Healthcare costs have grown to be such a large part of people’s retirement savings that they need to be part of retirement planning, according to industry experts. And for many employers, that means doing a better job of educating employees about the benefits of health savings accounts.
Shelby George, vice president of advisor services for investment management company Manning & Napier, says that five years ago many financial professionals with retirement expertise wondered why they should care about health benefits, but now, “we expect more employers to start asking their retirement professionals about these costs as well.”
In a recent report, Fidelity calculated what a 65-year-old couple would need to save to cover healthcare expenses in retirement: $275,000.
“What is more impactful and astounding than that number is that it doesn’t include long-term care,” George said, speaking at an online conference last week, sponsored by record keeping and TPA firm July.
She pointed out that long-term care costs an average of $8,000 per month and is needed by about 70% of all people who are 65 or older.
“These healthcare costs are not only staggering but can be helpful for your clients, whether individuals or plan participants, to talk about the sticker shock of all-in costs in retirement but debunk the myths around Medicare and the healthcare costs they will encounter year over year,” she said.
One big myth is that Medicare is free, she explained. Many retirees or those nearing retirement believe their healthcare expenses will be fully covered in retirement. Not only do people have to pay Medicare premiums on a sliding scale, but beyond the premium, Medicare doesn’t pay for all of the services it covers. On average, an individual will still pay 62% of medical costs, even for things Medicare covers, George said. There are also copays for many services.
Many items they expect Medicare to cover, like eyeglasses and dental work, are not covered by traditional Medicare.
Retirees can expect to spend most, if not all, of their Social Security checks on healthcare, she added.
But how can employers or financial advisers talk to younger demographics about medical costs and the importance of medical savings?
Millennials pose a major challenge when it comes to healthcare costs. They are the sickest group in the last century, according to the American Hospital Association when it examined certain risk factors like obesity, cigarette and alcohol usage, but only 44% of millennials who have access to healthcare coverage at work actually opt to be covered under the health plan. That leaves 56% of millennials opting out of health coverage from their employers, says George.
On top of that, fewer than half of millennials have an emergency fund to fall back on to cover unexpected costs.
“This can be crippling,” she said. “It is a very important issue even for young invincibles who may not have healthcare top of mind.” That’s where HSAs come in and can be very effective for active employees.
The need to explain HSAs — again
Plan leakage is a problem in the 401(k) space, with between 5% and 15% of retirement savings being withdrawn to pay for unexpected medical expenses. That is reason enough for plan sponsors to include future healthcare expenses when educating employees about their workplace-sponsored benefits.
Employers need to showcase HSAs and 401(k) plans as two different types of long-term savings vehicles, George said. Many benefits providers talk about HSAs as a spending vehicle rather than a savings vehicle. Many people don’t realize they can invest their HSA dollars for use for future medical expenses. Unlike flexible spending accounts, health savings accounts don’t have to be spent down during the plan year. Any money left over can be invested, just like a 401(k) plan.
Money contributed to an HSA goes in pre-tax but it comes out tax free as well.
Of course not everyone has access to a health spending account. HSAs are currently paired with high-deductible health plans. Not every employer offers a high-deductible health plan but they are growing in popularity.
Like 401(k) plans, HSAs can be rolled over from year to year and employees can take them with them when they change jobs. There are rules around eligibility for both 401(k)s and HSAs, but contribution limits are higher for 401(k) plans. One of the biggest differences between the two savings vehicles is that people don’t have to hold onto that money until they reach retirement age. They can use that money for qualified medical expenses at any time and there is no penalty.
Because of the preferential tax treatment of HSAs, financial professionals could encourage those individuals who can afford to pay for their medical expenses out of pocket to use their HSA as a long-term savings vehicle instead of a short-term savings vehicle.
“Most often this would be a fit for individuals who are higher earners with disposable income,” George said. “For people who fit that category, there are very few reasons not to set aside money in an HSA if they are eligible.”
It is important, especially for younger people who don’t use medical care often, to have an HSA to help pay for unexpected short-term medical expenses if they participate in a high deductible health plan. Premiums are lower with high deductible plans but participants need to meet a higher deductible before insurance will kick in and pay their costs. That can catch people unaware, she said.
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