[Editor’s Note: This article has been updated to clarify the source of HSA asset data in Morningstar’s report, which is Minnesota-based HSA provider and research firm Devenir. We regret the error.]
Health care is among the biggest expenses that clients will face in retirement, and the wildly disparate estimates make it hard to plan for. Fidelity estimates that a couple who retires today would need $285,000 to cover medical expenses. The Employee Benefit Research Institute (EBRI) projected that a couple with expensive medications may need nearly $400,000.
[Related: HSAs Can Be Used for COVID-19 Testing and Treatment: IRS]
HealthView Services, which publishes an annual report projecting health care costs in retirement, estimated in its 2019 report that a healthy 65-year-old couple who lives to their late 80s could spend more than $606,000 on their combined health care throughout their retirement.
Health savings accounts are a valuable tool for clients trying to plan for these kinds of costs. A client’s million-dollar 401(k) balance will look a lot bigger if half of it isn’t going to be spent on health care.
Since the HSA market was created in 2004 with the passing of the Medicare Prescription Drug, Improvement and Modernization Act, the number of HSAs reached an estimated 25 million in 2018, according to EBRI. Most of them—71%—have only been opened since 2015.
HSAs can be used as a checking account to cover current medical costs, or an investment account to save for future costs. Morningstar’s “2019 HSA Landscape Report,” citing data from Devenir’s 2019 Midyear HSA Survey, noted that total HSA assets topped $60 billion as of mid-2019. Although the vast majority of those assets (nearly $50 billion) are in checking accounts, invested assets are growing at a faster rate, the report found.
Leo Acheson, director of multiasset and alternative assets for Morningstar, noted that it’s not clear if that’s due to market appreciation or increased adoption.
The industry is taking steps to make it easier for clients to invest in HSAs. Over the past three years, Acheson has seen providers trim the fat from their investment menus.
“When we initially began evaluating these HSA providers in 2017, some of the providers offered hundreds of investment options in their investment menu, which in our view is overkill. It can lead to decision paralysis when you’re faced with that many choices,” he said. The 2019 report found the largest menu had been streamlined to a much less intimidating 33 investment options.
‘401(k) on Steroids’
Most advisors know HSAs are “triple tax advantaged.” Investors can fund the accounts with pretax dollars, interest earned in the account isn’t taxed and distributions aren’t taxed when they’re used on qualified medical expenses.
