Health care continues to get exponentially more expensive as medical therapies advance and people live longer. According to a report by HealthView Services, total lifetime health care costs for a healthy 65-year-old couple retiring this year are projected to be $387,644 in today’s dollars ($572,960 in future dollars). This includes premiums for Medicare Parts B and D, supplemental insurance (Medigap), and dental insurance, as well as out-of-pocket costs related to hospitalization, doctor visits, tests, prescriptions drugs, hearing services, hearing aids, vision, and dental.
Naturally, consumers are concerned about how these expenses will impact their retirement goals. Instead of using an IRA to cover health care costs in retirement, advisers and clients alike should be thinking about health savings accounts (HSAs). These accounts can help stretch retirement savings farther and build a more bulletproof financial plan.
HSAs on the rise
Devenir Research’s midyear report on HSAs found that as of June 30 2019, there were over 26 million HSAs holding over $61 billion in assets. Over $13 billion of those assets were invested. By the end of 2021, those numbers are expected to rise sharply as the HSA market is projected to approach $88 billion in assets with over 30 million accounts. And yet a survey by HSA provider HealthSavings Administrators found that nearly 60% of advisers are still not offering HSAs to clients.
Investing in an HSA account each and every year should be automatic. It is one of the top three things you can do each year of eligibility, regardless of where we are in the stock market cycle, to address health care’s increasing costs and prepare for retirement. And the triple tax benefit simply can’t be ignored — contributions to an HSA are either tax-free or tax-deductible; withdrawals for qualified medical expenses are tax-free; and HSA investment earnings are tax-free in most states.
My personal experience as an employee in a high deductible employer sponsored health care plan ignited our firm’s interest in HSAs. They are a really powerful retirement tool, but often people often have no idea about just how effective they can be, especially as an investment account. For example, younger individuals can max out an HSA contribution each year which essentially allows them to fund their own long-term care plan as opposed to purchasing long-term care insurance down the road. Plus, HSAs pair well with other pretax retirement accounts such as 401(k) and IRA plans.
The ‘S’ in HSA is not for ‘spending’
The thing that sets health savings accounts apart from other retirement vehicles is their investment-friendly approach. By putting health benefit dollars in institutional-class fund shares clients can grow their savings tax-free just as they would any other retirement account.
Unlike other accounts (such as flexible spending accounts), HSAs are not a use it or lose it scenario. Health savings account balances are portable. By default, the investment piece allows you to capture more growth over time, which is why dollar one investing is so important. Ultimately, these accounts will last longer and ensure those invested dollars can go further given there isn’t a tax consequence to get in the way.
Like any retirement asset, people can be aggressive with their HSA investment or modify their level of risk given an uncertain financial market. We think it is less about the timing of the market and more about how these assets fit into the overall financial picture. Liquid retirement buckets can be tweaked to modify the risk level up or down.
Overall, HSAs are an incredibly valuable tool for addressing rising medical costs. While the full power of these health care accounts is in the long-term, triple tax-free compounding advantage they provide, it’s worth noting they can be used in the short term, given the liquid nature of the funds, as a stopgap for medical expenses that can’t otherwise be covered.
The reality is we are all going to have to spend money on medical expenses at some point in our life. HSAs provide an additional bucket to save for retirement and prepare for those inevitable medical costs. As clients consider revising their financial plans for 2020, HSAs should be considered as a strategic part of the retirement planning process.