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How To Save Over $90,000 On Retirement Medical Expenses

According to a recent study from Fidelity, the average couple retiring at 65 years old in 2018 will need $280,000 in non-Medicare funds to cover their retirement healthcare expenses. That’s over a quarter of a million dollars the average retirees will need to save for their medical costs (and that estimate doesn’t include over-the-counter medications, dental services, or long-term care).

Some people might turn to their 401(k) accounts to pay for those additional healthcare expenses. But if you used 401(k) funds to pay for that $280,000 of medical care, you’d pay a total of $373,334 once you factor taxes in. That’s an extra $93,000 you’d be paying in taxes alone.

However, if you paid for those eligible medical expenses from your HSA, you’d only pay $280,000, because qualified medical expenses are tax-free. That’s nearly $100,000 of 401(k) funds you’ll keep to help fund the retirement you planned for.

By consistently contributing to your HSA and letting interest and earnings grow tax-free, you can build a sizable nest egg to pay for the medical expenses Medicare doesn’t cover. Let’s assume that you contribute and invest the maximum into your HSA each year (in 2019, the maximum for self-only coverage is $3,500 and the family maximum is $7,000).

With a conservative 6% rate of return, 25% tax rate, and 2% annual CPI increase, a 50-year-old retiring at age 65 could accumulate over $119,000 (self-only) or over $226,000 (family). And a 30-year-old could accumulate more than $530,000 (self-only) or over $1,098,000 (family)!*

And if you run into the happy problem of having more HSA dollars than medical expenses once you retire, you don’t have to worry. After you turn 65, you can withdraw HSA funds for non-medical expenses and only pay regular income taxes on those funds (the 20% penalty on non-eligible withdrawals goes away). Basically, non-medical HSA withdrawals after 65 are identical to withdrawals from other retirement accounts like a 401(k) or IRA.

For investing gurus, there’s one more trick that enables you to withdraw tax-free HSA funds to spend however you want, even before you turn 65. We call it shoeboxing; read more here.

If you don’t have an HSA and are ready to start investing, you can open an account here.


*Scenarios are hypothetical. Future rates of return can’t be predicted with certainty and investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. The compounded rate of return noted above does not reflect sales charges and other fees that separate account investment funds and/or investment companies may charge.

Author: James Denison