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HSAs Seen as a Viable Solution for Health Care Costs in Retirement

A 65-year-old couple retiring today can expect to pay $400,000 in health care expenses.

By Lee Barney | September 13, 2017
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Health savings accounts (HSAs) are a viable solution for people looking to cover their health care costs in retirement, according to a new report from HSA Bank, “Health Savings Accounts: Bridging the Retirement Savings Gap.” Health care costs can range from $10,000 to $20,000 a year in retirement, and a 65-year-old couple retiring today can expect to pay $400,000 for health care, according to HSA Bank. And these expenses are expected to increase 5.5% a year—twice the pace of the U.S. inflation rate.

HSA Bank notes that are many advantages to HSAs, not least of which is the fact that HSAs are “triple tax advantaged.” Funds are contributed pre-tax, grow tax-deferred and withdrawals used for qualified medical expenses are tax-free. The Schwab Center for Financial Research estimates that because of these tax advantages, funds for health care from an HSA are 33% larger than funds from a 401(k) and 44% larger than a taxable account.

HSA funds roll over from year to year and can be retained by the account holder if they leave their employer.  HSA funds can be invested, although only 3.8% of account holders are taking advantage of this opportunity. HSA funds can be used for long-term care insurance, and anyone can contribute to the HSA on behalf of the account holder, including an employer or family member.

HSA Bank notes that among companies with 5,000 or more employees, 89% now offer an HSA plan along with high deductible health plans (HDHPs). Among companies of all sizes, 70% offer HSAs. Citing a recent survey by the Plan Sponsor Council of America, HSA Bank notes that 75% of employers view HSAs as valuable tools for retirement saving.

NEXT: Nudging Participants to Use HSAs for Retirement Health Care Savings