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Health care in retirement: What’s your plan?

Health care remains one of the biggest expenses you’ll need to plan for in retirement. And with inflating health care costs, increased expenses as you age and the unpredictable nature of health itself, the only certainty in saving for retirement is that it’s a good idea to start now.

Your Health Savings Account (HSA) could be an important part of that savings strategy. While many people use their HSA like a Flexible Spending Account (FSA) and spend most of what they contribute each year, this misses an important benefit of an HSA—your account balance rolls over from year to year and can be invested to help you build your account for the future.

Make your HSA a part of your retirement strategy

Whether you want to start out with small incremental increases to your account contributions or begin investing a portion of your HSA savings for long-term growth potential, your HSA offers flexibility to align with your individual needs and goals. Let’s take a look at an example of how one couple is making an HSA part of their retirement planning.

Nora and Joe: Using an HSA together with their 401(k) accounts to prepare for retirement

Opportunity: Nora and Joe have been saving for retirement in each of their 401(k) accounts. This year, Nora’s employer offers a high-deductible health care plan (HDHP) with an HSA option, and Nora chooses to enroll with family coverage. Strategy: Nora estimates that her family’s out-of-pocket health care expenses are $3,600 for the year, so she decides to put twice that amount, $7,200, into her account to take full advantage of the tax savings on her HSA contributions, while saving what she doesn’t spend each year for retirement.

An image of a middle-aged couple standing in their kitchen and smiling

Factoring in investments: Nora has the choice to keep her HSA balance in cash or invest in a range of mutual funds for tax-free growth potential. She discusses her options with Joe:

  • If she leaves her money in cash and continues her current rate of spending and saving over the next 20 years, Nora’s balance could grow to more than $80,000.
  • With investing, the account has potential to grow to over $131,000 over 20 years. Seeing the long-term impact of investing, she sets up her investment account.
A graphic showing the potential of HSA investing versus leaving money in cash only over 20 years. A large dollar sign is colored red 2/3 of the way up and light gray on top, representing a total of $81,426 HSA dollars in cash only, assuming a 0.7% interest rate. Next to that, a second large dollar sign is colored entirely blue, representing a total of $131,789 HSA dollars invested, assuming a 5% rate of return.

Hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle. Investment return and principal value will fluctuate, and when redeemed the investments may be worth more or less than their original cost. Scenario assumes annual contributions of $7,200 and annual spending of $3,600 for 20 years. The cash-only scenario assumes an interest rate of 0.70% and the investment scenario assumes a 5% rate of return.
Investing involves risks. There is always the potential of losing money when you invest in securities.

Retirement outlook: With the money they are saving in Nora’s HSA, Nora and Joe are feeling better prepared for health care in retirement. They will be able to take tax-free withdrawals from Nora’s HSA to pay for qualified health care expenses and preserve more of the money in their 401(k) accounts for other retirement expenses.

What’s your plan?

With age and inflation come higher health care costs, but the more proactive you can be now to save money in your HSA and invest a portion of your balance for long-term growth potential, the better off you’ll be in retirement.
Take the next step by setting up account today.
Go to Home > Accounts > Investment Summary > Start Investing.

Investing involves risks. There is always the potential of losing money when you invest in securities.

Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions. This material should be regarded as general information on health care considerations and is not intended to provide specific health care advice.

State and/or local income tax treatment of payroll contributions may vary. Participants may wish to consult with a tax advisor regarding the state income tax treatment of such contribution.

Potential Tax Advantages: You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax, unless an exception applies. Any interest or earnings on the assets in the account are federal income tax-free. You may be able to claim a tax deduction for contributions you, or someone other than your employer, make to your HSA directly (not through payroll deductions). In addition, HSA contributions may reduce your state income taxes in certain states. Certain limits may apply to employees who are considered highly compensated key employees. Bank of America recommends you contact qualified tax or legal counsel before establishing an HSA.