Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today on Amazon or by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to discussing financial topics, we can cover it all. Now that said, please remember this is just a show.

Everything you hear should be considered informational, as in not financial advice. If you want personalized financial advice, then request your wealth analysis today from my team by going to www.yourwealthanalysis.com. With me in the studio today is David Transon. David, thanks for being here.

Yes. Glad to be here.

David's job's gonna be reading your questions, and I'm going to do my best to answer them. You can submit your questions in by either texting them to (913) 363-1234. That's (913) 363-1234, or you can email them to hey Mike@howtoretireontime.com. Let's begin. Hey,

Mike. How do you include HSA plans in a retirement plan?

Yeah. So some people will use them in all sorts of different ways, like tax free income eventually, which is kind of, I think, a weird situation. Some people have claimed that that's their plan. Oh. But it's like, what's the purpose of an HSA?

An HSA is basically a way that you can put funds into an account that can grow tax free, and that you can use tax free for certain qualified expenses. Now after a certain point, you can maybe tap into it differently. But if you're alive, there's a good chance that in your future, there's going to be medical expenses. Yeah. K?

If there's a future medical expense, you don't want that to disrupt the other parts of your plan, mostly for tax purposes. K? Let me unpack that for a second before I then finish this thought. Alright, David. It's December 10 Okay.

In the distant future. Alright. And you have a medical emergency because being with the family was just so stressful, it put you over the limit, and now you're having some health issues, whatever it is. I say that jokingly, but Yeah. Thanksgiving and Christmas or Hanukkah, like these family holidays Right.

They really raise people's chest levels.

Yeah. That's what I've heard.

Yeah. So anyway, alright. Now you don't have an HSA, you don't have a Roth, just everything's in your retirement account, your four zero one k, your your IRA.

In case

it's all pretax. You've enjoyed this particular year around, let's say, 200,000. You lived a great life. You've had a great retirement. You've spent 200,000.

Alright. So now you're in the hospital, and you've gotta pay for some of these expenses. K? Some medication, whatever it is, and the bill was high enough that it pushes you just over from a taxable standpoint to where you're not only just paying for these expenses with pretax income, so you're paying taxes on the expenses coming out, but you're also gonna increase your IRMA's Medicare charges. So IRMA's, if you go over, I think it's like 202,000, 2 hundred 3 thousand right now, that you're gonna you're gonna pay additional Medicare charges in addition to the taxes you've got to pull out, there can be a snowball event Okay.

That happens. Not just one example if it's IRMAA, you trigger a tax event that has a snowball event of other penalties, other surcharges, other basically increase in taxes, which kinda stink. Yeah. For the longest time, if you had under a certain threshold, let's say it was 44,000 for a household, and you increase that, you had medical expenses, you pull out some extra income, that could trigger a taxable event that now you've got Social Security taxes. Now Trump might get rid of Social Security tax, so that one might go away.

But you've got all these different situations to where if you just go a couple of dollars over from taxable income, it triggers other taxes. Think of long term care. Yeah. Maybe you've navigated your retirement to where you're slowly taking out income within the 0% long term capital gains bracket, or you're in the 15% bracket, and now you're in the next bracket. My point being is if your ability to take income out for, let's say, health expenses creates a taxable event, it could trigger other events.

And just to make sure I understand right, in your hypothetical situation, I'm already retired. I had, like, 200 k in my four zero one k and IRA.

No. 200 of income.

Oh oh, okay. So I'm making taxable income. I'm making 200 taxable income.

And then you had to pull out, let's say, $5,000 for medical expenses. Oh. You just crossed the tax threshold.

Oh, right.

And tax thresholds could be with Social Security. It could be with IRMA. There's a whole number of things that it could be. Oh, yes. And IRMA, if you're single, is less.

It's, around a hundred thousand. Yeah. For a married couple, it's 200,000. But there's all these different thresholds where if you just spend a dollar over one there's a taxable event that that could be triggered. Oi.

And they're all nuanced, and for the higher income people, the earning their moral, you've got, I mean, it's just this is why I can't see anyone planning for retirement without planning for health care costs and for taxes.

