Health Care Is Expensive; Plan Now With HSA's!
It’s open enrollment time! It’s the time of year when you are able to make changes and update your health benefit elections for the upcoming year, whether that be through company benefits, private coverage, or Medicare. The only other way you can make changes throughout the upcoming year is if a life changing event occurs such as losing coverage, getting married, or having a baby for example.
Health care planning is a vital topic that needs to be addressed in everyone’s comprehensive financial plan. Most people consider open enrollment time a decision for the upcoming year. It should be viewed as a way to prepare you for future health care expenses in retirement and a way to reduce taxes today.
According to Fidelity, the average 65-year-old couple retiring today will spend an estimated $380K in retirement until age 90 (not including long term care).
A 35-year-old couple today can expect to spend $521K over 25 years in retirement (again, not including long term care).
The best way to plan for health care expenses in retirement is to save now for those future costs. A Health Savings Account is designed to specifically save towards that goal. The Health Savings Account is the best tax advantaged account you can contribute to, even better than a 401K or Roth IRA, as they offer better tax benefits. Unfortunately, not enough people are taking advantage this account. According to a survey by Empower, only 50% of adults know how a Health Savings Account works. Only 34% of people that have access through an employer are enrolled. And only 24% of those that are enrolled have funded their account. We are missing out on a big opportunity! You need not have an employer to provide this benefit, you may open one as long as your health elections qualify you to do so.
We wrote about Health Savings Accounts in the past, see here Health Savings Accounts - The Underutilized Retirement Strategy - Hamilton Wealth
Health Savings Accounts Offer Unmatched Tax Benefits - CNBC
How Much To Save For Healthcare - USA Today
Unfortunately, not all health care expenses are covered by Medicare in retirement. Medicare covers a lot but does not include things such as vision, hearing, dental, cosmetic, long term care, etc. It is up to us to pay anything not covered with our savings. We use specific account to save for our retirement goals (401K, IRA), why would we do the same for health care (HSA)? This is the average breakdown of where health care expenses are being spent in retirement.
To contribute to a Health Savings Account, you must meet the following:
Be covered under a high deductible health plan (HDHP), meeting criteria of out of pocket max ($1,650 individual, $3,300 family) and deductibles ($8,300 individual, $16,600 family)
Must not be covered under another health plan
Must not be covered by FSA
Not be enrolled in Medicare
Not be claimed as a dependent on another person’s tax return
The benefits of Health Savings Accounts are as follows:
Triple tax benefit (the only account that does this!)
Immediate tax deduction on contributions
Earnings grow tax free
Tax free withdrawals for qualified health care expenses
Invest in whatever you’d like, these funds should be used in the future not today
Contribution limits for 2025 are $4,300 annually for individual and $8,550 for family (more if you are age 55 or older)
By adding $4,300 annually (2025 individual max) for 25 years, growing at 7% there would be an estimated $291K in a Health Savings Account to use for health care expenses in retirement. The tax savings shown are based on a 32% fed tax rate and a 9% state tax rate. Your personal tax situation could change these tax savings numbers some.
Please don’t wait to make your elections, there are deadlines and if missed you may not be able to change elections for another year. This is all part of building a comprehensive plan to prepare us in the future.
Let us know if you have questions, we are happy to assist and discuss further.
-Jerry
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