Key Components to Include in Your Retirement Plan: Medicare, Survivor Benefits, and Health Savings Accounts

When planning for retirement, many of us tend to focus on traditional aspects like savings accounts, investments, and pension funds. While these are undoubtedly crucial, there are other facets of retirement planning that often get overlooked. In this article, we’ll delve into three essential elements of retirement planning that you should consider: Medicare, survivor benefits, and Health Savings Accounts (HSAs).

Medicare

Let’s start with Medicare—a topic that doesn’t often get the attention it deserves in retirement planning discussions. We all know that health insurance is a critical aspect of our overall well-being, but how does it fit into our retirement plans? The answer is: more significantly than you might think.

If you’re a federal employee, being enrolled in the Federal Employees Health Benefits (FEHB) program and maintaining it into retirement can be a massive advantage. FEHB offers a wide range of quality healthcare options that can overshadow the role of Medicare in your retired life. But, it’s essential to discuss and analyze this sooner rather than later.

Take a moment to assess your health. Do you have any chronic conditions that require ongoing and costly medication? How often do you incur out-of-pocket medical expenses? And have you considered your family history? Sometimes, hereditary health issues can emerge later in life.

It might not be pleasant to ponder these questions, but addressing them now can make your retirement years more comfortable. Too often, people let recent good health sway their Medicare decision-making. For example, if you’re 65 and feeling healthy, you might choose to delay enrolling in Medicare Part B. However, if you’re later diagnosed with a condition that runs in your family, enrolling in Medicare could become significantly more expensive.

Start tackling this topic early in your retirement planning. There are numerous options and considerations regarding how Medicare and FEHB plans can work together to provide comprehensive coverage. Did you know that some FEHB plans now reimburse part of the Medicare premiums? Or that FEHB offers Medicare Advantage plans with substantial premium support from the government? Investing some time and thought now can lead to a better quality of life in your retirement years.

Slack on Survivorship

Survivor benefits may not directly impact your retirement, but they can have a significant impact on your surviving spouse’s financial security. In the federal retirement system, providing a survivor’s annuity means accepting a reduction in your annuity to provide your spouse with a percentage of your original annuity for the rest of their life.

This approach leverages the power of your federal annuity to provide income for two lives. However, there’s a caveat to consider. Some financial services promote the idea of replacing survivor benefits with financial products, primarily life insurance. While I’m not advocating for this approach, I urge caution.

One critical reason for caution is that without a survivor annuity, your spouse wouldn’t be able to continue FEHB coverage after your passing—a significant drawback. You might think about providing a partial survivor annuity to address this issue, but it’s not necessarily a straightforward decision. Reductions in CSRS or FERS annuities for survivor benefits are not taxed, whereas the extra money in your annuity from forgoing this benefit will be taxed. So, you’ll have less available for insurance premiums. Proceed with caution and weigh your options carefully.

The Hidden Power of the HSA

Now, let’s talk about Health Savings Accounts (HSAs). Often, people view HSAs as a means to reimburse deductibles and cover minor medical expenses. However, HSAs have the potential to be much more than that, and they can play a significant role in your retirement planning.

To have an HSA, you must be enrolled in a high deductible health plan. While this may mean higher out-of-pocket expenses in some years, it also allows you to set up and fund an HSA, which permits you to make pretax contributions, resulting in potential tax benefits come tax season. Moreover, the earnings within an HSA grow tax-deferred and can be withdrawn tax-free when used for eligible medical expenses.

But here’s the hidden power of the HSA that many people overlook: you don’t have to withdraw the funds for this year’s medical expenses. You can let the balance grow for years, and you can even invest part or all of it. The invested funds can continue to grow and still be withdrawn tax-free when used for medical expenses. In essence, an HSA combines the best of both worlds: deductible contributions like a traditional TSP and tax-free withdrawals like a Roth TSP.

Consider this: in 2023, a family can contribute up to $7,750 to an HSA. If you contribute that amount every year for 30 years and assume a 7% growth rate, your HSA balance could exceed $700,000. That’s a substantial amount of money available for various medical expenses, from everyday healthcare costs to Long-Term Care premiums and even Medicare Part B premiums.

In conclusion, retirement planning for federal employees offers numerous options and strategies that may not be immediately apparent. Medicare, survivor benefits, and HSAs are three key elements that should not be overlooked. These components can significantly impact your financial security and quality of life in retirement. So, take the time to explore these options, and make informed decisions to ensure a secure and comfortable retirement.