Hint: It Takes More Than a 401(k)
by Ron Mastrogiovanni, Sr.Mr. Mastrogiovanni is Chairman and CEO, HealthView Services. hvsfinancial.com for more information.
Employers have a sizable employee mind share and already support retirement planning by providing 401(k) or related benefits. Retirement savings are heavily encouraged and incentivized through matching, which is important.
But knowing how much money will be needed for a secure retirement is a complicated question that goes beyond knowing when, where and what we plan for our golden years. Health care costs also are a huge part of the equation, and if they aren’t factored in, we may be saving a small fraction of what we’ll eventually need.
Plenty of data show that health care is one of the most significant costs in retirement, and to most people, that is not surprising. But for many advisors, employers and employees here’s the real bombshell: the most advantageous way to plan for health care costs in retirement may not be through greater contributions to a 401(k) or other retirement plan.
It’s Not Just How Much We Save, But How We Save It
Unfortunately, too few people understand that it’s not just how much we save that matters, but how we save it. For example, taking advantage of the long-term savings opportunities and triple-tax benefits associated with a Health Savings Account (HSA) – only available to those with High Deductible Health Plans (HDHPs) – can dramatically stretch retirement dollars beyond money saved in other ways.
COVID-19 has brought new attention the fragility of the economy, employment, personal income and wellness. It is more important than ever to help employees address the concerns that are on their minds today – and for the foreseeable future: health and wealth. And the leading concern among today’s workforce happens to fall into two areas where they are accustomed to receiving their employer’s help – health care and retirement.
Key factors that threaten the balance of the Health/Wealth equation
Based on recent health care costs projections and analysis by HealthView Services, drawing from health care claims from 530 million individual cases, as well as actuarial and government data:
• Many retirees rely on Social Security to help fund retirement, but a significant portion of benefits will be absorbed by healthcare spending. In the first year of retirement, an average, healthy 66-year-old couple will spend 43% of their Social Security check on medical expenses. By age 87, the couple will spend 73 cents of every dollar from Social Security on healthcare – even after claiming at Full Retirement Age (FRA) and including annual cost-of-living adjustments (COLAs).
• Longevity is one of the most important factors in calculating total costs. If a couple were to live two years longer than their actuarial longevity estimates (89 and 91 instead of 87 and 89 for example), they could spend another $96,204 on healthcare during those four extra years.
• Those with chronic conditions will spend more annually, but less throughout retirement. Due to a longer lifespan (ten moreyears, on average), a healthy 55-year-old man will spend $437,713 on retirement health expenses, $224,698 more than a person with type 2 diabetes of the same age (though the healthy individual’s annual outlays will be lower)
• Long-term care (LTC) spending – if needed – can be a serious end-of-life burden. According to the latest data, a 50-year-old couple will spend approximately $585,205 combined for one year each of skilled nursing care.* Regional costs vary widely: a Boston, Mass. resident would pay approximately double the national average at a nursing home.
• Addressing tomorrow’s costs with investment plans today is advisable: A healthy 50-year-old woman currently earning $75,000 per year wants to cover total retirement healthcare costs (including one year in an assisted living facility). She saves for retirement by applying an 80% income replacement ratio and assumes a 3% ongoing inflation rate for all expenses, including medical, bring her income need at year one of retirement to $93,478. With this plan, she will be underfunded for her retirement healthcare cost needs. To bridge this gap and account for higher healthcare inflation and losing employer-sponsored coverage, she would dedicate $112 bi-weekly to her HSA for the next 15 years.
• New legislation may alleviate some costs for higher earners. In 2020 (and for the first time in about a decade) IRMAA surcharges (Income-related monthly adjustment amount, also known as Medicare means-testing) will be curbed as modified adjusted gross income (MAGI) thresholds will now adjust to CPI-U growth. Still, as healthcare costs continue to shift to individuals, Medicare expenses may increase elsewhere, or coverage and services could diminish.
