You need $$$ in retirement for healthcare expenses. Here are some tips to hack the system...

How to fund retirement healthcare expenses

One of the biggest concerns that people have when they consider retirement is the cost of healthcare. CNBC reported recently that a couple needs to save $285,000 for healthcare in retirement (female = $150,000 and male = $135,000). This is a huge sum of money for most people and, unfortunately, it’s something that is often overlooked.

You can fund this by socking away extra dollars in your retirement accounts and investments, which is fine. But the best way to save is with a health savings account (if you have one). See my previous post (below) on HSAs if you need more info.

Quickly, HSAs are paired with High Deductible Health Plans and allow you to save and pay for healthcare with pre-tax money. The money that goes into an HSA goes in tax free and you can take it out tax free when spending money on qualifying health expenses. Best of all, you can invest the money you put into the HSA and it grows tax free. HSAs are a super powered savings vehicle – if you’d correctly.

One of the most common mistakes is only using the HSA like a pretax debit account. You put money into the HSA and then spend it right away. It never gets invested. 94% of HSA accounts are used this way and only set up as checking accounts with no way to invest. You get some benefit because you are using pretax dollars to pay for healthcare, but you miss the benefit of tax advantaged compound interest. To really use the HSA correctly you need to open an investment account within your HSA and get the money invested. You’ll see that 66% of my account value below is my investment returns. This is the element that more than 9 in 10 people are missing!!

So how am I saving for my retirement healthcare expenses? Here’s the theory…

Let’s assume I have $0 in my HSA today and I’m 38 years old (click here for the calculator I used).

• $3,500 - annual contribution to HSA (family limit is about $7,000 in 2019)

• 7% - compounded growth rate (historical average of the SP 500)

• 27 - years until I turn 65

Result…

• $94,500 - total contributions over 27 years

• $186,284 - growth of account from investments 2 7% CAGR

• $280,784 - total account value @ age 65

But, remember the key is that the money needs to go into the HSA and STAY THERE. You need to pay for your healthcare as you use it with after tax dollars (credit card preferably) and keep track of your expenses so you can redeem them later. Finally, this approach is pretty safe because you can access your HSA funds at any time by redeeming your credits. There’s no penalty for accessing your HSA funds prior to retirement age as long as you are paying for qualifying medical expenses or reimbursing yourself for qualifying medical expenses that you’ve already paid for. What this means is you can pay for healthcare in the same way you pay for everything else and pay yourself back at any point in the future from your HSA.

Pretty much you should never use your HSA debit card. At the very least, you should use your favorite credit card to get cash back, miles or rewards points. Then, pay yourself back with your HSA. Or, better yet, key your money in the HSA and key it invested. Your future self with thank you.

Qualified Medical Expenses explained

A super important concept to understand when it comes to Health Savings Accounts (HSAs) is the Qualified Medical Expense (QME). There are expenses that are designated by the IRS and include medical, dental, vision and prescription expenses. They also include things that you buy at pharmacies, such as sunscreen (greater than SPF 15), pregnancy tests and first aid kits. Some things like OTC allergy medicine and cough syrup qualify if you have a prescription. Lastly, if your doctor gives you a letter for massage therapy, yoga or even dancing lessons, then these expenses are QMEs. Click if you want the nitty gritty details.

The hard part is keeping track of everything because you need to prove to the IRS that an expense was a QME if you get audited. Now, the risk of being audited is super low generally but you want to be prepared if the IRS ever comes knocking.

Therefore, you need to keep all of your pharmacy receipts to prove you bought sunscreen and not chocolate. You need to follow up with your doctor to get prescriptions for the over the counter (OTC) meds that you buy, and you need to get letters from your doctor when they direct you to get a massage. I will say that it’s not too difficult. I followed up with my PCP to get a letter for yoga classes and it was pretty easy.

The first step I took is turning on digital receipts with CVS and Wallgreens (you have to use your loyalty card for it to work). I went on their apps and enabled digital receipts (for CVS app go to… account -> digital receipt preferences -> toggle on). Below is the screenshot from CVS app showing what I did.

Enabling digital receipts means that the merchant will email you a receipt, so you know exactly what you bought (see below). All of the big pharmacy chains (CVS, Wallgreens, RiteAid, etc.) and the big retailers with pharmacies (Target, Walmart, etc.) will send you digital receipts if you are part of their loyalty programs and you turn on the feature.

Keeping track of this stuff is a bunch of work but its worth it. I use google sheets to keep a list of my QMEs and I embed links to my receipts that are saved on google drive. Contact us if you want more details on QMEs and pro tips on hacking the system.

FSA's...good but not as dope as the HSA

The Flexible Spending Account (FSA) is a savings account provided by employers, which allows employees to save money – up to $2,700 in 2019 – for qualifying medical expenses (QME) and do it with pre-tax dollars. Normally, people with more conventional health benefits (i.e. not high deductible health plans) can have FSAs. By putting money into an FSA, you get to use pre-tax dollars when you pay for healthcare and you get to avoid some payroll taxes. The rub with FSAs is you have to spend all of the money you save in the plan year (12 months). Some employers will give you a grace period after year-end and/or allow you to rollover up to $500, but you should plan to use all of your FSA contributions in year. 

This can be tricky. My family doesn’t really have a lot of recurring medical expenses. Rather, we pay for healthcare when our kids get sick or I do something stupid as a weekend warrior (sidebar - it sucks getting older). So...you really need to plan out what you think you will spend and do a good job spending all of the dollars you save in the FSA. Otherwise, you risk saving a bunch of dough and losing it when your balance resets to $0 for the next year. 

