It can be hard to save for retirement. Especially for pastors who need to because they’ve opted out of Social Security. A lot of big denominations have pensions, but what about independent pastors? Non-denominational pastors usually don’t have workplace retirement plans. That doesn’t leave them with much more than an IRA. Or does it?
Back in March, we discussed how to save enough for retirement if you only have an IRA. I briefly mentioned health savings accounts (HSAs) as another possible retirement savings vehicle. Today I’m going to explain to you what I meant.
First of all, if you aren’t familiar with HSAs, follow this link to learn everything you need to about HSAs. Ok, now that you’re all caught up, what do HSAs have to do with retirement?
Medical Costs During Retirement
First, let’s talk about retirement. After you retire, you usually get older and sicker until you eventually die. I hope you don’t mind my frankness, but that’s basically what happens. Sure, there will probably be some awesome trips, a bunch of cute grandkids and some meaningful mentoring as well. But that’s not the focus of this article.
Because your body deteriorates the most during retirement, you will probably have your highest health care costs during that time as well. It is estimated that a couple retiring now will need $260,000 to cover their medical costs during retirement. However, that estimate does not include Medicare Part A premiums. Most people don’t pay them, but if you’ve opted out of Social Security you will have to. That means you’ll need even more money.
About one-third of the $260,000 estimate is premiums for Medicare Parts B (doctor services and outpatient care) & D (prescription drugs), so those costs don’t even depend on your health. That’s just to cover your basic insurance. Even if you’re perfectly healthy, you will still spend a lot.
How To Use Your HSA For Retirement
One way to save for your medical costs in retirement is with your HSA. It’s not a typical retirement savings account because it can only be used for qualified medical expenses (including insurance premiums). However, as we saw above, a big chunk of your retirement expenses are going to be medical and qualify for HSA funds.
As you know (because you read my previous article on HSAs), HSAs have more tax advantages than any existing retirement plan. They are both funded with pre-tax dollars and all of the growth is tax-free. What does that look like?
Let’s imagine you pay 25% taxes now and you will in retirement, and you have $100 pre-tax per month to put aside for 30 years, earning 8%.
- With a traditional IRA, you will end up contributing $36,000 and have $110,815 in growth. After the earnings are taxed, you will have a total of $119,111.
- With a Roth IRA, you contribute after paying taxes, so contributions will only add up to $27,000. Your tax-free growth will be $83,111, for a final account total of $110,111.
- With your HSA, you will contribute $36,000 and have $110,815 in growth. You don’t have to pay taxes on any of it, so your final account total will be $146,815.
Amazing, right? So how do you actually do this?
Open An HSA
The very first step is being eligible for an HSA. Only high-deductible health plans are eligible, and the IRS has specific criteria that plans must meet. Ask your insurance provider if you are unsure of your plan’s eligibility.
Once you’ve confirmed your eligibility, open an account. If you simply google “open an HSA,” you will get plenty of options. My previous article gives more specific tips on opening an account.
Invest The Money
For this to work, you have to be able to invest your money where it will grow. A savings account or money market account will not cut it. We’re talking stock market here.
Review the options your HSA provider offers and choose one that will bring you a good return where the risk level lines up with your time horizon. If you do not invest the money, you’ll waste the tax advantage and inflation will slowly eat away at it.
Have Uninvested Money To Cover Expenses
Stock market investing is a long-term strategy and you should never invest money that you’ll need within 5 years. So, you’ll need money set aside to cover current medical costs that isn’t invested.
In your HSA, you may be able to keep some of your money in a money market account and have some invested in mutual funds. This way you could keep some of it for current expenses while also investing for retirement.
If you can’t separate the money like that, you’ll have to have an extra savings account for medical expenses. You wouldn’t be able to use pre-tax dollars to pay for them, but you would be able to set aside more for retirement than if you only used part of your HSA.
The important thing is to have money set aside to cover your current expenses without having to cash out your investments. Markets have cycles and if you have to cash out while things are down, it could cost you a pretty penny.
One final thing: I’m not telling you to save for retirement with your HSA instead of your IRA. HSAs are only for medical expenses, and you’ll need money for all kinds of other things (like spoiling those cute grandkids). You need to be maxing out your IRA. An HSA is just a beautiful way to complement an IRA, especially if you don’t have any other tax-advantaged options.