A healthy 55-year-old couple will likely need over $450,000 in today’s dollars for health care costs in retirement. Compound this staggering amount with the expectation that health care inflation will average 5% annually over the next two decades, and one can draw an alarming conclusion: The road to paying for health care in retirement remains unpaved for many.
So why the bumpy ride? Workers are quick to cite high expenses, with too little left over to save, as their primary reason not to stash away more money for retirement. But deeper, underlying factors are often present—those caused by external forces.
One group to consider is the Millennial Generation, digging out of student loan debt and uneasy about the prospect of home ownership, much because the median income has shrunk over 10% since 2000. A little farther up the unpaved road is Generation X who, despite higher earnings, struggle with childcare costs—now calculated as the third-greatest drain on the family budget; Gen Exers shoulder the highest debt levels, thanks to high-interest credit cards, mortgages and auto and personal loans. The Baby Boomers, hit hardest by the Great Recession, have seen subsidized benefits and pension plans largely go by the wayside—their replacement being high-premium insurance plans.
The Road Map to Retirement Savings: Can the HSA Help Steer the Way?
The ability to afford health care in retirement has certainly lessened due to these twists and turns, but employers can help their work force get back on track with the increasingly popular yet underutilized health savings account (HSA) program.
Available to participants who enroll in a qualified high-deductible health plan (HDHP), the HSA has garnered significant attention for its abilities to provide individuals with maximum control over their health care decisions; valuable triple-tax savings—i.e., contributions, investment growth, and withdrawals for qualified medical expenses are all tax free; and long-term investment options.
Making HSAs even more attractive, the account truly belongs to the individual, meaning he can take it with him when he goes, should he switch employers or health plans. And, unlike a flexible spending account (FSA), the HSA does not limit an accountholder with a “use it or lose it” scenario with his funds come end of plan year, meaning that an individual can continue to grow his HSA year over year, through contributions and investments. Finally, at the age of 65, the holder can withdraw and use his HSA funds, subject to income tax, on things other than medical expenses—e.g., vacations, gifts and other lifestyle indulgences.
For these reasons, the HSA shows promise in serving as a powerful vehicle for retirement savings. But the reality is, the HSA is often under-communicated—frequently miscommunicated—and underutilized. As a result, we have barely scratched the surface of its true savings potential.
And how does this translate for employers and employees? If the latter don’t understand the basics of an HDHP/HSA or the savings opportunities available to them, they may opt for a more traditional plan merely out of comfort and fear of trying something new—even if at a higher cost to them and, ultimately, to their employers.
Turning the Corner: Understanding HSA Perception vs. Reality
In making meaningful strides to improve account literacy and identify what factors influence utilization, employers should closely monitor trends among their population, specifically: accountholder attitudes, awareness and usage; contribution and spending patterns; trends, by accountholder age; “spender” vs. “saver” analytics; and investment patterns and perspectives. Keeping an eye on these metrics will help drive the difference between participant perception and what the data is actually depicting.
For instance, a significant number of workers participating in ConnectYourCare’s account trend survey rate themselves as “knowledgeable” about how their tax-advantaged accounts work (80%); convey strong concern for funding health care in retirement (69%); and cite long-term savings as a primary motivator for electing HSAs (45%). Yet few HSA holders leverage HSA investments. Among those who do, most expect to withdraw invested funds prior to retirement.
The study further uncovered that the majority of participating HSA holders are spenders (81%)—both by their self-evaluation and backed up by spending and balance data. However, 44% of them saved at least half of their contributions last year, which indicates a promising future shift in saver/spender trends … and demonstrates further evidence of participant attitudes and perceptions vs. reality.
Savings for the Long Haul: HSAs Prevail as Vehicle for Future Medical Needs
Overall, employee survey responses show that the longer-term benefits of an HSA trump more immediate benefits. Additionally, for the second year in a row, the “ability to use an HSA as a savings vehicle for future health care needs” was the No. 1 reason ConnectYourCare survey respondents said they selected an HSA-based plan at enrollment time—even beating out “tax savings” and the “lower premiums” offered by HDHPs.
These findings reinforce the need to continue the “health to wealth” conversation with employees and to build innovative communications programs and resources that grow employee education and encourage employees to plan for the future.
Ultimately, employees enrolled in an HSA are starting to connect the dots with smart savings goals and a keen eye toward retirement. Employers, meanwhile, can continue to nurture these participants with ongoing education, while giving more attention to strategies that will help drive traditional plan participants into HDHP plan/HSA enrollment.
Jamie Janvier is senior marketing manager at ConnectYourCare, a provider of consumer-directed health care (CDH) account solutions. For more information, please visit www.connectyourcare.com, email the author at firstname.lastname@example.org, or follow the company on Twitter @ConnectYourCare.