Planning for Retirement? Don't Forget the Cost of Health Care
While HSAs are helping employees save for out-of-pocket costs today and retiree health care tomorrow, the high-deductible health plan they are tied to saves employers money as well.
Jeff Koch is a sales representative who thinks he is doing a pretty good job saving for retirement.
But Koch, who works for Chambers & Owen Inc. in Janesville, Wisconsin, says he hasn't given much thought to how much of his retirement savings will go toward health care. "I'm just saving for retirement," says Koch, 29. "It's more of a general pool of money."
Koch is like many Americans who are unclear on how much they will need to spend on health care in retirement. A new survey from Fidelity Investments reports that a 65-year-old couple with traditional Medicare insurance coverage retiring in 2013 will need $220,000 to cover their medical expenses. Meanwhile, a 2013 study from GfK Roper Public Affairs & Corporate Communications found most workers think they will only need about $50,000 for health care costs.
"It's a message that by and large is still not out there," says Sunit Patel, senior vice president for Fidelity's Benefits Consulting Group. "For most individuals, until they are right at the doorstep of retirement, they don't understand their [retirement] health care needs."
Health savings accounts are an effective strategy for workers who want a tax-savvy way to save for health care in retirement, experts say. These accounts are the piggy banks employees use for current expenses not covered by their high-deductible health plans. They are powerful savings accounts because they have a triple tax advantage: the money contributed goes in tax free, gains on investments are not taxed and withdrawals used for medical payments are not taxed either.
But the real kicker for workers is that these accounts can be used to save for retiree health as well.
"Health care costs in retirement are going to be higher, and workers need to address this while they have the time to do it," says Bob Kaiser, head of health savings solutions for Bank of America Merrill Lynch. "There is a bigger theme going on today. It's not just your 401(k) and IRA you are putting savings in, it's your health care account, as well."
In May, Fidelity showed a 53 percent increase in HSAs opening in 2012 from the prior year. In addition, Bank of America showed a 68 percent increase in HSAs in March 2013 from two years ago. Average account balances for Bank of America's participants have seen steady growth, as well: $2,093 in 2013 from $1,741 in 2011.
As a result of rising premiums and the uncertainty being brought on by the Affordable Care Act, industry experts expect more employers to use account-based plans like high-deductible health plans. A March Towers Watson & Co./National Business Group on Health survey showed no respondents used account-based plans as their sole option in 2010, but 12 percent used this strategy this year; that figure is expected to nearly double in 2014.
HSAs are employee-controlled accounts, just like many 401(k) plans. The Internal Revenue Service sets annual contribution limits—$3,250 for individuals and $6,450 for families in 2013. Workers ages 55 and up can do catch-up contributions of $1,000 annually, just like 401(k) or IRAs.
Employers typically sponsor HSAs, but individuals can get them through banks, as well. HSA requirements include: participating in a high-deductible health plan, being 65 or under and not having Medicare coverage. Also, candidates cannot be listed as a dependent on someone else's tax form.
And while the HSA helps workers save for out-of-pocket costs today and retiree health care tomorrow, the high-deductible health plan it's tied to saves employers money, as well. The 2012 Kaiser Family Foundation Employer Health Benefits Survey showed employers paid $4,163 for the average individual in this type of plan and $10,409 for the average family. Average employer cost for HMO coverage that year was $4,554 for individuals and $11,166 for families.
Patel and Kaiser agree that educating employees is critical for companies using HSAs.
"It's important to get employees prepared for this," Patel says. "HSAs are by far the most effective way to save—especially for retiree health care costs."