Benefits of HSAs Key to Holistic Retirement Planning

Health savings accounts remained an increasing area of focus for readers of PLANADVISER during 2016. 

As health care costs continue to rise and outpace inflation, it’s not surprising that more and more people are turning to health savings accounts (HSAs) to complement high deductible health plans (HDHP).

According to research firm Devenir, HSA assets reached $4.2 billion by the end of 2015, representing a 33% increase from the previous year. As saving for health care in retirement becomes more important, some firms predict HSAs are set to follow the growth of 401(k) plans.

Devenir projects that the HSA market will likely exceed $50 billion, accounting for 30 million accounts, by the end of 2018. Still, HSA adoption will face some of the same challenges 401(k)s did in their infancy—and some unique ones. 

Experts say plan sponsors and advisers can best make the argument for HSAs by relaying so-called triple tax advantage, wherein contributions are made tax-free, earnings on investments grow tax-free, and distributions to pay for qualified medical expenses are tax-free as well.

With this advantage, HSAs can serve as powerful savings accounts for health care expenses that can be combined with retirement plans and other benefits programs as well as employer matches to support a comfortable and healthy retirement.

These benefits, along with improving HSA portability, can’t be ignored in light of estimated retiree health care costs reaching record levels—even for healthy couples. Fidelity projects a 65-year-old couple retiring in 2016 will need an estimated $260,000 to cover health care costs throughout retirement, a 6% increase from last year’s estimate and the highest since the firm began making projections in 2002.

NEXT: HSAs help combat deductible growth 

Employer health care deductibles increased by 50% in 2016, according to the latest Health Plan Survey released by United Benefit Advisors (UBA), an independent employee-benefits advisory organization.

Medicare Part B premiums also went up in 2016, further driving the argument for investing via HSAs. Health care inflation including Medicare Part B is expected to grow at an annual rate of 6% for the next 10 years at least, according to HealthView Services, a provider of software that projects health care costs.

At the same time, it’s important to note that several studies suggest Americans are living longer, raising concern that longevity could erode retirement income. 

Not surprisingly, more than half of Americans are terrified about health care costs in retirement, according to the latest Nationwide Retirement Institute survey conducted by Harris Poll. But this trend may be reversed through targeted education and communication that can relay the benefits and advantages of HSAs. Effective strategies can help investors grasp the long-term potential of HSAs in order to avoid underutilizing them.