Okay.

It is such an important part of a retirement plan. And so why would someone use HSA as an income source? It doesn't make sense to me. If you're alive, there's a good chance that at some point in your life, you'll probably have health care expenses. HSA is a way that you can take it out tax free, take care of those expenses, and not upset or disrupt other tax issues in retirement.

You see how it's like Yes. Can I keep it separate? If you if you want tax free income, fill up your Roth, or do IRA to Roth conversions, Yeah. You're not doing IRA to HSA conversions, you're doing IRA to Roth conversions, build up your Roth, do the contributions to the Roth. If you wanna go down the route, if you need a death benefit, you've got a bunch of after tax brokerage funds, maybe you do put money into an IUL.

You're gonna pay cost of insurance for death benefits, so you need the death benefit. You may want a certain rider to help with health care costs because you didn't have enough in the HSA, but the HSA isn't the end all, be all. You can buy insurance to help cover that, but you're buying insurance. There's cost to insurance, so let's call it as it is. But my point being is with HSA or really any investment product or strategy, use it as it was intended to be used.

Don't Frankenstein things into the end all be all that solves all of your problems. It's like, I love football. No. We had a great season here in Kansas City. You did?

So would you have Patrick Mahomes be a running back? Like

I mean, he's a good runner, but no. He's that's not his specialty.

That's not his fort are you gonna have Patrick Mahomes be the center? No. Definitely not. Or offensive line? Like, no.

No way. No. Would he make a good linebacker? I don't know. Maybe.

Yeah. But his training was to be a quarterback. Yeah. And so each person on the offense or defense is a highly specialized individual that's learned their craft.

Mhmm.

When you have a deliberately designed portfolio, you've got a bunch of different investments or products with a very specific purpose. The problem is when you try to get an investment or a product to do a little bit of everything. Nothing does everything well. And so I think that's where people get the misconception. So all the younger people, if you still have access to fund an HSA, fund, fund, fund.

Like, just put money in there as best you can. It is such a great resource, but don't plan on it being an income resource. Use it for a medical expense buffer. Yeah. Very few people I have met have over 3 to $400,000 in their HSA.

Wow. That's not a common thing. The average retiree is expected to spend $315,000 in medical care costs, and that's like long term care

and so

on. So let your HSA be there on the side to cover the unintended health care costs that will likely rise in the future. The reality is we're living longer than expected, and we're sicker longer than expected. We can't control health care expenses. So don't try and, you know, squeeze every penny out of it for income, let it be for healthcare expenses.

Have that flexibility, have that kind of be like a healthcare reservoir. It's there in case of issues. And then how do you invest in it?

Yeah. I was just gonna ask. I was just thinking like, well, what what should we invest it in? Should we go like really high risk? What's the strategy behind what the funds get invested in?

So it depends on the person. This is not investment advice.

Okay. Sure. Yes.

The person driving the car right now is listening to him. I'm not talking to you one on one, I don't know your situation. Uh-huh. So you gotta be cognizant of the whole plan, but in my opinion, a good portion of it should be in something that has significant growth potential. If you're healthy, and you probably don't need it, let it grow, try to grow it, but have maybe 20% in a reservoir or a certain dollar amount that you know is less risky, whether that's a bond fund, whether that is maybe more conservative stocks.

Okay.

You know, something like that. I mean, it's in the market in one way or the other, but you wanna you wanna make sure that it's growing, grow, grow, grow. Because if you're in your sixties, and you have a normal kind of health care time span, grow until you're 70, and then maybe become more conservative with it in the seventies.

Okay.

So it's it's seasons of life, the different time frames, and all of that. But, yeah, grow, baby, grow. HSA, grow it for health care expenses. Simple economics would suggest that the more people that are retiring, which there are more and more people being retired today than ever before, the increased costs of the health care industry, because there's limited supply and there's an increase of demand, is going to drive up the prices. So make sure that you're increasing your HSA and you're growing your HSA to offset those potentially future higher prices.

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