Financial Planning, Retirement

More Americans Are Utilizing Health Savings Accounts

7/4/19 8:00 AM

/iStock-462756183.jpgMany pre-retirees assume that Medicare will be able to cover all of their healthcare bills in old age, but this government program was never designed to pay for medical expenses in full. In reality, Medicare usually covers just 64 percent of the cost of healthcare services for Medicare beneficiaries ages 65 and older, according to the most recent data from the U.S. Department of Health and Human Services, while the rest is typically paid for by private insurance coverage and out-of-pocket spending.

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These potential outlays should be incorporated into one’s retirement plan, especially given how significant healthcare expenses can often be. An updated study by the Employee Benefits Research Institute (EBRI), for instance, estimated that a 65-year-old man (woman) in 2019 would need $79,000 ($104,000) in savings just to achieve a 50 percent (coin flip) chance of having enough money to cover all healthcare expenses in retirement, e.g. premiums and prescription drug costs. For a 90 percent confidence level, those figures jump to $144,000 for a man and $163,000 for a woman. What is worse is that the EBRI’s estimates do not even include any expenses associated with long-term care, a growing financial risk that 47 percent of retired Americans recently surveyed by Transamerica said is one of their greatest old-age fears at the moment.

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In fact, only a reduction in Social Security benefits was able to match long-term care needs as the top concern. Such responses are to be expected since the median surveyed retiree anticipates living until age 90 (more than two decades of retirement to fund). Clearly healthcare outlays can be substantial and should therefore be integrated into one’s long-term financial plan. However, non-retired Americans also need medical care, and unsurprisingly health insurance is among U.S. workers’ most highly-valued employer-provided benefits, according to an earlier EBRI survey. A separate analysis similarly found that more than one in four surveyed workers ranked healthcare as “the most critical issue in the United States,” and just 30 percent said they are confident that over the next decade they will be able to pay their medical bills without experiencing a financial hardship.

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Many employers have started offering high-deductible health plans (HDHPs) in response to rising insurance outlays. The hope for these plans is that greater out-of-pocket spending will nudge workers into being more cost conscious when seeking care, but research on the effectiveness of this strategy has at best been mixed. On the bright side, one clear benefit of greater enrollment in high-deductible plans is that it will typically make people eligible to participate in a health savings account (HSA). Indeed, as a quick review HSAs are tax-exempt trusts or custodial accounts that you set up with a qualified trustee to pay or reimburse certain medical expenses you incur. Contributions are deductible from taxable income, contributions can grow (from interest or other capital earnings) tax free, and withdrawals are tax exempt if used for qualified medical expenses.

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The funds roll over and accumulate year-to-year if not spent, and some estimates even suggest that individuals who routinely save and invest with HSAs for just 10 years can amass between $53,000 and $68,000, depending on contribution size and realized return, and as much as $1.1 million over a 40-year horizon. Fortunately, the number of Americans taking advantage of HSAs has surged in recent years, growing from only 4.9 million in 2009 to 25.1 million at the end of 2018. This is likely another positive side-effect of the continued economic expansion in the United States, i.e. more Americans with jobs and enough disposable income to utilize HSAs. There is still room for improvement, though, because very few participants actually contribute the maximum to their HSA each year, and many account owners treat HSAs more like specialized checking accounts than investment vehicles.

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Sources: U.S. HHS, EBRI, FRBSL, Devenir

Post author: Charles Couch

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