Hey Reader,

77% of high-net-worth individuals say they know how much money they need to retire comfortably.

However, humans naturally suffer from overconfidence bias (myself included—just ask my fiancée), and I believe they overlook one key risk.

Retirement Healthcare

According to Fidelity, a 65-year-old couple retiring in 2024 should expect to pay $12,800 for health care in the first year of retirement and ~$356,000 for the remainder of an average life expectancy (87 for men and 90 for women).

Even worse, healthcare costs have a long-term inflation rate of 5.12%.

I’ve run hundreds of long-term cash flow and retirement projections, and I can confirm that medical expenses are one of the biggest needle movers in terms of probability of success.

Today, I’ll share my favorite tool and strategy for addressing this risk.

The Tool

Most people know that a Health Savings Account (HSA) is the most tax-advantaged account you can use, but 87% of people are using it wrong.

Only 13% of HSA owners invest their contributions, and over 50% withdraw funds for current medical expenses.

So, if you’re leaving your HSA contributions in cash (or a conservative target date fund), you’re losing up to 5% of your purchasing power every year.

In 2024, the maximum individual HSA contribution is $4,150, the maximum family contribution is $8,300, and HSA owners age 55+ can contribute an extra $1,000.

Now, let me show you how to use an HSA to its full potential.

The Strategy

When you’re young, healthy, and working, you typically have fewer medical expenses and more cash flow to pay them.

As you age, healthcare is typically more expensive and frequent, especially if you retire before Medicare eligibility at age 65.

What happens if you invest your contributions and let them compound for decades instead of using them to pay for current medical expenses?

Let’s say you start contributing and investing the maximum HSA contribution (not adjusted for inflation) every year for the next 20 years.

Assuming a 6% return, a family HSA would grow to ~$305,000 and an individual HSA would grow to ~$153,000.

Planning Note: Your HSA should hold high-risk/return assets because you have a 20+ year timeframe and tax-free withdrawals, so it’s possible to achieve a long-term return higher than 6%.

According to Fidelity, a 45-year-old couple planning to retire in 20 years will need ~$439,000 for retirement health care, and an individual will need ~$214,000 (use this tool to play with different numbers).

That means you can accumulate around 70% of your retirement healthcare needs over a 20-year timeframe.

Assuming they’re qualified medical expenses (see a full list here), you can pay for them tax-free!

Conclusion

I didn't get into HSA specifics in this newsletter because, honestly, they're pretty boring, but everyone should know how powerful they are.

That said, HSAs aren’t right for everyone, so do your due diligence (read more here).

If you've heard enough and you’re ready to create a financial plan to grow and protect your hard-earned wealth…

Until next week,

Matt Garasic

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Disclaimer:

This is for general educational and illustration purposes only. This should not be taken as individual investment, tax, or legal advice.

Consult your legal, tax, and financial team before implementing any financial strategies for your specific circumstances.