HSAs not Enough for Retirement Health Care Savings

May 4, 2010 (PLANSPONSOR.com) - While health savings accounts (HSAs) can be used to save for health care expenses in retirement, the maximum savings that can be accumulated in an HSA will be far from sufficient to fully cover the savings needed in retirement for insurance premiums and out-of-pocket expenses, according to the Employee Benefit Research Institute (EBRI).

In an Issue Brief, EBRI noted that HSAs have several drawbacks as an accumulation vehicle for funding health insurance premiums and out-of-pocket expenses in retirement:

  • Availability is limited to those with a high-deductible health plan (HDHP);
  • Contributions are limited by law;
  • Given the coupling with HDHPs, it is likely that HSA owners will tap their accounts to a significant extent for medical expenses incurred during their working years, before they reach retirement, or to pay COBRA premiums and insurance premiums during periods of unemployment; and
  • Distributions cannot be used for employment-based retiree health insurance premiums until an individual has reached age 65. Early retirees do not have immediate access to these funds for retiree health premiums.

Specifically, EBRI found that if an individual age 55 in 2009 were to contribute $3,000 to his or her HSA and also contribute the $1,000 catchup contribution each year for 10 years, after 10 years a total of $46,200 could be accumulated if interest rates were 1% over the 10-year period and no withdrawals were taken from the account. At a 2% interest rate, $48,300 would be in the account at the end of 10 years. If interest rates were 5%, $55,100 would be accumulated at the end of 10 years.  

However, the report noted that such savings levels by themselves are inadequate, given the estimates that a man age 55 in 2009 would need between $144,000 and $290,000 by the time he reached age 65 in 2019 (depending upon his use of prescription drugs in retirement) to have a 50% chance of having enough money to cover premiums and out-of-pocket expenses for Medigap and Medicare Part D.   

Thus, a 55-year-old man would be able to use an HSA to save between 16% and 32% of needed savings for insurance premiums and out-of-pocket expenses in retirement if he was comfortable with a 50−50 chance of having enough savings and the account earned only 1% interest during the next 10 years.If a 2% interest rate is assumed, between 17% and 34% of necessary savings would be accumulated in the HSA.  

EBRI noted HSAs are more inadequate for women because women, on average, live longer than men, and will need greater savings.  

The Issue Brief is here.