If you were optimistic about the future of Social Security and Medicare to support you in retirement, you won’t be after this.
The annual Medicare trustees’ report released June 5 estimates that Medicare will deplete all of its reserves by 2026, three years earlier than last year’s prediction.
Those reserves cover Medicare Part A, the program’s inpatient hospital insurance that makes up 40% of its total expenses.
Now, this doesn’t mean Medicare goes totally broke in 2026, but once its reserves are depleted, it’ll have to survive on its income, which is only predicted to cover 91% of annual costs.
And the prediction might not stay at 2026; it could come sooner.
Social Security isn’t faring much better. Trustees predict that by 2034 Social Security’s reserves will be totally depleted as well, and its income will only cover 77% of benefits.
But at least that’s about the same as the trustees predicted last year.
So What Does This Mean for You?
If you’re in your 20s and 30s, you need to focus on your retirement way more than your parents and grandparents did.
Social Security and Medicare aren’t going away, but the fact is in 20 years these programs may not look like what we’re used to, and we have to prepare for that.
The light at the end of the tunnel is that the sooner you start, the less you have to prepare. So here are some things you can start doing today to get a jump-start.
Pay Off Your Debt
You can’t afford to have debt in retirement. The quicker you pay off your debt and stop taking out new loans, the more you can invest and, eventually, spend in retirement.
Whether it’s through getting a work-from-home side job or reversing the lifestyle inflation you’ve allowed to creep up, sacrificing while you’re young will help you exponentially more than trying to catch up when you’re older.
Max Out Your HSA
If you’ve selected a high-deductible insurance plan, you’re likely eligible for a health savings account, or HSA. As of 2018, the annual maximum contribution to your HSA is $3,450.
There are several reasons the HSA is an awesome investment vehicle, but the most important one for the purpose of this article is that contributions, growth and withdrawals from your HSA for qualified medical expenses are tax-free.
See, once you’ve contributed at least $2,000 to your HSA, you can choose to put additional contributions into an investment account. If you’re healthy and don’t need to use your contributions you can let them grow for years and benefit from compounding interest.
Let’s say you contribute $2,000 this year to get the minimum threshold and then $3,450 to your HSA every year for the next five years, if the market returns at 6%, you’ll have over $20,000 in your HSA investment account. Then you decide you want to switch plans and stop contributing to it.
If you let that grow for 30 years without adding anything more to it, it’ll grow to almost $115,000. And you’ll have only contributed $19,250.
That’s $95,000 that you can put toward qualified medical expenses and you won’t pay a penny of tax on it. That could be more if you stay healthy and max out more years.
And unlike a retirement account, an HSA doesn’t require you to wait until your 60s to withdraw from it. It’s available for qualified medical expenses from the second you start contributing, making the HSA a great supplement to fill in the gap of Medicare benefits.
Increase Your Retirement Account Contributions
The question isn’t “Should I have a 401(k) or an IRA?” It’s “Why don’t you have both already?!”
If you have a 401(k) available to you through an employer, you should be contributing to it at least up to the match.
Once you’ve done that, or if you don’t have one available to you, you should max out your IRA.
MAX IT OUT EVERY YEAR.
Because you’ll never get those years back. As of 2018 it’s only $5,500 a year, which should be easy to do once you don’t have any debt payments. *wink, wink, nudge, nudge*
If you can’t max it out right now, start with what you can and increase by 1% every month. You’ll need the growth of your retirement accounts to supplement the Social Security benefits you’ll likely miss out on.
Jen Smith is a staff writer at Codetic and gives money saving and debt payoff tips on Instagram at @savingwithspunk.