Bridging the Retirement Savings Gap

Monday, October 2, 2017
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The rising cost of healthcare has led to an increased focus on the need for both short- and long-term savings to fund these expenses. Employers are seeking additional tools that can be used to help employees plan for the healthcare costs they will face throughout their lifetime, particularly during retirement years, when healthcare costs can range from $10,000 to $20,000 per year.1 Health savings accounts are gaining recognition as one such tool for retirement savings due to their triple tax advantage, ability to cover Medicare premiums and out-of-pocket expenses after age 65, and investment capabilities.

The Retirement Savings Gap

According to a 2015 United States Government Accountability Office study, 29 percent of Americans 55 and older don't have a retirement nest egg.2 Those who do have retirement funds don't have enough money to cover essential living expenses: 55- to 64-year-olds have an average of $104,000 and those 65 to 74 have $148,000 in savings.3 A recent study by Health View Services estimates a healthy 65-year-old couple retiring today can expect to pay over $400,000 (not adjusted for inflation) in healthcare expenses alone during retirement when taking into account Medicare Parts B and D, supplemental  insurance, dental and vision insurance, deductibles, copays and other out-of-pocket healthcare costs. And, it's expected that these expenses will increase by an average of 5.5 percent per year during retirement, twice the U.S. inflation rate.4

Maximize Healthcare Funds for Retirement

The retirement savings gap is a significant hurdle for many Americans, especially with thousands of baby boomers approaching retirement age each day. There are many viable options available that allow individuals to save for retirement, including the 401(k) (pre-tax and Roth), Traditional and Roth IRAs, annuities, and even taxable brokerage account solutions. However, none of these options provide the healthcare savings advantages of the HSA.

* HSAs are triple tax advantaged.  Funds are contributed pre-tax and grow tax-deferred. Withdrawals are made tax-free when funds are used for IRS-qualified medical expenses.5

* There is no use-it-or-lose-it clause with HSAs. Funds roll over year to year and accountholders retain the money if they leave their employer.

* HSA funds can be invested in mutual funds, stocks and other linked investment options as part of a long-term retirement strategy.

* At age 65, HSAs can be used to pay for Medicare Parts A (when applicable), B (individuals may reimburse themselves for premiums deducted from Social Security), C (Medicare Advantage), and D (prescription drug coverage), tax-free and penalty-free.

* Qualified long-term care insurance premiums can be reimbursed from an HSA tax-free up to federal tax-deductible limits (increases with age).

* HSA funds can be used to reimburse medical expenses incurred any time after the HSA is established, even in retirement, many years after an expense has occurred.

The triple tax benefit of HSAs is a significant advantage over traditional retirement options, which are subject to income tax when withdrawn. When funds from a 401(k) or IRA are used to pay for medical expenses, the funds are subject to income tax. Whereas, HSA funds can be used tax free and require less post-tax funds to cover expenses. For example, if you have a $400 medical expense, you can withdraw $400 in HSA funds, or $500 in 401(k) or IRA funds, given a 20 percent tax rate, to pay for the medical expense.

Additionally, HSA funds don't have to be used to pay for medical expenses. For those age 65 and older who do not require all of their HSA funds to cover healthcare costs, the funds can be withdrawn for any reason without penalty. However, HSA distributions not used to pay for IRS-qualified medical expenses are subject to income tax, similar to traditional 401(k) and IRA distributions.

HSAs play an important role in the larger picture of retirement needs and can be an integral part of a holistic retirement strategy. By combining savings from an HSA and traditional retirement vehicles, Americans will be better prepared for the healthcare expenses they will incur during their retirement years.

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1 Sawyer, Bradley. "While health spending increases throughout adulthood for both men and women, spending

varies by age." Peterson-Kaiser Health System Tracker. May 4, 2017. Peterson-Kaiser Health System Tracker.

18 July 2017.

2 "Most Households Approaching Retirement Have Low Savings." United States Government Accountability Office. May, 2015. United States Government Accountability Office. 18 July 2017.

3 "Most Households Approaching Retirement Have Low Savings." United States Government Accountability Office. May, 2015. United States Government Accountability Office. 18 July 2017.

4 "2017 Retirement Health Care Costs Data Report." Health View Services.  June 2017. Health View Services. 18 July 2017.

5 Federal tax savings are available. Most states provide tax savings, but exceptions apply.


The information provided here is for general informational purposes only and should not be considered or relied upon as advice. HSA Bank does not provide tax or legal advice. Where specific advice is necessary or appropriate, please consult with a qualified tax or legal advisor.

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