Health Care Costs Through The Lens Of Retirement Income
By highlighting opportunities to plan for and manage retirement health care expenses, employers can play a key role in helping employees take action. Where to start? Simply sharing health care cost projections in the context of retirement planning is a powerful driver of increased savings.
For example, one organization that showed employees personalized health care cost projections saw a 25% increase in retirement savings among those employees.
Employers offer a range of retirement planning and saving options. Still, there remains a significant gap between awareness and action: while 61% of American workers are significantly concerned about their inability to cover future healthcare expenses, only 26% have calculated the monthly income they will require to address their needs in retirement.
Why the disconnect? First, competition for income with more immediate living and debt expenses de-prioritizes saving for retirement now. Second, poor understanding and faulty assumptions about retirement costs. This second category can be addressed through education and information. Data show that once educated, employees take measurable steps to increase retirement savings.
If employees recognize they have the problem ahead, then their employers are well-positioned to help them tackle the challenge. First, by educating them on the specifics of their customized, personal health care cost projections, and second, by offering solutions to them — or teaching them how to use the tools already available.
Using basic health and demographic information future health costs can be projected for employees. Lifetime cost projections for a healthy 65-year old couple are estimated in the range of $606,000. Late last year, for a healthy 55-year old couple, we calculated their medical-cost outlook at nearly $1 million. These are big numbers, but what we are aware of, we can plan for. That’s why educating working people as part of their benefits package – or financial planning sessions – is so critical.
And the good news is that a growing number of employers already offer the single best, most tax-advantaged ways to save for health costs in retirement: the HSA.
An HSA Is Like… A Teenager
Unfortunately, the HSA is a bit like a teenager. It is easily misunderstood, yet full of potential. The plan (not unlike the teen) needs to be minded and nourished, but with growth and maturity, it becomes a vital, contributing part of our life and happiness.
Under federal law, the HSA is available only as part of a high deductible health plan or HDHP. This is simply tough packaging because from the get-go, employees see and use the HSA as a way to set aside a little money to be used within the plan year to pay for a health expense tax free. At best, these tax savings are nominal.
As fully described in one Connecticut-based employer’s health plan guide: “Some plans make you eligible to open and save money tax-free in an HSA. You can use your HSA funds to pay for qualified health care expenses, including prescriptions.”
This health benefit plan isn’t motivated to promote the savings potential and triple tax benefits of using the HSA for retirement planning. And yet this component of the HDHP is an unbeatable silver lining that, if better explained and understood, could increase adoption of these plans, help lower employer costs, and help solve the future health care cost problem many employees know they have.
In an ideal world, the HSA would be positioned in tandem with other retirement savings vehicles as part of a comprehensive plan that showed cost projections for retirement living, expected income from public programs, and retirement health care costs. Employees could then manage their savings strategically based on what they can afford.
HSA Money Goes Further
But as HealthView Services explains in a new report, when it comes to high value savings, money earmarked in the HSA goes much further against future health care expenses than money saved any other way. Down the road, it also adds another resource to help strategically manage the spending of retirement assets to stretch our savings further.
Aside from an employer, some people could reasonably expect a pointed discussion with their financial advisor about the full scope of the health costs they should anticipate. But less than 30 percent surveyed work with a professional advisor. And, of course, HSA plan administrators could offer enhanced insights or access to projection tools so people can see and understand this looming cost.
Ample research has consistently placed the quality, availability and cost of health care as a high-ranking concern among a majority of Americans. A growing recognition that employers and corporations may be able to solve more social problems also shows some focused successes, but the long-term view remains watery. So that leaves individuals in their own boat, and anyone young enough to be saving for retirement needs to be paddling hard toward a secure future.
Employers can help navigate employees to security by educating them more fully and in more personal ways about their future health care costs. Employers are in the best position to help. In doing so, they can increase utilization of their retirement benefits, and potential help steer additional employees into high deductible health plans.
*National average annual spending may range from $150,000 to $300,000, depending on the level of care needed (home health care, assisted living, or skilled nursing).