Why Delaying Retirement Might Be Your Best Strategy

It may seem like an impossible destination, but the day will probably come when you reach retirement. Many Americans look forward to retiring as soon as possible after working and saving for decades. However, staying in the workforce just a few extra years may help couples save tens of thousands of dollars in medical costs.

Couples retiring at age 65 are expected to incur $220,000 in healthcare expenses on average during their golden years, according to a new analysis by Fidelity Investments. That estimate includes Medicare Part D premiums and out-of-pocket costs, as well as certain services excluded by Medicare, but it does not include expenses like long-term care or dental services. While that is a large estimate facing retirees, the news is worse for those retiring before receiving Medicare coverage.

On average, respondents in the Fidelity survey said they retired at 62, often by choice and before Medicare coverage at 65. These couples can anticipate an additional cost of $51,000, or roughly $17,000 per year in the three years leading up to 65. This is due to expensive health insurance premiums and out-of-pocket costs. In contrast, waiting until 67 to retire could save couples $10,000 per year.

“Rising healthcare expenses are forcing people to make educated decisions now more than ever, ranging from the services they utilize to the age at which they choose to retire,” said Brad Kimler, executive vice president of Fidelity’s Benefits Consulting business. “We understand some people don’t have a choice in when they retire. Sometimes health issues or someone’s occupation play a role. So it’s critical that people plan well in advance for the considerable cost of healthcare by adding it into their overall retirement planning discussions.”

In an effort to save for future medical costs, some households may want to consider health savings accounts (HSAs), which are tax-advantaged savings accounts specifically used to pay for qualified healthcare expenses. They are essentially available to everyone who has a qualified for a high-deductible health plan but no other main health plan, is not enrolled in Medicare, and cannot be claimed as a dependent on someone else’s tax return.

There are several notable benefits with HSAs. Individuals can claim a tax deduction on contributions made by him or her or someone other than employers, even if deductions are not itemized on Form 1040. Similar to some retirement accounts, interest or other earnings within HSAs grow tax-free. Your employer may contribute to the account, but HSAs belong to individuals, so they stay with you if you change employers or leave the workforce, and any remaining balance can be carried over to the following year. You can even invest your HSA funds in stocks and bonds if you wish to do so. If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse’s HSA after your death.

Americans should view HSAs in the same manner as retirement accounts. You need to make regular contributions so the money is there when you need it. Having a high-deductible health plan allows people to save on their monthly premiums, but those savings need to be placed aside for future medical needs. For tax year 2014, individuals can contribute a maximum of $3,300, while families can contribute up to $6,550. Furthermore, people 55 or older can contribute an additional $1,000, which means  some families can contribute up to $8,550 this tax year.

At the end of 2013, HSAs have grown to an estimated $19.3 billion in assets and 10.7 million accounts, according to the latest survey from Devenir, an independent investment adviser in the HSA industry. This represents a year-over-year increase of 25 percent for assets and 30 percent for accounts. Last year, people were able to open HSAs at more than 2,200 banks and credit unions.

“Even if couples make informed decisions, the only real prescription to prepare financially for healthcare costs in retirement is to plan well in advance to optimize health and wealth,” said Kimler.

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