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Health Care Costs in Retirement Might Make You Reconsider an HSA

Practice Management
Fidelity has once again come out with its annual estimate of how much it will cost to cover health care in retirement—and it’s a doozy.  
 
Released to help better educate employees on the importance of planning for health care costs, particularly for those approaching traditional retirement age, the firm’s annual Retiree Health Care Cost Estimate for this year is $295,000—an all-time high. This is the amount a hypothetical 65-year old couple retiring in 2020 can expect to spend on health care and medical expenses throughout retirement. 

This year’s estimate represents an increase of 18% since 2010, when the amount was $250,000. One positive note is that the level is up only 3.5% from last year’s estimate of $285,000—as health care cost inflation has started to level. For single retirees, the 2020 estimate is $155,000 for women and $140,000 for men.
 
The estimate assumes individuals do not have employer-provided retiree health care coverage, but are covered under Medicare. The calculation also takes into account cost-sharing provisions, such as deductibles and coinsurance, associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care. Of course, actual assets needed may be higher or lower depending on actual health status, area of residence and longevity. 
 
“While the retiree health care cost estimate has reached an all-time-high at $295,000—this isn’t about ‘sticker shock’—this is about helping our clients think through their own health needs and make informed financial decisions about their futures,” says Hope Manion, Chief Health & Welfare Actuary and a senior vice president with Fidelity Workplace Consulting. “Educating employees about these potential costs could help drive smarter choices during annual enrollment about their health plans and a better understanding of the impact opening a health savings account could have on their future financial well-being.” 
 
In that regard, Fidelity reports in “Uncovering the real value of the benefits you offer” that 92% of employees know whether or not an HSA is offered, but only 50% are signing up. Yet, when the HSA is utilized, 89% of employees report that it has a positive impact on their lives. HSAs help families save for their health care expenses and they offer a triple-tax advantage of tax-free contributions, tax-free growth and tax-free withdrawals for qualified medical expenses. HSAs also can be used to pay for current health expenses or invested and then used to cover future expenses, such as those in retirement. 

Fidelity also reports that one in four (27%) organizations have changed employee health benefits since the COVID-19 pandemic began in March, based on a survey of 293 plan sponsors from June 2020. Yet, nearly 80% of employees don’t anticipate spending extra time evaluating benefits this year compared to what they have done in the past. Given these changes and the importance of maintaining physical, mental and financial health, this year’s annual enrollment marks a critical moment when employees need to spend more time evaluating their options, the firm emphasizes. 
 
“If 2020 has shown us anything—it’s that this is not a typical year and arguably, we are approaching the most important annual enrollment we will ever experience in our lifetime and we cannot simply default our benefits like we may have done in previous years,” Manion stresses. 
 
Persona-based Communications
 
Given what Fidelity has reported and recent survey results from the Plan Sponsor Council of America, which found that 87% of plan sponsor respondents offer an HSA-capable health option, but only 61% said educating employees was their primary concern regarding HSAs, as an interesting approach to HSA education comes from HealthSavings Administrators.   

Using behavioral and transaction data, along with direct input from more than 5,000 accountholders on their understanding and usage trends, HealthSavingsoffers six common behavior-based persona options that accountholders can choose which persona most closely matches them and their needs. 

All supporting communications and educational resources from that point on are tailored to them. “It’s a unique approach that improves HSA knowledge and transcends the industry’s ‘one-size-fits-all’ approach to HSAs,” notes Alison Moore, vice president of marketing at HealthSavings.  
 
The primary HSA personas and associated findings are:
 
  • The Planner: This is the largest category with 39% of accountholders. They are focused on investing their HSA to save for retirement and estate planning as all are very comfortable managing investments. With a majority of this group in the 45-65 age bracket, most are enrolled in family medical coverage and make more than $100,000 per year.
They cite retirement readiness as their biggest financial priority. 
 
  • The Harvester: 25% are retired or nearing retirement and now want to get the most out of their HSA. As most are over 65 years old, they are already very or somewhat comfortable managing investments. They expect their income to stay the same or decrease, and some are managing a chronic illness. 
  • The Provider: 14% use their HSA to pay for some doctor’s visits and medical expenses but also consider HSAs a long-term retirement savings vehicle. Unlike the other personas, an overwhelming majority of Providers is somewhat or very comfortable investing. More than half of Providers are also on family medical coverage, which means they have higher HSA contribution limits.  
  • The Budgeter: 9% of opted-in accountholders use their HSA strictly to pay for day-to-day medical expenses. They do not feel comfortable managing investments and instead rely on their HSA for short-term spending and/or saving. The firm notes that the key difference for this group when compared to the Newcomer is that paying bills is their biggest financial priority and most have children. 
  • The Newcomer: 8% of accountholders who have opted into a persona fit the Newcomer category. They are new to managing their benefits and want to learn how to get the most out of their HSA. Based on the research, Newcomers tend not have chronic illnesses and most did not anticipate medical expenses in 2020. 
  • The Catalyst: Only 5% chose the Catalyst, which is a persona designed to meet the unique needs of women, who are likely to incur 84% higher medical costs than men according to the U.S. Department of Health & Human Services. They want to get the most of their HSA both now and in the future, but are not comfortable or only somewhat comfortable managing investments.