Preparing for the unknown is one of the biggest challenges facing Americans who wish to achieve financial wellness, and unplanned medical costs can often emerge as the most expensive unplanned variable. Therefore, it is essential for financial professionals to address healthcare expenses (present and future) when creating stable long-term financial strategies. Reliable healthcare cost projections – both during and in retirement – are the cornerstone of this process.
Most employers offer multiple plans with an array of cost and coverage options, but how does one really make the optimal choice? Some offerings may increase disposable income, generate future savings, or offer a combination of both. The key is for individuals to assess their personal (and family’s) health status and determine whether a less expensive high deductible health plan (HDHP) can fulfill their medical needs.
While HDHPs offer benefits that are absent in traditional HMOs and PPOs, participants may avoid these plans with higher deductibles because they fear costs that can be triggered by a catastrophic health event (like a heart attack or stroke) or serious accident; however, HDHP participants can achieve peace of mind when they have access to actuarial data.
Applications integrated into financial wellness plans can offer personalized projections based on age, gender, health conditions, state, and plan options. Armed with this information, employees often choose the high-deductible plan with a triple tax-free HSA over traditional HMOs and PPOs, which is evidenced by consistent annual HDHP enrollment growth from 2013 to 2021 (30.3% to 55.7%.) Calculating personalized costs for an HDHP – including those related to premiums, out-of-pockets, and potential one-time health events – ensures that workers can make informed decisions. Including catastrophic-event planning, in particular, relieves the “What if?” apprehension about facing the larger deductible.
Enrollees have much to gain from reduced HDHP costs. For example, over the next ten years, HDHP premiums are expected to be $10,000 lower than the average PPO option. These savings, which can amount to several hundred dollars each year (or more), can be allocated to a health savings account (HSA), used to pay down high interest credit card debt, or dedicated to a necessary household purchase.
Beyond savings, HDHP enrollees are eligible for additional HSA benefits.
Consider the case of a healthy 40-year-old couple retiring at 67. By maximizing HSA contributions ($6,750 from the household and $1,000 from the employer), this couple can:
- Take advantage of employer contributions (more than $25,000 between now and retirement);
- Reduce FICA taxes owed by over 10% annually;
- Cover all pre-retirement out-of-pocket (OOP) health costs for the next 22 years, tax-free;
- Invest remaining annual HSA assets after OOP spend;
- Add $639,571 in savings to their HSA up to age 67 (assumes 7% pre-retirement rate of return). These funds can be used tax-free for health expenses or penalty-free for any other retirement expenses.
Pre-retirement, employers usually subsidize 70% to 75% of employee healthcare premiums; however, during retirement, individuals are responsible for 100% of premiums and other OOP costs such as co-pays. To illustrate the impact on retirees, the couple mentioned earlier (living to age 87 and 90) with a combined household income of $120,000/year will be responsible for $1,584,850 in HSA-eligible healthcare expenses during retirement – and that excludes potential long-term care costs. These totals can be overwhelming, but solutions can be built into a financial wellness plan, which would allow the couple to
- Continue earning 6% annual return on HSA investments in retirement;
- Withdraw tax-free for health expenses* and fund 68% of in-retirement HSA-eligible health expenses – a total of $1,076,112;
- Save $107,270 in taxes (primarily on in-retirement withdrawals, but total also includes FICA savings).
Alternatively, the nearly $640,000 in additional savings from the HSA can be used penalty-free in retirement – even for non-medical expenses. This increase in disposable income can dramatically improve a person’s retirement outlook.
*If withdrawals are made for any other reason, they would pay the same taxes on non-medical HSA withdrawals as they would from a traditional 401(k).
Contributing to an HSA
Below are additional cases that highlight the benefits of switching to an HDHP and maximizing HSA contributions:
- A 44-year-old Illinois man with high cholesterol can use his HSA to fund all pre-retirement out-of-pocket costs and about one-third of his in-retirement health expenses beginning at age 65. If he delays retirement to 68 (and continues his HSA contributions), he can fund more than half of his retirement costs.
- A healthy 50-year-old Michigan couple can add $113,790 to their retirement savings at age 66 by investing their HSA assets instead of leaving them in a savings account.
- A 39-year-old single mother of two in New Jersey (who earns $100,000/year) will save $216,974 between FICA taxes during working years and tax savings on withdrawals during retirement (starting at age 65.)
Employees with multiple health-plan options are justifiably hesitant to take on the perceived risk of a high deductible health plan. Without adequate resources to inform that decision, some will default to a more conservative option (usually an HMO or PPO) and miss the opportunity to fortify their financial wellness plans. Data shows that when presented with personalized health-cost projections (especially those that consider potential one-time health events), employers are more likely to choose the HDHP with the triple-tax-free HSA, which can result in savings for both the employer and the employee. In addition, having an account that pays for medical expenses without tax implications – and can also be used without penalty for non-medical expenses during retirement – can create a stronger financial foundation.
As is often the case, achieving long-term financial wellness hinges on making important choices early in life. A good first step may be choosing an HDHP while maximizing HSA contributions, which not only saves money now, but also addresses retirement’s greatest expense: healthcare costs.