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Covering health care costs in retirement

covering health care costs in retirement

Whether it’s right around the corner or still decades away, there is never a wrong time to consider how to cover health care costs in retirement.  According to a 2019 study by HealthView Services, couples in their 50s today are expected to pay around $400,000 in lifetime retirement health care costs.  Yikes!

So, how can you use your Health Savings Account to save up your half? Here’s a very rudimentary breakdown of the numbers:

Road to $200K Math Equations

The current 2021 HSA contribution limit is $3,600.  There is also an extra $1,000 additional contribution allowed for eligible individuals aged 55 or older at the end of the tax year.  To keep things simple, we won’t get into predicting annual increases or interest rates just yet.

If you max out your HSA contribution each year and don’t withdraw any funds until age 65, it would take 53 years to save up $200,000.

Since twelve-year-olds aren’t even eligible to open an HSA, let’s look at some faster ways to build that balance.

Time is Money

HSA funds earn interest over time!  Typically interest rates are tiered based on the balance in your account.  Double-check what those balance tiers are and take advantage of them. Let’s say your HSA custodian has laid out their interest rate tiers like so:

Balance Interest Rate
$0 – $5,000 0.02%
$5,000 – $10,000 0.07%
$10,000 – $25,000 0.10%
Over $25,000 0.20%

Will your annual contributions end up pushing your balance into the next tier?  Consider whether you can make a lump sum contribution early in the year to maximize the time your funds accrue interest at a higher rate.

You’re probably looking at these interest rates and thinking that those numbers will not make a dent in getting you to $200,000.  It seems minimal, but every penny counts, and you’ll get to $200k a whole year quicker!

Invest in the Long Term

So relying solely on accruing interest will save some time, but 52 years is still a long time, and thirteen-year-olds are not eligible for HSAs.

To really speed things along, consider investing a portion of your HSA funds.  There may be a limit on the funds you can contribute, but there is no limit to how much you can earn!

There is no one size fits all investment strategy.  To break down the basics and learn about what kind of portfolio you might want, The Motley Fool is a great resource!  How you invest will depend on how many risks you’d like to take.

Stocks tend to be volatile, but the increased risk can lead to greater rewards.  Bonds have more stability but tend to have lower overall returns than stocks.

Check out Jon’s journey with investing his HSA funds.  If his experience is anything to go off of, there’s no telling how quickly you’ll make it to $200,000!

The Bottom Line

We know saving $200k in your HSA by the time you cut into your celebratory retirement cake seems like a daunting task.  Here is the summary of our “shortcuts” to make it less overwhelming:

  • Get your funds into your account as early as possible and make time work for you, not against you, especially if you’re on the cusp of a higher interest tier.
  • Invest! This is one of the best features of an HSA, so use it.

Love HSAs and want to keep reading?  Check out our blog Why a 401(k) & HSA make the perfect power couple to see how the two accounts complement each other.