Women in their 40s and 50s will be faced with a big decision this open enrollment period for benefits and it is one on which they need to take the long view. As employees and their families review their medical plan options, many will have the option of a high-deductible-compatible health care plan. This is a plan that women in their 40s and 50s need to seriously consider for their future health.
It might seem odd that choosing a high deductible health plan today would have an impact on meeting their health care costs in retirement. But women today are facing greater longevity than ever before, and they need to manage their health care planning accordingly. HealthView Services, a provider of software to project health care costs, recently released Addressing the Women’s Longevity Gap, which found that a healthy 43-year-old woman in retirement will face $200,000 more in health care costs than her husband.
Making the right decision today about your health plan is important. While a high deductible plan requires that the participant be able to meet the deductible, it also provides an opportunity to save by using a health savings account or HSA. This key account can be a secret weapon for women in managing longevity issues in their retirement.
What Is A Health Savings Account?
An HSA is relatively straightforward as a savings tool. Like other types of retirement-focused, tax-advantaged accounts, an HSA is set up and funded with pretax dollars. The funds can be used for qualified medical expenses and the distributions are tax free. What is unique about this account is that the funds do not need to be used within a certain time frame. Rather they can be invested, grow tax deferred and be saved for future years. HSAs are only available to participants in high deductible health care plans that are HSA compatible.
As with 401ks and IRAs, there is a cap on the annual amount that can be contributed to an HSA. For 2020, this is $3,550 for individual plans and $7,100 for family plans. There is a catch-up contribution of $1,000 for those age 55 or older.
If you ask most women in their 40s and 50s, they would say that they have heard of HSAs. If you ask them whether they utilize this tool, the typical answer is that they just have not had the time to figure out the role HSAs play in their planning.
This is not a surprise. Alegeus, one of the leading benefits platforms for HSAs, found in their 2020 Consumer Pre-Open Enrollment Survey that less than half of consumers understand that HSAs are beneficial for both short- and long-term medical expenses. Given people’s confusion and lack of clarity, they are not taking the opportunity to leverage these tools.
How to Maximize
In order to benefit from an HSA, women in their 40s and 50s must recognize that this account, if used properly, can cover them for the long-term. They need to see it as the same type of account as their 401k and IRA.
By consistently funding an HSA in their mid-40s and investing it with a targeted 6% rate of return, it is not unreasonable for a woman to have saved $200,000 by age 65, to cover retirement medical costs. This is calculated based on the individual contributions of $3,550. If family contributions are made, the amount saved will be even greater.
But many women make sacrifices for their families and that is likely the case with the HSA. In making sure that their spouses and children’s expenses are covered, women often delay meeting their own needs.
One way for women to manage the family account is to allocate percentages of the account to different needs. For instance, the account might be 50% annual family medical expenses, 25% unexpected family medical expenses and 25% for retirement medical expenses. By working towards targeted goals, it enables women in their 40s and 50s to make decisions that will serve them well throughout their lives. Further, as children mature and move off of their parents’ plan, more of the HSA savings can be earmarked for longevity costs.
While retirement might seem a long way off for women in their 40s and 50s, now is the time to start planning. Retirement medical expenses will likely be high and longevity will be more of an issue for women. As we go through health care open enrollment periods, women should seriously consider the longevity risk and make choices to embrace and maximize the benefits of the HSA.