The Critical Role of HSAs in Helping People Prepare for Retirement

During the 2020 PLANSPONSOR HSA Conference, Nancy Emerson, vice president, health solutions thought leadership, Fidelity, said the first step in helping people better prepare for health care expenses in retirement is to help them “understand the health care benefits they are enrolled in.”

Emerson also said financial and health considerations are intertwined. “We believe health care plays a big role in someone’s financial wellness.”

To help improve financial wellness, Emerson said in the session, which was sponsored by Fidelity, Fidelity has been offering health savings accounts (HSAs) for the past 10 years. She said Fidelity believes that the first step in helping people improve their outlook when it comes to health care expenses is to teach them to “shop for health care services the way they do for other things. Confident consumers make better health care decisions, and this can help bring costs down, and controlling health care costs means a greater likelihood of people attaining financial security.”

Next, it is important to teach people about healthy behaviors and preventative care, she said.

If someone opens an HSA, they should be able to take care of health care expenses as they come in, Emerson said.

Three ways people can do a better job of preparing for health care costs in retirement are by opening an HSA, taking out long-term care insurance and educating themselves about medical costs in retirement.

To that last point, William Applegate, vice president, industry relations, Fidelity Health Solutions, said Fidelity estimates that a single person retiring today at age 65 will need $150,000 to cover health care costs in retirement, and a 65-year-old couple retiring today can expect to spend $295,000 on health care throughout their retirement.

Applegate said that while it is important to educate people about these costs, it is also important to prevent them from getting “sticker shock, because that leads to inertia and they don’t do anything to prepare. These are big, scary numbers—no question. The most important thing is to help drive smarter choices during open enrollment and to educate them about the important role that HSAs can play in helping them prepare.”

Applegate noted that people who own HSAs have generally taken the time to become more knowledgeable about health care costs in retirement, and those who save for both retirement and health care costs through an HSA are more confident about their personal finances, are more confident about achieving their financial goals and believe they will have enough savings by the time they want to retire, Applegate said.

It’s up to plan sponsors and advisers to educate workers that HSA balances can roll over from year to year, can be invested, have a triple tax advantage and can be withdrawn for nonqualified expenses after age 65, he said. As it stands, Applegate said, “38% of people think you use the money or lose the money at the end of the year, 54% don’t know the assets can be invested, 33% don’t know about the triple tax advantage and 46% don’t know about the leniency of the use of the money in retirement.”

Applegate noted that a third of people in the U.S. are carrying some form of medical debt, and 31% of hardship withdrawals from defined contribution (DC) plans are to cover health expenses.

Applegate said the best way to get people to open an HSA is to integrate education about the accounts with retirement savings and to make investing the assets in the HSA automatic. “People who invest their HSA savings have balances that are four times higher than those who do not invest, at every step of the way,” Applegate said.

Applegate also said that people who have both an HSA and a retirement account have a total of $216,000 in savings, versus $114,000 if they only have a retirement account. People with both are deferring an average of 10.6% of their salary, versus 6.7% for those with just a retirement account, he said.