I mentioned in some previous updates that these next few months might be pretty ugly and we’re starting the ugliness in August.
Last update, I spoke about how a three paycheck month can spike savings making month to month data somewhat unreliable and August shows the reverse of that where one time costs can spike expenses.
I had some medical concerns pop up in the last few months and my doctor suggested getting some tests done to rule out a few things. I’m not one to mess around with my health so I followed his guidance. The great news is that everything looked solid but the bad news for those of us with HDHP plans like myself are the bills that come with those type of tests. August included the first payment for the initial doctor visits but there’s a lot more to come that will sink the savings for months to come!
It’s really hard to wrap your mind about the expense of healthcare in the United States. Healthcare costs aren’t socialized here which is often the norm in a lot of other countries which means lower taxes but higher medical expenses when concerns arise.
I probably spent just north of one hour total on all these visits; the one with my doctor, the one to get some blood drawn and the one to get some tests done and will end up with about $2000 in medical bills! On top of that I have to pay my monthly insurance premiums for a product that doesn’t provide any benefit until I spend another few thousand to hit my deductible! Insurance is a necessary product for catastrophic cost protection but premiums are no fun even if they are heavily subsidized by my employer which won’t be the case forever.
I’m not sure exactly how much my employer contributes to my medical insurance but I estimate the overall annual cost of my medical plan without their contributions to be $3000+/yr. That’s steep especially when it’s when you’re working for a huge employer who can take advantage of economies of scale. Add to that the deductible I have to meet and the coinsurance before my out of pocket maximum is hit and my potential out of pocket in a year without employer contributions could be as high as $7000+ before the insurance picks up the full tab. Even if you add the employer contributions to the mix, I’m still sitting at a potential 4-5k outlay any given year before insurance kicks in fully.
And that’s in 2016 when I’m in my early 30s with employer contributions. What’s going to happen when I’m 45 and need to buy insurance on my own? It’s a scary thought especially for those of us expecting to retire early and therefore lose the advantage of those employer contributions. Medical costs and premiums trending at a much higher rate than inflation so it could potentially be a huge portion of your post-retirement expenses. This is especially true if you have a chronic condition that requires constant treatment which can be expensive on a high deductible plan, a type of health insurance that is becoming the norm these days. With rising deductibles, that $7000 outlay that might be the norm for that type of condition now may be much, much higher by the time you retire. That is a big burden to carry later on in life.
HSAs, or health savings accounts can certainly help minimize that burden as they allow people to save money tax-free for future health care expenses. Most HSA administrators also allow you to invest that money in mutual funds so an HSA can also function as another type of IRA for the savvy investor. Most employers with high deductible health plans like the one I have will have an HSA attached to it and will contribute some dollars for their employees as well. That will help them get a head start on saving for the future but maxing out the HSA is a great idea.
Not only do you get tax-free growth like in an IRA but dollars going into an HSA are also exempt from FICA making them an even better deal than an IRA. On top of that, any money you take on the back end is tax-free as long as you spend it on medical costs. Once you turn 65, an HSA also functions like a regular IRA if you’re not using it for medical expenses. Tax-free growth and tax-free distributions are really something you need to take advantage of if you have the option to do so especially with the added bonus of the reduction in FICA as well.
I do have a bunch of money in my HSA that could easily cover these expenses but honestly I’d rather have that money grow tax-free for the future and pay out with cash right now. I think the value of money in a tax-free account far exceeds the value of cash that would otherwise go in a taxable account and since there’s a limit as to how much you can contribute any given year into an HSA, I’d rather leave that money in there and let it grow tax-free for years and years.
Do note also that based on how the HSA regulations are currently written; one can technically save the receipts from cash payments for medical services paid in 2016 and claim them against distributions made in 2025 making those distributions tax-free since they’re technically being used for the medical expenses made in 2016.
August definitely made me take a closer look at medical expenses and the effect they can have on a retirement plan. HSAs are key for anyone thinking of retiring early as they will help manage the transition from an employer sponsored medical plan to an individual one. I don’t know if enough people consider their potential medical expenses in their expense calculations as they often down happen when you’re young and are sure to go up in the future especially if you plan to have kids somewhere down the line.
You might not be visiting doctors often now if you’re in your 20s but that can certainly change as you age and medical costs are one thing that likely won’t be going down in price anytime soon.
There is a lot of talk about the need for socialized medicine in the future and maybe that will be the path forward for the U.S. in the future. It would certainly help those of us looking to retire early but until that happens, the best idea is to open up an HSA and max it out every year to get a head start on grappling with your potential future medical expenses. Hopefully you never need it until you’re well into your retirement phase but it’s certainly good to have it if the need crops up and this month reminded me of that.
I’m not using the money now because I want it to continue growing tax-free but it’s nice to have it in case I did need it.
Let’s take a look at this months gross income breakdown.
This is by far the ugliest month yet with a huge jump in expenses that drove the saving rate way down.
The gross income savings % this month is an anemic 15.5% which becomes 20.5% when you add in employer contributions. That’s well below last month and well below my target of 33.3%.
The issues here weren’t just the healthcare expenses but also other one-time expenses that drove my expense % higher. My healthcare costs will mostly be a factor in the next few months as only about 1/4th of the overall medical bills were paid this month.
Let’s take a look at the savings rate.
I had a savings rate of 21.2% this month. That numbers jumps to 28% when accounting for employer contributions.
The goal here is to have this number be at 50% on a consistent basis so I was well off that number here as expenses were much higher than usual.
Let’s take a look where my money went this month.
Rent was once again the highest piece of the puzzle this month. My living expenses as reflected by rent were actually higher than usual this month as the annual renters insurance premium was included in that piece of the pie. It’s not a huge expenses and renter’s insurance is well worth having for the piece of mind it offers.
Car payment + expenses are higher than average this month as well. Last month it was the car tax payment that spiked that number and this month it was the insurance premium that does the same. Cars sure are expensive especially newer ones as I’m finding out; not only is the car payment a drag but so are the higher insurance and tax payments.
Personal health is the 3rd highest category this month and those are my aforementioned health expenses. They’re sure to be a high expense for the next few months as more bills come in for my various tests and visits.
Groceries and gifts/short-term savings are next. My quarterly tax bill goes out in September so I was finishing up saving for that one and will start on saving for the December tax bill next.
The rest of the categories are in the same range as usual. I didn’t spend a ton on restaurants as I was cooking at home a bit more often and cut back on some other things knowing the few one-time hits I’d have this month.
Travel expenses is a new category this month. It was the expense for my passport as well as some other small parking fees for various day trips we took.
There’s no denying that this was a pretty ugly month and while it wasn’t all driven by health expenses, that was the expense that was at the forefront of my mind during the past few weeks. There were other one-time expenses this month in the form of car and renters insurance that drove my savings rate down but it will be healthcare and travel expenses that will do the same in the next two months.
Health worries are nothing to take lightly so I have no issues spending extra money to get some tests done to rule out some possible health issues. The news at the end of the day was good which is great but there will be a short term hit to my savings rate. I’m also taking a short vacation in the next few weeks that certainly won’t help my savings rate either but some time off with the girlfriend to celebrate our anniversary is worth splurging on!
That’s it for this week. How was your savings rate this month? Have you got that HSA set up and ready to go already or do you not have an eligible health insurance plan?