Planning for Retirement Health Care Costs: Is There a Cure-All Solution?
Health care expenses are the biggest line item in an employer’s benefits budget—and they are also the most valued benefit to employees. While one of employees' biggest fears about retirement is not being able to afford quality health care, many fail to integrate health care planning into a holistic retirement savings strategy.
Employers' Adoption of High Deductible Health Plans
Percent of employers offering/likely to offer CDHP*
Historically, plan sponsors have largely kept health care concerns separate from retirement savings. But in 2017, 75% of plan sponsors said that health savings accounts (HSAs) were part of their retirement benefits strategy.**
* Consumer-directed health plan (CDHP). HSAs require the use of a high deductible health plan (HDHP), which is a specific type of CDHP.
Source: Mercer National Survey of Employer-Sponsored Health Plans.
** Source: PSCA Health Savings Accounts and Retirement Plans, 2017.
Understanding the Differences in Health Care Savings Options
We aim to provide advisors and their clients with a fair and balanced review of savings strategies, and an understanding that there is not a perfect solution. If done well, incorporating future health care costs in retirement planning can inspire confidence and help remove a major barrier to having peace of mind in retirement.
Reflects Roth and pretax employer-sponsored plans (as opposed to IRAs) unless noted. Advantages of account type (relative to the others) shown in blue. All three types grow tax-deferred. These are not the only options when it comes to saving for health care and/or medical-related expenses in retirement. Note that while HSAs are structured for the individual to save or invest for health costs, this is not the intended primary purpose of a defined contribution plan or IRA. Individuals should evaluate their health coverage needs and other factors before seeking tax benefits of an HSA. Source: IRS documents.
1 Federal income taxes. State laws vary. HSA contributions through an employer may be excluded from FICA taxes.
2 Subject to income limitations on participation (Roth IRA) or deductibility (Traditional IRA). Amounts do not include catch-up contributions.
3 Penalties end at age 65 for HSA and generally at age 59½ for Roth and Pretax. Distributions of contributed assets from Roth accounts are tax- and penalty-free.
4 Early distributions from retirement plans or IRAs may be subject to taxes and penalties unless an exemption applies.
5 Once you reach age 59½ with an account that has been opened for at least five years, you may qualify for tax-free withdrawals of both Roth IRA contributions and any accumulated earnings.
6 Roth IRAs have no RMDs for original owner.
For additional information, please reference T. Rowe Price's “Using Health Savings Accounts Wisely”.
Strategically Address Health Care With Clients
Differentiate your practice by helping clients prepare for future health care expenses as part of a broader discussion around retirement savings.
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Include Health Care in a Holistic Retirement Strategy
Health care is one of the most critical issues that workers and employers face today. Historically, health care concerns and retirement savings have largely been kept separate, but that conversation is changing. Offering a comprehensive benefits package that addresses the need to save for health care expenses in retirement can help employers stand apart from the competition.
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