Using an HSA to save for health care in retirement

Saving enough for retirement can be a challenge for employees. This challenge is compounded by the fact that health care costs in retirement can be considerable. Not only does Medicare not cover health care expenses in retirement in full, but employers have been cutting back on retiree health benefits as well. As a result, employees are increasingly assuming responsibility for out-of-pocket health care expenses that they may incur in retirement. The predicted savings target for Medicare beneficiaries to cover premiums, deductibles, and prescription drugs in retirement remains high. A 65-year-old couple will need to have saved $351,000 to have a high chance of having enough to cover premiums and prescription drug expenditures.

To help employees save for future health care expenses, employers can offer health plans with health savings accounts (HSAs). HSAs benefit from the “triple tax advantage.” As a result, HSAs are an attractive means for filling the gaps in Medicare coverage.

An individual could save just over $1 million in their HSA under the following assumptions:
• Contributions are made for 40 years (assuming they start at age 25 and continue through age 64).
• Maximum contributions are made each year, including catch-up contributions.
• Distributions are never taken, regardless as to whether the individual uses any health care services.
• The HSA earns a 7.5% rate of return.

Lower rates of return and/or fewer years contributing to the account can have a substantial impact on the HSA balance.

Past EBRI research has found that the longer someone has owned their HSA, the larger their balance tends to be, in particular because the higher their contributions tend to be, the more likely they are to invest their HSA in assets other than cash. These strategies better position accountholders to withdraw larger sums when unexpected major health expenses occur and can leave accountholders more prepared to cover their sizeable health care expenses in retirement.