligible healthcare expenses.
For 2022, the maximum you can contribute to an HSA is $3,650 if you are enrolled in a health insurance plan on your own and $7,300 if you are enrolled in a family plan. People 55 and older can add an additional $1,000 to their annual dues. If you’re going to spend money on medical bills — and you probably will — you might as well save for them and get some tax relief in the process.
Given enough time, your HSA can handle the load
Imagine that you are enrolled in an HDHP yourself and contribute $300 per month to an HSA, investing it in an index fund that returns, on average, 8% per year over 25 years. During this period, you would have personally invested $90,000, but the investment would be worth more than $263,100. If you have more time and can do it for 30 years at those returns, it would be worth over $407,800.
And because it’s in an HSA, the money would be tax-free, compared to a regular brokerage account where you’d have to pay capital gains taxes on profits earned. This could potentially cost tens of thousands of dollars over time.
If you are enrolled in an HDHP family plan and are able to contribute $600 per month, you could exceed estimated health care costs in retirement in 20 years with average annual returns of 8%. The one thing you need to be careful of, however, is having too much of your HSA invested in stocks when you’re close to retirement. The goal should always be to grow your money as much as possible while you’re younger because you have time to bounce back from market drops, but as you get closer to when it’s time to use your money, you don’t want a scenario where stocks – and your HSA value – plunge with little time to recover before you need the money.
Using an HSA is a win-win situation: you will get the present benefit of tax relief and the future benefit of money that has had time to grow and accumulate at home. tax shelter. Take advantage of it if you can.
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