Benefits

Utilizing HSAs to Fund a Healthy Retirement

With health care costs reaching record levels by some projections, HSAs can serve as a crucial piece of a holistic retirement-savings strategy.

By Javier Simon editors@plansponsor.com | December 21, 2016

As health care costs continue to rise and outpace inflation, it’s not surprising that more and more employers are turning to health savings accounts (HSAs) to complement high deductible health plans (HDHPs).

According to research firm Devenir, HSA assets reached $4.2 billion by the end of 2015 representing a 33% increase from the previous year. As saving for health care in retirement becomes more important, some firms predict HSAs are set to follow the growth of 401(k) plans.

Devenir projects that the HSA market will likely exceed $50 billion, accounting for 30 million accounts, by the end of 2018.

Still, HSA adoption will face some of the same challenges as 401(k)s did in their infancy and some unique ones. But plan sponsors stand to gain by relaying the effectiveness of HSA benefits including a triple tax advantage where contributions are tax-free, earnings on investments grow tax-free as long as they are used for medical expenses, and distributions to pay for medical expenses are tax-free as well.

HSAs can serve as powerful savings account for health care expenses that can be combined with retirement plans and other benefits programs to support a comfortable and healthy retirement.

These benefits along with HSA portability can’t be ignored in light of estimated retiree health care costs reaching record levels for healthy couples. Fidelity projects a 65-year-old couple retiring in 2016 will need an estimated $260,000 to cover health care costs throughout retirement, a 6% increase from last year’s estimate and the highest since the firm began making projections in 2002.

Moreover, employer health care deductibles increased by 50% in 2016, according to the latest Health Plan Survey released by United Benefit Advisors (UBA), an independent employee-benefits advisory organization.

Medicare Part B premiums also went up in 2016. Health care inflation, including Medicare Part B, is expected to grow at an annual rate of 6% for the next 10 years, according to HealthView Services, a provider of software that projects health care costs.

It’s important to note that several studies suggest Americans are living longer raising the concern that people may outlive their retirement savings. The threat of longevity poses a particularly serious retirement savings threat for women, says HealthView Services.

Not surprisingly, more than half of Americans are concerned about health care costs in retirement, according to a survey by financial services firm Edward Jones.

But this trend may be reversed through targeted education and communication that can relay the benefits and advantages of HSAs when used correctly.

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