by Andy Lavin
on May 17, 2016
What comes to mind when you think about retirement? Golf? Sunny beaches, perhaps? Responsible management of a traditional retirement savings account like a 401(k) can put you in a place to enjoy whatever comes to your mind when you think about retirement. Most employers offer benefit packages that include opportunities to invest in tax-advantaged retirement vehicles, and a large percentage of employees are investing in them nation-wide.
However, one of your most significant retirement expenses is likely something that doesn’t come to mind when you contemplate retirement. US News recently reported that health care is Americans’ second largest retirement expense after housing costs. Out-of-pocket costs for medical, dental, and prescriptions will likely inflate to over 20 percent of a typical retiree’s budget as they age into their 70s and 80s. Fidelity Investments estimates that a couple retiring at age 65 will spend $245,000 on health care throughout their retirement. As much as we’d like to avoid thinking about health care, preparing for those expenses is a vital part of a sound retirement plan.
Fortunately, preparing for the increased cost of health care in retirement is becoming easier. One of the best tools to make it easier is the health savings account (HSA). Like a 401(k), an HSA is a tax-advantaged savings vehicle. However as you’ll see, the tax savings enjoyed by using an HSA to pay for health care expenses are significantly greater than with a traditional retirement plan. Thus, the HSA can be a vital part of your overall retirement strategy. Here’s how:
As outlined above, dollars spent on medical expenses through an HSA are never taxed. This is in contrast to dollars contributed to a traditional retirement plan like a 401(k), which is taxed upon withdrawal, or a Roth, with is taxed before contribution. The unique tax treatment of HSA dollars makes it a powerful retirement planning tool to complement your traditional retirement savings vehicles.
Despite this extremely advantageous tax treatment, HSAs continue to be under-utilized – especially as tools to prepare for retirement. According to the large HSA investment provider Devinir, only about 14% of the money held in HSA accounts is invested. This indicates that HSA funds are largely being used on current medical expenses rather than being saved for retirement.
Perhaps the single largest barrier to HSA growth is the requirement that contributions to an HSA be made only when an individual is covered under a qualified high-deductible health plan. The good news is that more employers are benefiting financially by offering these types of qualified high-deductible health plans because they made sense for them financially. So while under-utilized, invested HSA funds are growing quickly – by over 33% year over year according to Devinir. For employees who have the option to enroll in a qualified high-deductible health plan, investing in an HSA can go a long way towards maximizing retirement readiness.