Americans Underestimate Health Care Costs’ Impact on Retirement Decisions
Oct 13, 2023
Health savings accounts and cash flow from
annuities can help mitigate too-rosy thinking, says retirement income
association fellow.
Many
Americans underestimate the impact of health care costs and the challenges on
their retirement savings, according to recent research from the Alliance for
Lifetime Income and Cannex Financial Exchanges Ltd.
The issue is particularly important as the U.S. reaches Peak 65
next year, when the country will have its greatest number in history of people
turning 65, according to the Alliance and Cannex, which does pricing and
analytics for annuities and bank products. Currently, on
average, more than 10,000 people in the U.S. turn 65 every day, and that will
increase to 12,000 per day in 2024.
The joint Protected Retirement
Income and Planning Study released in September found that 84%
of working Americans do not expect health reasons to be in their top three
reasons for retiring. That may be optimistic, however, as 38% of retired
Americans ages 45 to 75 named health as the reason they or a loved one retired,
the Alliance and Cannex found.
That reality could bring an unexpected shock to the retirement
saving plans and outcomes of workers. But solutions do exist, according to Jae
Oh, an education fellow at the Alliance for Lifetime Income’s Retirement Institute and
author of “Maximize Your Medicare.”
Health savings accounts are
one key vehicle to prepare both for unexpected health costs and retirement
planning, Oh says. These vehicles provide “multiple advantages” for both
retirement and health care, he notes, including:
·
Contributions to an HSA account are tax-deductible at the time
of deposit;
·
There are catch-up provisions for people aged 55 and older;
·
The funds can be invested in mutual funds, depending on the
operating bank; and
·
Withdrawals are tax-free, as long as money is used on qualified
health expenses as defined by the IRS (Publication 502), notably
including Medicare Part B premiums and long-term care insurance premiums.
Use With Care
Oh does note that “caution is required if a person works beyond
65, enrolls in Medicare Part A and continues to work with employer-sponsored
health insurance that includes an HSA contribution.” In that case, “no
contributions can be made while enrolled in any part of Medicare, and there is
a Part A look-back feature, which will set the Part A coverage date six months
prior to application if the person applies for Medicare at any point after
reaching 65.5 years old. Exceeding the annual contribution limit will result in
a tax violation.”
For anyone using an HSA, Oh emphasizes, it is important to work
with a human resources expert or a financial planner to consider its uses both
prior to and during retirement. Employees also sometimes confuse HSAs with
health reimbursement arrangements or flexible spending accounts, so care should
be taken in employer communications.
That said, an HSA is a particularly strong option because it is
not a “use it or lose it” investment vehicle, Oh notes. “In fact, an HSA is a
bank account, owned privately by the employee,” he says.
The House Committee on Ways and Means is working to pass legislation
that would expand eligibility for HSAs, along with raising contribution limits.
Two related bills are pending vote in the full House of Representatives.
A recent report by financial services firm Voya found that
knowledge about HSAs is still lacking among employees. The study,
which compared employee HSA knowledge from 2020 with that found in 2023, found
that general understanding of the savings vehicles showed no discernable
increase.
Annuities, Too
The Alliance and Cannex also pointed to annuities as a way to
shore up retirement income, even in the face of health care costs. The
researchers noted that 97% of consumers say that having guaranteed lifetime
income in addition to Social Security is valuable, but only 43% of people
between the ages of 45 and 75 have protected income through a pension or
annuity.
Oh notes that annuities are a benefit in providing guaranteed
cash flow, and they are also potential tax advantages that could lower the cost
of health insurance.
When using an annuity, “not all of the cash is taxed due to the
exclusion ratio,” he says. “The result is that a person could qualify for the
Advance Premium Tax Credit under the Affordable Care Act or possibly avoid
higher Medicare IRMAA surcharges, depending on the household’s modified
adjusted gross income (which is slightly different for health insurance
calculations).”
“Second, many deferred annuities have features in which a
guaranteed lifetime income rider includes an enhanced income level, for certain
periods, if a person cannot fulfill the required number of activities of daily living,”
he continues.
An annuity is also valuable, according to the research report,
in managing the potential for cognitive decline, during which wealth management
can become complicated. The researchers found that only 8% of
soon-to-be-retired or retired consumers who work with a financial professional regularly
talk with their adviser about the possibility of cognitive decline.
“Financial professionals should discuss health, including
cognitive decline, and the important role that protected income can play to
help manage the various health-related risks Peak 65ers could face in
retirement,” Jean Statler, CEO of the Alliance for Lifetime Income, said in a
statement accompanying the report. “Start these conversations now to protect
your clients and their families.”
The Alliance for Lifetime Income and Cannex surveyed 2,507
consumers in the U.S. ages 45 to 75 and 519 financial professionals who conduct
retirement planning for individual clients.
Source: Plan Adviser