HSAs and Retirement Planning

Preparing for retirement may seem daunting, but good planning can help. In addition to saving for living expenses in retirement, think about saving for your health care. It now costs $370,000 out of pocket for the average retired couple1 – above what Medicare pays – for medical costs in retirement. Think of your HSA as a 401(k) for health care costs, and consider making it a key component of your retirement strategy.

Saving with a Purpose

As you consider your retirement savings strategy, it’s important to save with a purpose – matching your savings and investment strategies with projected spending in each of three categories: fixed, variable, and medical expenses.

Fixed expenses should be your first priority. Think of these as expenses necessary to live your life and cover the basics like food and shelter. Typically, fixed expenses are difficult to change and are needed longer-term, throughout retirement. Since these expenses are a priority, you’ll want to tap all available retirement assets to meet fixed expenses – from pensions and Social Security to 401(k) and IRA.

Fixed Variable Medical
Pension 401(k)/403(b) IRA Social Security 401(k)/403(b) IRA HSA

Variable expenses are those that can change quickly and are typically flexible and not required. These come down to lifestyle: will you have enough savings for travel in retirement? What about nonessentials like eating out as often as you’d like? It is easier to manage your budget and change variable expenses than it is fixed expenses. Funds for variable expenses typically come from traditional retirement accounts such as a 401(k) and IRA.

Medical expenses in retirement are the third savings bucket to consider. With the cost of retirement health care skyrocketing in recent years, it’s critical to prepare. HSAs offer incredible flexibility when saving for this purpose. You can save in your HSA for today and with an eye to the future because HSAs offer something no other retirement account provides: the option to spend the money tax free on qualified expenses any time, from today through retirement. Just like a 401(k), HSAs also offer the option to invest the money2 – with tax-free investment gains – making them the ideal tool to save for retirement medical expenses.

Purposeful saving helps you consider how much you will need and how you will reach each of your savings goals. Focus on each category of expense, start early, and commit to regular saving. It can have a big impact on your future quality of life.

To help you determine how much you’ll need to save for retirement, talk to your financial planner or use an online calculator. Personal finance advocates such as Kiplinger’s offers a useful calculator. BenefitWallet has a savings calculator that can help with planning your medical savings goals.

Planning Your Next Dollar of Savings

Balancing retirement savings with day-to-day expenses can be difficult. You might be wondering: how can I maximize every dollar saved? Here’s one possible savings strategy; you should always consult a financial advisor to determine the benefits of any savings strategy for your specific situation.

  • If an employer offers a match to your HSA or retirement savings plan, prioritize the match portion of your contribution first. That way you won’t lose out on this extra compensation.
  • Next, look to maximize your HSA contribution. HSAs lower taxable income immediately and they offer tax-free distributions for qualified expenses any time in the future, giving you more flexibility than any other account
  • Any remaining retirement savings dollars should next go to either a 401(k) or IRA, depending on your individual tax situation and the options available to you.

Start Immediately and Maximize Your Tax Impact

No matter what you choose to do, the sooner you start saving, the greater your long-term potential. Time is your number one ally to drive potential growth. Plus, between a 401(k)/403(b) plan and an HSA, you have a tremendous amount of tax savings opportunity. Depending on your family status and age, you may be eligible to lower taxable income between $21,740 and $31,750 per year, all while building a nest egg for your retirement needs – from fixed expenses to medical.

Footnotes:

  1. HealthView Services, 2018 Retirement Health Care Costs Data Report.
  2. BenefitWallet is not recommending any investment, nor can it assure you of a profit or protect you against any loss on any investment made via the BenefitWallet investment platform.