Whether you are on your FIRE path and aiming for an early retirement, or plan to retire past the age of 65, it's inevitable that you will require medical care at some point during your post-working years. If you're like me and living with a chronic health condition, setting your health and finances up for the best success is a powerful way to ensure that your retirement years will be relatively smooth.
In 2018, after numerous visits to many doctors, emergency rooms, and a laparoscopic surgery, I was diagnosed with endometriosis. To cover my medical expenses, I had depleted my FSA at the time, and I was more than grateful that I had it available. However, my medical bills were so high that I needed to arrange for a 0% interest payment plan so that I wouldn't deplete everything else. My condition continues to require regular medication management to this day.
While my healthcare costs are nowhere near the level they were at during 2018, they can easily run up into the thousands of dollars per year. Even though I live with an expensive health condition, I opt for a high-deductible plan (HDHP) so that I can have an HSA, or Health Savings Account.
There are a few reasons why I love HSAs, especially over an FSA (or Flexible Spending Account):
Portability and ownership: I was able to take my HSA funds with me after quitting my last job, and I still contribute to my account. Previously, my FSA funds were tied to my employer.
Rollover: HSA funds rollover for years, and the investment can grow if unused. FSA funds tend to have a use-it-or-lose-it policy. FSAs can be great if you know you'll spend all the funds. I know of some folks that have to do the end-of-year scrambles to spend those funds, even on things they might not need such as over-the-counter medications or health equipment.
Tax-advantaged long-term savings for retirement: Assuming that you don't deplete these funds every year, HSAs are fantastic investments. HSA contributions, investment earnings, AND qualified withdrawals for medical expenses are tax-free!
So, what's the catch?
One major drawback is that in order to have an HSA, you must have an HSA-eligible health plan, also known as a High Deductible Health Plan (HDHP). In my experience, these plans usually cover preventative services, but not much more. With my chronic health condition, and all the medications and appointments required to manage it, I usually meet my deductible each year. It is definitely high (over $7,000 annually the last few years).
Another sucky thing is that this number is way beyond the annual contribution limit for HSAs ($3,850 in 2023 and $4,150 in 2024). So even if I used up all of my HSA contribution for the year, I still have to pay hundreds more to cover my medical expenses. Personally, I try not to touch my HSA, so I pay out-of-pocket for my deductible. I'm in a fortunate enough position now where I can financially afford to do so. This also provides me with psychological peace of mind. I'm looking out for future me, ensuring that I can fund my retirement, and investing in my overall health.
Finally, an HSA and HDHP might only make sense if you are lucky enough to have the funds to cover these things. Years ago when I was earning much less money, it made more sense to have an FSA and a cheaper health plan. I knew I was likely going to spend all my FSA funds anyway because of my chronic health condition, and having a cheaper health plan through my employer was more financially doable. If you're income is relatively low, I might only recommend an HSA and HDHP if you're in good health and confident that, should something happen, you can cover your deductible for the year.
Benefits of HSAs
Health Savings Accounts (HSAs) offer a range of benefits, especially when used strategically for retirement planning. Here's a list of several advantages to consider for your FIRE path:
(1) Triple Tax Advantage:
Contributions are tax-deductible, providing an immediate reduction in taxable income.
Interest, dividends, and capital gains earned within the HSA are tax-free.
Withdrawals for qualified medical expenses are tax-free.
(2) Rollover: Unused funds in the HSA can be carried over from year to year, allowing for long-term savings and investment growth. Unlike Flexible Spending Accounts (FSAs), there is no "use it or lose it" rule for HSAs.
(3) Investment Opportunities: Many HSAs offer investment options, allowing you to grow your contributions over time through the stock market or other investment vehicles.
(4) Portability: HSAs are portable, meaning you can keep the account and its funds even if you change employers or retire.
(5) No Required Minimum Distributions: Unlike some retirement accounts, there are no required minimum distributions from HSAs, providing flexibility in managing withdrawals during retirement.
(6) Medical Expenses in Retirement: Health care costs tend to increase in retirement. HSAs can be used to cover a wide range of medical expenses, including Medicare premiums and long-term care insurance.
(7) Medicare Premiums: HSA funds can be used tax-free to pay for Medicare premiums, including Part B and Part D.
(8) Tax-Free Withdrawals After Age 65: If funds are used for non-medical expenses after age 65, withdrawals are penalty-free, though they may be subject to income tax.
(9) Emergency Fund for Health Expenses: HSAs can serve as an emergency fund for unexpected health expenses, providing a financial cushion and reducing the need to tap into other retirement accounts.
(10) Lower Health Insurance Premiums: By choosing a high-deductible health plan (HDHP) required for HSA eligibility, you may qualify for lower health insurance premiums, freeing up additional funds for retirement savings.
(11) Tax Planning Tool: HSAs can be used as a tax planning tool by strategically timing withdrawals to optimize tax benefits, especially in years with higher medical expenses.
(12) Estate Planning Benefits: HSAs can be passed on to heirs tax-free if the designated beneficiary is a spouse. If the beneficiary is a non-spouse, the HSA becomes taxable, but the funds can still be used for qualified medical expenses.
(13) Control Over Health Care Decisions: Having an HSA empowers individuals with more control over their health care decisions, as they have funds specifically earmarked for medical expenses.
It's important to note that the benefits of an HSA for retirement planning depend on individual circumstances, including health, financial goals, and tax situations. Consult with a financial advisor to determine the most effective strategy for your specific needs.
If you'd like to learn more about how you can invest in your health, check out my previous blog post.