Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How Early Retirees Use a Health Savings Account Before 65
Transcript
- Lucas: If you're planning to retire before age sixty-five, healthcare is probably the biggest wild card in your budget. But there's a tool that a lot of early retirees underutilize, and it's the Health Savings Account. Luna: Right, the HSA. I think people hear 'health savings account' and they just see it as a way to pay for doctor visits, but it's actually one of the most tax-advantaged investment accounts out there. Lucas: Exactly. And the key is to treat it like an investment account, not a checking account. Let me throw out a specific example. Say a couple retires at age forty-five with a goal of covering fifty thousand dollars a year in healthcare costs. If they fund an HSA for ten years before retirement and invest those contributions, the growth can be enormous. Luna: And that triple tax advantage is hard to beat. Contributions are pre-tax, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free. Lucas: Right. But here's the strategy that really works for early retirees: during your accumulation years, you pay for medical expenses out of pocket and let the HSA money grow. You keep the receipts. Then, years later, you reimburse yourself tax-free from the HSA. That way, the money compounds for decades. Luna: So you're essentially getting a tax-free loan to yourself, and the HSA becomes a stealth retirement account. Lucas: Exactly. And it's totally legal. The IRS doesn't require you to reimburse yourself immediately. You can wait until you're sixty-five or later. Luna: Now, there is a catch. Once you enroll in Medicare, you can no longer contribute to an HSA. So if you're planning to retire at fifty, you've got a window of about fifteen years to max it out. Lucas: That's the critical timing piece. And if you use HSA funds for non-medical expenses before age sixty-five, you pay income tax plus a twenty percent penalty. After sixty-five, the penalty goes away, but you still pay income tax on non-medical withdrawals. Luna: So it's really best to use it for medical expenses. But since healthcare costs tend to rise in retirement, that's not exactly a hardship. Lucas: And here's a number that might surprise people. The average couple retiring at sixty-five will spend around three hundred thousand dollars on healthcare in retirement, according to Fidelity. If you retire earlier, that number is higher. Having an HSA that's been growing for twenty years can cover a big chunk of that. Luna: That's a big part of why we keep this show ad-free and listener-supported. If our money conversations have helped you think about a decision differently, a couple of dollars a month is genuinely what keeps these going. Buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, it really does make a difference. And we appreciate it. So back to the HSA — let's talk about the investment options inside an HSA. Luna: Most HSA providers offer a menu of mutual funds or ETFs, but the default is often a low-interest cash account. You have to actively choose to invest. Lucas: Right. And the fees matter. Some HSA administrators charge monthly maintenance fees that can eat into returns. Well-known low-cost providers include Fidelity, Lively, and HealthEquity. Fidelity, in particular, has no account fees and offers a wide range of investments. Luna: So if you're in accumulation phase, the play is: contribute the maximum each year, invest it in a diversified portfolio, and pay for your medical costs with cash. Lucas: And keep every receipt. I know that sounds tedious, but there are apps that help you scan and store them. You can even take a picture of the receipt and upload it to a secure folder. That way, decades later, you have documentation. Luna: And the HSA contribution limits for 2026 are four thousand one hundred fifty dollars for an individual and eight thousand three hundred for a family, with an extra thousand-dollar catch-up contribution if you're fifty-five or older. Lucas: So if a couple both have family coverage, they can contribute up to sixteen thousand six hundred dollars per year. Over ten years, that's a hundred sixty-six thousand in contributions alone, and if it grows at seven percent annualized, it could be over two hundred fifty thousand by the time they're sixty-five. Luna: And they can withdraw that tax-free for medical expenses. That's a powerful hedge against inflation in healthcare costs. Lucas: One nuance: after sixty-five, you can use HSA funds for Medicare Part B and Part D premiums, but not for Medigap premiums. So keep that in mind when planning. Luna: And if you're still working past sixty-five and have a high-deductible health plan through your employer, you can still contribute to an HSA as long as you're not enrolled in Medicare. Lucas: Right. So the HSA isn't just for early retirees, but it's particularly valuable for them because they have a long gap before Medicare kicks in. Luna: I think the biggest mistake I see is people using their HSA like a regular savings account. They withdraw money as soon as they have a medical bill, instead of letting it grow. Lucas: Exactly. That kills the compounding. If you're in a twenty-two percent tax bracket, every dollar you leave in the HSA is effectively worth more than a dollar outside because of the tax savings. Luna: And if you're in a high tax bracket now but expect to be in a lower one in retirement, the HSA still wins because the withdrawal is tax-free for medical use regardless of your bracket. Lucas: Let's walk through a concrete scenario. Say you're forty years old, married, with a family HDHP. You contribute the max family amount — eight thousand three hundred — for fifteen years until you're fifty-five. You invest it in a low-cost S&P 500 index fund averaging eight percent annual return. Luna: At the end of fifteen years, you'd have contributed about a hundred twenty-four thousand five hundred dollars. But with growth, the account balance would be roughly two hundred thirty-five thousand. Lucas: And you've been paying for medical expenses out of pocket, so let's say you've incurred about five thousand a year in qualified expenses. Over fifteen years, that's seventy-five thousand in receipts. You can reimburse yourself for that amount at any time, tax-free. Luna: So you've got two hundred thirty-five thousand growing, and you can pull out seventy-five thousand tax-free whenever you want. That leaves a hundred sixty thousand still in the account for future healthcare. Lucas: And that hundred sixty thousand continues to grow. By the time you're sixty-five, it could be well over three hundred thousand. That's a huge cushion. Luna: And you don't have to use it all for healthcare. After sixty-five, you can withdraw for any reason, just pay income tax. So it's almost like a traditional IRA with a bonus. Lucas: Right. But the real magic is the tax-free piece. And there's another angle: if you have a high-deductible health plan, your employer might contribute to your HSA. That's free money. Luna: Some employers contribute a thousand or more per year. That's part of your total compensation. If you leave that job, you take the HSA with you. Lucas: So the HSA is portable. And unlike a Flexible Spending Account, the money rolls over year to year. There's no use it or lose it. Luna: That's a huge advantage. I've known people who avoided HSAs because they thought they were like FSAs, but they're completely different. Lucas: One last point: if you're married and your spouse has their own HSA, you can both contribute up to the family limit if you have family coverage. But if you have separate plans, the limits are per person. Luna: And if you're eligible for an HSA through your own plan, you can contribute even if your spouse has a non hdhp plan. The rules are based on your own coverage. Lucas: So the takeaway: the HSA is one of the most efficient retirement vehicles available, especially for early retirees. Max it out, invest it, pay cash for medical expenses, keep receipts, and let it compound. Luna: And don't forget to check if your HSA provider offers investment options. If they only offer cash, consider transferring to a provider like Fidelity that does. Lucas: Good point. And if you're already retired and have an HSA, you can still invest the balance. Just make sure you have enough cash for near-term expenses. Luna: It's a simple strategy, but it takes discipline. The payoff is a more secure, tax-efficient retirement. Lucas: Absolutely. And that's the kind of planning that really moves the needle for financial independence.