Americans today are living longer lives and need to make preparations for a retirement that may stretch for decades. As time spent in retirement increases, that also means strategies for meeting future healthcare needs are vital components of retirement planning discussions. And employers need to pay attention.
An average 65-year-old couple today will need $265,000 to cover out-of-pocket healthcare expenses in retirement, according to the Employee Benefits Research Institute. However, many Americans are ill-prepared for these expenses. Some haven’t saved adequately, while others are under the false impression that Medicare will cover most of these medical costs. In fact, retirees will be responsible for covering Medicare premiums, deductibles and coinsurance, as well as routine dental, vision and hearing care.
In the face of growing healthcare concerns, employers need to start thinking about retiree health — and how it affects both employees and institutions — today. Planning conversations with employees should include accounting for healthcare expenses as part of a comprehensive health and wealth strategy. And to further support their workforce, employers should consider providing retiree healthcare benefits as a part of their total benefits package.
Without doing so, there can be a number of detrimental effects for both employees and employers. First, the strain of retiree healthcare costs may impact an employee’s ability to retire on time. Employees may postpone their retirement date to save more and maintain coverage through their employer’s health plan. This may affect the employer’s ability to renew the workforce or bring in new talent. This could also impact total compensation strategies and active health insurance risk pools, as older workers typically earn more and drive higher overall health insurance costs than younger employees.
Additionally, the financial burden of healthcare needs can threaten to deplete employees’ retirement incomes. Employees saving through work-based retirement plans often aren’t saving enough to account for out-of-pocket healthcare costs. Instead, retirees paying for medical expenses from their retirement savings plan could run through their savings faster than expected and outlive their nest egg.
Providing retiree healthcare benefits
A defined-contribution (DC) approach to retiree healthcare benefits can help control costs, maximize compensation costs and drive timely retirement. A DC approach can help address an institution’s financial concerns and meet employees’ needs by allowing employees to save for retirement healthcare expenses, while plan sponsors maintain control over institutional costs. A Retirement Health Savings Program (RHSP), for example, is a plan funded by the employer that may allow employees to contribute on an after-tax basis throughout their careers.
DC retiree healthcare approaches offer a powerful triple-tax advantage that could potentially stretch benefit dollars up to 50%: employer contributions are made tax-free, earnings grow tax-free, and distributions are tax-free. Plus, taking a total benefits approach may yield the necessary funding to support an RHSP offering. For example, the potential savings generated by shifting from a health maintenance organization (HMO) to a high-deductible health plan (HDHP) offering could cover employer contribution and administration costs sufficiently.
Offering a retirement plan that focuses on income replacement may also be an effective way to help employees prepare and ensure they’re on track to retire on time. Employers can further help employees by offering a DC retiree health approach that works in tandem with existing retirement plans to help address both employees’ health and financial well-being — two factors that are vital to living comfortably in retirement.
What should employers consider when assessing retiree healthcare solutions? When reviewing possible options, it’s important for employers to keep four factors in mind:
Healthcare will continue to evolve and employers must keep pace with the change. Employers must be prepared for how developing legislation will impact them and their employees. As the landscape shifts, employees will likely need more support as they plan for future healthcare expenses.
Understand the demographics within the organization and explore retiree healthcare solutions tailored to organizational needs. Find a balance: It’s important to take into account cost, effectiveness, ease of administration and effect on workforce renewal strategy.
Review current retiree healthcare benefit spend. Evaluate the financial impact and effectiveness of current retiree healthcare plan to identify possible improvements.
Take a total benefits approach. This approach could help minimize liabilities while maximizing total benefits spend. Additionally, savings in one benefits area could allow additional funding for new retiree healthcare solutions.
Ultimately, retirement readiness must include planning for healthcare expenses.
Healthcare is likely to be one of the largest expenses employees will face in retirement, and it can pose a major strain on savings or even derail retirement plans. This troubling trend affects employees and institutions alike, so it is critical for employers to prepare their workforce for success by encouraging them to plan in advance and providing benefit options which address both employees’ health and financial security.
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