Health Savings Accounts: The Intersection of Retirement and Health Care

The increasing costs of health insurance borne by employees and employers alike has spawned a variety of plans and strategies to help manage the expenses. Among these are health savings accounts (HSAs), which first came onto the scene in 2003. HSAs allow individuals who are covered by high-deductible health plans to receive tax-preferred treatment of money they have saved for medical expenses. Kevin Murphy, our national retirement plan strategist, explains the benefits of HSAs, and how they can even help build your retirement savings.

Every year Franklin Templeton conducts its Retirement Income Strategies and Expectations (RISE) survey,1 asking individuals how prepared they are for retirement, the strategies they have used to save for it and what concerns them most about their post-work life. Concerns about health care expenses often top the list of worries among survey respondents. In fact, in the 2018 RISE survey, paying for medical and pharmaceutical expenses was the number one expense individuals were concerned about in retirement. And that’s no surprise, as health care planning—or lack thereof—can directly impact one’s retirement for the better or worse.

Health Care Costs on the Rise

The amount US employers spend on employee benefits rose 24% between 2001 and 2015.2 That is almost exclusively due to the rising cost of health care, which has more than doubled during that time frame. And, retiree health care expenses are expected to continue to outpace the overall US inflation rate, as well as annual projected Social Security cost-of-living adjustments (COLAs).3

To put the cost of health care into perspective, in a 2017 report, HealthView Services projected the basic total lifetime premium costs for a healthy 55-year-old couple retiring in 10 years would amount to an estimated $410,002.4

Health care costs have continued to take a larger share of our overall expenses (see chart below) and the trend doesn’t appear to be slowing.

The ABCs of HDHPs and HSAs

High-deductible health plans (HDHPs) have been one solution to help employers and employees cope with rising health care costs. Along with traditional health care plans, increasing numbers of employers have been offering these plans, which can provide greater upfront savings to the employer than traditional plans, and significantly lower premiums for individuals. As the name implies, an HDHP has a higher deductible than a traditional health insurance plan. The individual is responsible for paying medical expenses up to a specified level. After meeting the deductible threshold coverage kicks in. Certain aspects of care may be covered in full outside the deductible, such as yearly exams and preventative care.