A key element about FSAs that most people miss is that there are a lot of items that are qualifying medical expenses, such as: 

• Medicines prescribed by a doctor (even OTC meds)

• Breast pumps

• Pregnancy tests

• Bandages

• Crutches

• Acupuncture

• Chiropractors

• Dental work

• Vision expenses like glasses and contacts

Double check what you are buying. There’s a good chance that you are leaving money on the table if you are saving money in an FSA. 

Note - There are other types of FSAs that can be used for other purposes beyond healthcare such as child care and commuting. Check out Nerd Wallet for more info on these types of FSAs.

The HSA is actually pretty dope...

First, I’m almost 100% sure you are leaving money on the table if you have a health savings account (HSA). Here’s a link to the stuff that are Qualified Medical Expenses (it’s a lot of stuff).

Now, here are the details on HSAs and how you can crush using them…

A few years ago, my company introduced a high deductible health plan (HDHP). I didn’t know what to make of it and I was a little clueless. When you get an HDHP, you also get a health savings account (HSA). I was equally as clueless when it came to the HSA. This is despite the fact that I work in healthcare and I started my career as a finance advisor. You are not alone if you feel overwhelmed or out of the loop. It takes a lot of effort and info to sort out HDHPs and HSAs.

The basics…

• A HDHP is a health benefit with an individual deductible of $1,350+ and a family deductible of $2,700+ (I’d argue that a $1,000 deductible is still “high” but the IRS drew the line at $1,350).

• Normally, you’ll have a much lower premium with a HDHP, but you need to consider that you’re spending all of your own money until you hit the deductible. For example, if you have a sick visit at the doctor and it costs $150, then you are paying $150. BTW, 70% of people enrolled in a HDHP don’t hit their deductible. They are paying straight cash money the whole year.    

• If you are enrolled in a HDHP, then you are eligible for an HSA. HSAs may be the best tax shelter in the IRS tax code. You can put $3,500 (individual) - $7,000 (family) into an HSA each year. These dollars go in tax-free, they grow tax free, and money comes out tax free as long as you are using them for Qualified Medical Expenses. Super dope!

• Unlike a flexible spending account (FSA), you don’t have to spend all of your money in a given year. It can roll over year after year. Also, you can change the amount you contribute to an HSA at any point during the year. With a FSA, you can only change your contribution amount once during the year (during open enrollment).  

So what…

• Most people think HDHPs suck because they have to spend their own money until they hit the deductible. I totally get this reaction, especially if they are used to paying only a co-pay of $10-$20. But the power of the HSA likely offsets this challenge. First, the money in the HSA is pre-tax. So, using your HSA account to pay for healthcare means you are getting a discount equal to your tax rate. Basically, you get to pay $75 on a $100 bill because you are using pre-tax dollars. Plus, you avoid paying FICA taxes on any money that you put in to an HSA.

• The pre-tax benefits are good, but the real benefit of the HSA is investing and keeping those funds in the account earning returns tax free. For example, I’m 38 years old. If I start today and put $100/month into my HSA, my account will be worth $95,300 when I’m 65. It’s a brilliant way to save money for future healthcare expenses.

• The key is keeping the money in the HSA. You do this by paying for healthcare with dollars outside of your HSA and keeping track of your spending because you get to pay yourself back for those expenses at any point in the future. For example, if I use my visa to pay for a $200 medical bill then I bank that credit, which I can redeem at any point in the future (3 months later, 3 years later, 30 years later…). That $200 will grow by 600% if I invest those dollars and keep them invested until age 65. If for some reason I need that $200 back immediately, I can simply pay myself back from my HSA account. Pretty much, you should never use your HSA debit card to pay for healthcare. At the very least, you should use your preferred credit card and get cash back, airline miles or something else.

• Best of all, if you’ve had an HSA, then you have the opportunity to get your money back when you’ve bought things that are Qualified Medical Expenses. For example, have you bought sunscreen recently with your credit card? If so, it's a Qualified Medical Expense. Contact lenses? A filling at the dentist? These are all expenses that are recoverable now or in the future.

One thing I’ve noticed over the years is that rich people know how to play the tax game. Most of us don’t. This is a perfect example. Using your HSA correctly will literally create an opportunity for you avoid paying taxes. Lots of taxes. You just need to know how to play the game.

Until next time…Get Lit!

Get Lit!

I’m really excited to announce that I’m launching Lit Health to help people make better decisions about healthcare.

In 2019, Americans will spend almost $400 billion dollars (out of pocket) on healthcare services but only a small percentage of people really understand their benefits, how they are applied when they get care and the tools that are available to help – like a Health Saving Account.

I definitely feel this. Even though I work in healthcare and have a good working knowledge of the system, it still feels like the wild west. It takes a huge effort to make the best decisions and “play the game” effectively. I say “play the game” because a lot of success is determined by the fine print. For example, did you know…

• yoga classes are qualifying medical expenses if you have a doctor’s letter? Awesome but almost no one knows.

• a hospital may be “in network” but the doctor you see in the emergency room may be “out of network.” Crazy but true.

• some healthcare services, such as MRIs, can have wide price variations ($600 to $3,000), depending on where you go. The imaging centers may even use the same equipment. A 500% price difference is bananas.

I’m going to explore and clarify these situations and many others through Lit Health.

My goal is to empower and arm you with information and tools to be an informed healthcare consumer.

Eddie Ross