Savings Health Check! Calculate Medical Care Savings for Retirement

There is no such thing as too early or too late to start saving for retirement. While many Americans worry about having enough for their golden years, most focus on traditional retirement plans like 401(k)s, IRAs, and pensions. Few are taking advantage of one of the most powerful tax-advantaged accounts for retirement available today: the health savings account (HSA).

HSAs are typically offered with high-deductible health plans (HDHP) to offset out-of-pocket spending with tax-free funds and to provide a savings growth vehicle for medical expenses in retirement. As the cost of health care continues to rise year after year, HSAs are gaining steam as a necessary means to cover medical needs now and long-term care costs in retirement. If you are wondering what an HSA really does and how much should you contribute, our HSA Growth Estimator calculator* may help!

It Adds Up: Health Care Costs in Retirement

When it comes to retirement savings, many people forget to consider how much they will need just to cover medical expenses. In fact, the U.S. Department of Labor reports that only 40% of Americans have calculated how much they need to save for the average 20 years many will spend in retirement. For retirees managing the cost of living in America, health care comes in third after housing and transportation as the largest household expense, at an average of $6,833 a year, according to the Bureau of Labor Statistic’s latest Consumer Expenditure survey.

That means that the average retiree household in 2020 would need roughly $137,000 set aside just for medical costs. If we account for inflation and increasing health care costs, the actual amount may be much higher.

If you haven’t started planning for retirement or if you are trying to catch up late in your career, these numbers can feel overwhelming. This is where the HSA can become a lifesaver if you are worried about your retirement preparation (or lack thereof)!

Count the Tax Savings with an HSA

A health savings account is exactly what the name states—an account that allows you to save for health care spending, whether it’s money you want to set aside for emergency medical bills or to create a nest egg for medical expenses in retirement. The HSA is a powerful savings vehicle because you do not pay taxes on contributions, earnings, or qualified withdrawals. Little known fact is that the account also provides investing opportunities, too.

When you enroll in an HSA plan, you allocate pre-tax dollars from your paycheck, grow your funds with tax-exempt earnings from interest and return on investments, and withdraw money tax-free for eligible medical expenses.

What are HSA eligible expenses? See our list of examples!

The long-term aspect of the HSA relates to the fact that it travels with you throughout your career and into retirement, just like traditional 401(k) and IRA plans. By investing HSA funds and paying out-of-pocket for medical expenses, HSA owners have the potential to amass significant savings to put towards medical costs in retirement. And if it turns out your medical costs aren’t so high down the line, your HSA funds can be used for non-medical spending in retirement by simply paying income tax on those withdrawals. You don’t have to feel constrained by only using HSA funds for health care expenses.

Bring Balance to a Retirement Savings Plan

Despite all the advantages that come with opening an HSA, the account remains underutilized and misunderstood. The latest Cerulli Edge U.S. Retirement report found that when asked what they would do with an extra $1,000, the 401(k) participants surveyed ranked “HSA contribution” last among 12 options.

HSAs have been in the benefits marketplace for about 17 years, but compared to other retirement planning accounts, they are new on the scene. With more education offered by employers and brokers on the value of HSAs, there is no doubt they will grow in popularity and eventually become a necessary factor in any balanced retirement plan.

If you have an HSA, it may be time to ask yourself: “Am I making the most of it?” On the other hand, if you haven’t opened an HSA account, you might ask: “What is holding me back?” Whatever your situation may be regarding the HSA, we’re certain that these triple-tax advantaged accounts will continue to evolve in the coming years to help people at all stages in their careers feel secure about their retirement plans.

Try Our HSA Growth Estimator for Yourself!

Our HSA growth calculator for health care savings can help you determine how much to invest in your HSA to meet savings goals for the long-term. Regardless of age or income, everyone can benefit from making a retirement plan. It’s never too soon or too late to save for health care. Here are some factors our calculator considers:*

Age – Your current age will determine how many years you have for your money to continue growing.
Annual HSA Contribution – How much are you allocating each year for your HSA is key to project savings growth potential. Whether you contribute just $500 a year or max out at $7,100 in a family plan (based on 2020 IRS contribution limits), every dollar helps!
Employer HSA Contribution – How much your employer contributes each year is also a factor in savings—not all employers offer a contribution, but it is a great way to incentivize employees to enroll!
Interest and Investment Rate of Return – Interest is the percentage the savings accrue; some savings accounts, for example, earn around 1% interest rate, and rate of return is the percent of earnings on your capital, or initial investment. To find this, you will subtract the initial investment from the amount you have at the end of a year to see the total earnings, and divide that number by the initial investment to get the rate of return. Add the interest rate and rate of return in this field to see how your HSA money could grow.
Amount Withdrawn from HSA Each Year – How much you typically spend on health care costs using HSA funds each year will also affect how much you are able to save and grow your money over time.

Including all these factors in the equation, our HSA growth calculator will crunch the numbers to show you how your HSA money can grow each year, up to retirement age, to stay on track for you savings goals—no matter where you’re at in your career!

Want to see some examples? Here are two different scenarios that show how you can reach short-term and long-term savings goals with an HSA!

Starting Age 32, Contributing $2,000 a year

Kirk is 32 years old and opens an HSA for the first time. He will contribute $2,000 a year to his HSA in pre-tax dollars from his pay, and his employer will offer $200 a year in contributions. Kirk expects to earn around 4% in interest and rate of return on his investment, and he withdraws $600 per year from the HSA for out-of-pocket health care spending. In 5 years, Kirk will have approximately $9,000 saved; in 10 years, he will have nearly $20,000; in 20 years roughly $50,000; and by retirement age 65, over $110,000.*

Starting Age 55, Contributing $8,000 a year

Anita is 55 and has been offered an HSA for the first time at her company. She will contribute $6,000 a year on a family HSA plan plus the $1,000 additional catch-up contributions permitted for those 55 and over. Her employer offers $1,000 a year in contributions, and she expects a 5% return on investment and interest. Anita decides to pay for medical costs out of pocket, so by retirement at age 65, she will have $105,655 saved in her HSA after just 10 years!*

Want to check out the calculator yourself?

Give it a try here!

This calculator was created by ConnectYourCare to be illustrative of typical results of typical participants in similar type benefits programs, and does not take into account specific situations such as filing status or variances in state tax law. The accuracy of the results are predicated upon the input provided by the user, and as such, ConnectYourCare disclaims the accuracy of any results shown. This calculator is intended merely as a planning tool and is not meant as tax or investment advice. Before taking any action based upon the results provided, please consult with a tax consultant or expert.

About the Author:
Diana Bauza is a content writer based in the Greater Philadelphia area. She writes about products and services in the health and technology industries, with the goal of empowering consumers with quality information to help them make decisions that best serve their needs.