Given increasing life expectancies, you’ll need to prepare in order to have enough money to cover both health care and living expenses in your retirement years. If you’re married, you and your spouse can help each other save money for retirement.
“By 2020 a 65-year-old married couple without an employer-based health plan and with median drug expenses could need a total of $365,000 to $454,000 to pay for Medigap, Medicare Part B and Part D premiums, and out-of-pocket drug expenses,” reports Ameriprise Financial Services Inc.
That’s certainly a large sum of money. It could seem daunting and even impossible to put that much away just for health care, but it can be simple if you know what to take advantage of now.
Saving money with HDHP and HSA
If you or your spouse is currently enrolled in a high-deductible health plan, you may be eligible to open a health savings account. In an HDHP, your annual deductible must be met before insurance will cover any medical expenses other than in-network preventive care. Not only can an HSA help you pay your current medical bills tax-free, but it’s also a great way to save money for your future health care.
“With an HSA you can make tax-deductible contributions each year to pay for current and future health care costs. What you don’t use in any given year will stay invested and continue to grow tax-free, assuming you eventually pull it out to use for medical costs,” reports a 2016 article from CNN. You can contribute up to $6,750 annually with a family plan.
“If your employer offers an HSA, it typically works just like a traditional 401(k): Your contribution is taken out of your paycheck on a pretax basis. Your employer may also kick in a contribution,” the CNN article states.
You can even use the funds in your HSA to invest in stocks, bonds and other securities. Note that money cannot be withdrawn from an HSA without a penalty fee until you’re at least 65, and the funds will be subject to income tax.
Benefits of investing in traditional or Roth IRAs and your 401(k)
Both spouses can help each other save for retirement with tax-preferred accounts, like 401(k)s and IRAs. For both a 401(k) and a traditional IRA, your contributions are tax-free but tax is applied to funds that are withdrawn, whereas with a Roth IRA, your contributions are taxed but there is no withholding later when money is withdrawn. With all three, you cannot withdraw funds without an additional penalty until you’re at least 59 ½ years of age.
“Is it worth making maximum contributions [to an IRA account]? Absolutely. Let’s say that you contribute $1,200 to an IRA every year over a 10-year period. With an annual, compounded return of 6 percent, your savings would total $16,766. On the other hand, if you contribute [the maximum] $5,500 to an IRA annually, and keep the other factors the same, you would end up with $76,844,” reports Ameriprise.
While you can’t open a joint IRA in both your names, you can contribute the maximum amount annually in each of your names, doubling your savings. And once you turn 50, you can each make an additional $1,000 annual catch-up contribution to your IRA, for a total of $6,500 annually per person.
With a SIMPLE 401(k), the 2016 annual contribution limit is $12,500 and you can also make catch-up contributions after turning 50, this time at $3,000 – totaling an annual contribution of $15,500 after age 50. With a little planning, you and your spouse can take advantage of these savings opportunities.
According to a February 2016 U.S. News & World Report article by Senior Editor for Retirement Emily Brandon, both spouses should be investing in their individual 401(k). If you can’t max out the annual contributions on both your accounts, take a look at the match percentage from each company and then the fees associated with the account, and put additional savings toward the 401(k) that is lower in cost.
If you or your spouse need more help planning for retirement, contact us and we’ll be happy to guide you.
[PRINTER FRIENDLY VERSION]