The Medicare Trust Fund will soon be out of funds, and there will be no foreseeable way for the government to continue to provide the level of benefits that current Medicare recipients receive. The result will be serious rations, waiting periods, and a reduction in benefits. If you wish to maintain your freedom of choice, and have access to a high level of specialized expertise for your health needs, you must be prepared to pay for it yourself. The optimal strategy is to manage your health responsibly, and to build up your medical retirement fund as large as possible by using a Health Savings Account.
The Coming Medicare Insolvency
The total federal debt is now over $10 trillion. But if you also include the current unfunded liabilities of social security, Medicare, and other programs, the total federal debt is at least $54 trillion. This number has been confirmed in three separate studies – by the American Enterprise Institute, the National Center for Policy Analysis, and the Brookings Institution.
It is difficult to get a grasp of a number that big. That’s $180,000 per person currently living in the United States. It is four times the U.S. Gross Domestic Product, the measure of the final value of all goods and services produced in this country in the course of a year.
The shortfall in Social Security and Medicare revenues will continue to increase as the years go by – it will exceed $2 trillion by 2030. At that point, roughly half of all tax dollars will have to be allocated to Medicare and Social Security.
That clearly can’t happen. Instead, the Medicare system will face massive cuts; large tax increases are also probable.
Who Will Pay Your Medical Expenses During Retirement?
So will Medicare be there for you? It depends on how old you are. Unless you are retiring soon, don’t count on it, especially if you want to be confident that you will have access to top quality medical care during your retirement years.
According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2019 may need approximately $285,000 saved to cover health care expenses in retirement. That estimate did not include other expenses, such as the cost of over-the-counter medications, the majority of dental services and, if needed, long-term care. And it did not include the charges that are currently paid by Medicare.
If it is not certain that Medicare will be available to us, the only smart solution is to save as much as possible for medical expenses during our retirement years. You can also avail of popular options on the market, such as Medicare supplement insurance. This will ensure that you can obtain the quality care you need.
What Is Your Solution?
As most readers already know, the very best tool for accumulating funds for future medical expenses is a Health Savings Account. An HSA is the only investment that provides a tax deduction when you deposit the money, yet never taxes the money if it is used to pay for qualified medical expenses.
Therefore, you should put as much money as possible into your HSA, and withdraw as little as possible. The contribution limit for 2019 is $3,500 for an individual, and $7,000 for families. Those over 55 can also contribute an $1000 catch-up contribution. Meeting the maximum contribution each year of your working life will help you build a medical retirement fund that can be used to pay future medical expenses, tax-free.
Rather than withdrawing money from your account to pay for medical expenses as they occur, you should pay for medical expenses that are not covered by your health insurance, out of your own pocket. Save your receipts (for doctor visits, eye glasses, aspirin, etc), and leave your money in the account to grow tax-deferred. There is no time limit before you have to reimburse yourself, so you can make the most of this tax-free investment.
As soon as possible, you may also want to transfer some of the money into mutual funds. While some HSA administrators are paying interest rates as high as 5%, you are going to need a higher return as 5% barely exceeds the rate of inflation. Many HSA administrators offer a discount brokerage option, so you can place your funds in virtually any stock or mutual fund.
For a family that contributes the maximum contribution each year, it is quite reasonable to assume an HSA account value well over $1 million after 25 or 30 years. The Medicare system may be broke, but at least you won’t be.
The solution to the pending meltdown of the Medicare system is convoluted, but it is clear that government-sponsored medical programs don’t work. And we have proof of this bleak scenario. The dismal results can be seen everywhere, from the former Soviet-bloc countries, to the broken national healthcare systems in Canada and European countries. For best results, Medicare must be transformed into a program where retirees have some ownership interest in the money they are spending.
Replacing the government’s obligation to provide benefits to its citizens with a voucher that seniors could use to purchase health insurance from competing private insurers, and/or deposit into a “Medicare Health Savings Account,” would bring great market efficiencies and competition into the landscape. This idea is endorsed by both the American Medical Association and the American Hospital Association.
Retirement HSAs may or may not ever come to fruition. But fortunately, HSA plans are available to those under age 65. If you do not yet have an HSA, sign up for one as soon as possible. You will lower your health insurance premiums, and you can then begin allocating money for medical expenses you will almost inevitably incur during your retirement years.