If you knew there was something that you could do to would improve your quality of life in retirement, would you take that step? And, no it’s not the obvious --- “start early, save more” advice. Instead, encourage yourself to have an “I want to be financially healthy” mindset. Having a healthy mindset can have a dramatic impact on both your quality of life and your financial freedom in retirement.
Starting with a diagnosis
Begin by asking yourself, how am I feeling? Asking yourself how you feel about your current financial situation and future plans will allow you to reflect on your goals and to begin constructing a plan to get you to where you want to be. But it’s not just about the financials, first consider how you can improve your quality of life in the short term and have more time in retirement. Secondly, consider your physical health. Going into retirement healthy, will allow you to do more and supports point number three, which is ---- you can avoid some of the healthcare costs that come with aging. While it’s up to you to determine how or if you want to live a healthy lifestyle, you may want to think about how healthcare costs may impact your retirement plan. Explore our Healthcare Calculator to better understand how much you might need in retirement based on your unique circumstances.
The good news is that there is a specific savings vehicle to help you pay for your healthcare costs now and/or in your retirement years.
Health Savings Accounts (HSAs) are the most tax advantaged account available in the marketplace because they are what’s called triple tax advantaged:
- All contributions are pretax
- Any account earnings grow tax-free; and
- Any distributions are tax-free as long as they go towards qualified medical expenses
Therefore, an HSA can be a very tax-efficient investing tool, if used properly. However, it is important to remember that you are eligible to contribute to an HSA only if you are enrolled in a high deductible health plan (HDHP) through your employer. In addition, like your 403(b) or 401(k), your HSA is yours to keep even if you change jobs and any unused balance rolls over to the following year.
Let your HSA grow
Medicare is limited in what it covers and even for the services it does cover, you generally have to pay your deductible, coinsurance, and co-payments. And since no one knows how long they will they will live or any health conditions they may develop ------- those costs may be significant over the course of your retirement. To help mitigate this unknown, if you can afford to pay for your current healthcare expenses out of pocket; consider not withdrawing any funds from your HSA and saving the balance for retirement.
Contribute the maximum amount you can afford to both your retirement plan (especially if there is an employer match) and health savings account to increase your overall total account savings values and your overall tax savings. Plus both accounts are generally pre-tax and earnings grow tax-free1. Then, if your HSA provides an investment menu, invest your HSA balance, just as you can with a retirement account. Upon retirement you will have access to a tax-free source of funds to pay for your healthcare expense in retirement from your HSA. As an aside, you can use your HSA to pay for Medicare premiums and out-of-pocket expenses including deductibles, co-pays coinsurance and some long-term care expenses.You can also withdraw from your HSA at age 65 for any reason and just pay ordinary income tax.
One final prescription
Getting healthy now, physically and financially, during your working years, can enhance your lifestyle immediately and create great benefits for your life in the long-term. Healthier individuals can experience lower healthcare costs which means more to spend on what matters most to you and you’ll be in better shape to pursue your goals. While fitting into your favorite swimsuit may not be enough motivation, start looking at your decisions as an investment into living the life you want.