Depending on your “season” of life, you may recall that the “normal” or “full” retirement age was 65 for many years. That changed in 1983, when President Reagan signed H.R. 1900 into law. These Social Security amendments established that the retirement age be incrementally raised, setting off a perennially hot-button issue. Proponents of these amendments cited longer life expectancies and the generally favorable health status of seniors well into retirement.
For instance, U.S. Census data notes that the average life expectancy for men and women regardless of race in 1950 was around 68 years. In 2016, that figure had risen to by more than 10 years – to almost 79 years. The law applies to those born in 1938 or later. The age has increased by a couple of months for every birth year – until age 67 for those born during or after 1960. Accordingly, the Social Security Administration offers a calculator that you can use to determine the year and age that you are eligible for full benefits. Of course, retirees take benefits starting at 62; however, these benefits will be reduced by a small percentage for each month until you reach full retirement age.
This could mean the difference between, for those born in 1960 and later, receiving the full $1,000 benefit versus the $700 benefit each month. You can apply your specifics to determine how early retirement could affect these benefits, for both you and your spouse.
When the 2010 Census was taken, the oldest of the historically largest Boomer generation hadn’t even reached age 65! Now, in less than 10 years (2030), all roughly 73 million boomers will have crossed the 65-year mark. The passage of time reflects a dramatic shift in needs and demands on the health care system and associated public services, from emergency and hospital infrastructure to Medicare Part B and senior job training.
Certainly, these concerns have not been lost on those who would be most directly affected by policies and investments related to these services – the seniors who represent the largest users of these services. In HSA Bank’s 2020 Health and Wellness Index survey spanning more than 2,000 adults, 83% of respondents aged 66 and older “report worrying about current or future medical bills.” Yet, there is a definite gulf between these sentiments and action; almost four of every 10 seniors aged 66-plus said that they “rarely save money for future healthcare expenses.” Furthermore, almost half of those respondents did not know if their health care plan was Health Savings Account-eligible. Notably, HSAs are a tremendous vehicle to prepare and save for future health care expenses. Yet, if the policyholder isn’t even aware that his or her plan is eligible, it stands to reason that utilization of this valuable benefit will be disappointingly low. Data derived from the research arm of Devenir, which has been providing investment solutions since these tax-advantaged health accounts were first introduced in 2004, bears this out. Reportedly, more than 29 million HSAs held an estimated $73.5 billion (as of June 2020). While this sounds like a lot and does represent a year-on-year increase (12%), it is a fraction of the number of eligible employees – at 30% -- of the eligible employees who could be saving with an HSA. Buoyed partly by an increase in investments of 7% YoY, Devenir projects that the HSA market will approach 35 million and upwards of $100 billion in value by the end of next year. You need to be among those new account holders! And why should you be?
Well, let’s consider the sheer costs of health care in the United States. By way of HealthView Services health care data, a healthy 65-year-old couple who retires this year will accrue, on average, a whopping $662,000 in premiums and out-of-pocket costs in retirement! Just who among us has $662K sitting around, on top of the other basic needs and needs to maintain one’s lifestyle into retirement? Circling around to Social Security benefits, HealthView asserts that if the couple began receiving their SS payments at 65, health care expenses would consume close to 70% of those benefits. In other words, not much will be left to pay for basic living expenses, housing and food, let alone for fulfilling that “bucket list!”
HSAs represent a powerful, albeit underutilized, tool to lighten the heavy load on your personal savings and on any benefits that might be available to you at retirement. HSAs are akin to personal savings accounts – only they are specifically designed to help you save for health care expenses. These accounts allow one to grow his or her health care savings tax-free. There is a triple-tax benefit:
You are not taxed when you invest monies into the account.
You are not taxed on any gains to the funds in the account.
You are not taxed on withdrawals.*
*There is a caveat; generally, the monies must be spent on eligible health care products and services, otherwise you will be subject to penalties. Be aware that we say “generally” here because, after age 65, you can use the funds in your HSA on anything – without fear of a hefty penalty! These eligible expenses are always changing, with technology and the likes of a pandemic; for instance, telemedicine was not a “thing” all that long ago and is now a covered expense. So, it can pay off to see if your upcoming expense may be covered by funds in your HSA.
Unlike other types of retirement accounts established by workplaces, these funds can travel with you wherever you go and as your employment status ebbs and flows. Monies are still available to you following furloughs, after leave for greener pastures, or upon retirement. Oh, and the money can truly grow and grow, because HSAs are not “use it or lose it” funds. The monies in your account roll over from one year to the next, without penalties or the loss of a portion of those funds.
To our employer friends out there, we encourage you to revisit the pre-retirement communication and education that you may be offering to your employees as it relates to retirement and health care savings plans. It is not uncommon for business owners to be disappointed about a lack of utilization. There may be benefits available to you that aid in buoying that utilization! Even reminders to employees aged 55 and older about catch-up contributions can be helpful. After all, once they hit this milestone, they’re eligible to contribute an extra $1K each year, which can really add up until they are ready to use those funds into retirement. These funds may even be used to help shoulder the expense of premiums (i.e. Medicare).
We at O’Donnell, Ficenec, Wills & Ferdig are privileged to be able to offer so many consultative tax and financial solutions to both individuals and employers alike. After all, we are “more than accounting.” However, you may benefit from our focused retirement and distribution analysis and related planning services. We partner with you to keep the shine in your golden years.