Who Pays For Aging?

Longevity’s Fragile Finance

How Health Savings Accounts can help fund medical expenses in retirement

By Doug Dubitsky

Mr. Dubitsky is , Vice President of Product Management & Development at The Guardian Life Insurance Company of America®, New York, NY 10004. Visit www.guardianlife.com

Part of the way you can become a valued advisor is to provide what might be called uncommon, common advice. When you talk to your client about information that’s basic, yet makes good sense, they’ll appreciate it. You’ll gain their trust and, ultimately, their business.

One example is providing sound recommendations about planning for health care expenses in retirement. When suggesting a client take advantage of a health savings account (HSA) that’s available to them through their workplace, an advisor doesn’t stand to gain direct financial benefit, but it’s the right thing to do.

Start the Conversation

Beginning a conversation with a client specifically about health care costs and health savings accounts is not something that you, nor your client, may feel comfortable about. Indeed, it’s a topic that advisors don’t often bring up with their clients.
A better approach may be to start from an overall financial planning perspective. When you first discuss retirement expenses, the focus is typically centered on the accumulation of wealth. A client may assert that their mushrooming 401K, combined with social security, will hold them in good stead.

This may naturally evolve into a discussion about the importance of converting some of that money into guaranteed income and the value of delaying the start of social security, if possible, to maximize overall benefit. You may also talk with your clients about setting aside assets they might want to leave to family members or other beneficiaries, a proposition that’s often best addressed by permanent life insurance.

As you go through each concept that a client should think about in retirement and over the remaining span of their life, they begin to fit together like a puzzle. Planning for health care expenses then becomes the next natural step in this progression.

The Rising Cost of Health Care

It’s no surprise that healthcare costs continue to rise. But your clients may not realize just how much health care might cost during their retirement. Men retiring in 2015 at the age of 65 will need approximately $115,000 to cover healthcare costs for the rest of their lives. Women retiring at the same age will need an estimated $130,000 to account for two years of additional life expectancy.*

This means that the average couple will need anywhere from $230,000 to $260,000 to cover healthcare expenses after retirement. These amounts are about 10 percent higher than they were in 2014, and 29 percent higher than for those retiring in 2005.* For higher net worth clients, healthcare expenses during retirement will likely be larger as they’re more apt to seek more and higher quality health services.

The screaming message is that healthcare costs in retirement are high – and they’re only going higher. So what can you offer your clients to help them account for such significant expenses and to be better prepared.

The Role of the HSA

Health savings accounts (HSA), which were introduced in 2004, have become increasingly popular in the last several years as employers have introduced high-deductible health plans. The core concept for the establishment of HSAs was to help workers cover their healthcare expenses today but, more and more, HSAs are being viewed as a great source of savings to fund healthcare expenses for one’s retirement years.

An HSA allows individuals to pay for current health care expenses and save for those in the future. HSAs offer three tax benefits: tax-deductible contributions, tax-free growth and tax-free withdrawals for qualified medical expenses.

Communicating the Nuances of HSAs

There are aspects of HSAs that are not well understood. This means there is great opportunity for an advisor to provide important education to a client.

As you go through each concept that a client should think about in retirement and over the remaining span of their life, they begin to fit together like a puzzle

One area where there is inadequate knowledge is in understanding what constitutes “qualifying medical expenses.” Most people know that co-pays for doctor and hospital visits and prescription drug costs qualify, but there are many other qualifying medical expenses that your clients will likely incur in retirement that are covered—and that they don’t know about.

For example, the cost of massage therapy for back problems when recommended by a doctor is covered. Expenses related to adapting a residence to accommodate someone with disabilities or medical conditions, such as the rebuilding of steps or the installation of special handrails, are also covered. Other, surprisingly eligible medical expenses include dental sealants, sunscreen with SPF 30 or above, arthritis gloves and telecommunication devices for those with hearing or speech disabilities. These may seem like extreme examples, but the point is that HSAs cover more than what most people think they do.

Your clients may also be confused about how health savings accounts differ from other accounts obtained through the workplace, such as flexible spending accounts. Some may think the money in their accounts is subject to a “use it or lost it” requirement. However, unlike flexible spending accounts, which have a maximum yearly carryover of $500, HSAs have no limit on the amount of money that can be carried over nor do they have a stipulation on when funds may be used. The money in HSAs belongs to the account owner, even if the account is opened through an employer-sponsored program. Accounts are held with a trustee or custodian, which may be a bank, insurance company or brokerage firm.

You’ll have an HSA credit card for things like office co-pays, however if your client have other sources to use to pay for such cost, then they may choose to invest the money within the HSA for long-term appreciation rather than spend it on current health care needs. With HSAs there is the optionality to select investment options that allows them to have potential growth. HSAs typically default to a money market or other non-investment account unless participants choose investment options. They should of course be reminded that with investments there are risk and growth is not guaranteed.

Now of course, your clients have the option to withdraw money from their HSAs, but should be reminded that if they use withdrawals for nonqualified medical expenses, such as for cosmetic surgery, hair transplants and teeth whitening, before the age of 65, they must pay a 20 percent penalty. Starting at age 65, account owners can withdraw money from their HSAs for any reason without penalty. However, if they are not used for qualifying medical expenses, they must pay tax on the distribution.

HSAs: Increasingly Common But Still Underutilized

Health and health savings are key areas of concern for employees. There is no greater wildcard when it comes to living expenses before or during retirement than those for health. Moreover, healthcare expenses are “first dollar costs,” meaning they need to be paid prior to disbursements for less urgent retirement costs, such as golf club fees, travel or other recreational pursuits. HSAs hold the potential to address these concerns.

As employers continue to try and shift more health care costs on to employees, high-deductible health plans are becoming increasingly common. As a result, more workers are eligible for HSAs.

However, despite the great advantages of HSAs, they remain extremely underutilized by American workers. This is unfortunate, as it could be a great benefit for them today, and in future years, given that health care expenses in retirement are a near certainty and will continue to grow.

Encouraging clients to take full advantage of the HSAs available to them makes good sense. Most importantly, it will help them plan for the ever-uncertain medical costs they’ll encounter before and during retirement. It will also help position you as someone your clients can come to for invaluable advice and a trusted source along their financial journey. ◊