With the rise in health savings account (HSA) enrollment
among younger employees and the decline in company matching rates of 401(k)s,
HSAs have emerged as a retirement account option for new employees. In this
guest post, Sean Hanftm, a flexible compensation specialist with FSAstore.com/HSAstore.com, explains
the many benefits of these savings vehicles and compares them to the most
popular retirement accounts.
You’re young. You’ve just graduated college and have your
first “real” job. You have the world in front of you. Retirement is the
farthest thing from your mind because, let’s face it, that’s a lifetime away.
And so it goes, younger workers continue to lag in their savings habits,
particularly when it comes to long-term savings.
In fact, a census data report in 2014 showed 66 percent of
millennials have absolutely nothing saved for retirement (CNN Money), and this doesn’t include many
more who may be saving but are far behind in their retirement goals.
As with most things, the new workforce is breaking the mold
and shifting the workplace paradigm. Numerous studies exist that explore the
psyche of the millennial and Gen Z workers, as employers and human resource
professionals strive to attract and retain top talent from this generation that
will dominate the workforce for the foreseeable future.
Ironically, millennials and Gen Z employees have more
options than ever when it comes to retirement savings. Where older workers may
be more likely to pursue 401(k)s and other traditional retirement plan options,
younger millennials and Gen Z have sparked a growth in health savings account
(HSA) enrollment and may have improved their retirement potential in the
process.
According to The State of Employee Benefits 2017 report,
published by employee benefits firm BenefitFocus, the number of eligible
millennials under age 26 enrolling in an HSA rose by 40 percent in 2017. The
same study found that millennials increased their HSA contributions by an
average of $200 in 2017.
An HSA is an attractive savings option because it can
provide an immediate boost to your retirement earning potential, while letting
you cover immediate healthcare costs. HSAs were created in 2003 and are similar
to flexible spending accounts (FSAs) in that they’re funded with pre-tax
dollars, and subject to yearly contribution limits (2018 limits are $3,450 for
individuals, $6,900 families). However, HSAs have additional benefits,
including, rollover of unused funds from year to year, triple-tax savings
(contributions, interest and withdrawals for health expenses are not taxed),
and the ability to invest a portion of unused dollars in mutual funds and other
long-term savings vehicles.
HSA funds can even be used to pay for copayments,
prescription medicines and thousands of over-the-counter medical products.
Where HSAs really pique the interest of millennials is in
their long-term retirement potential. HSA funds can be used tax-free for
qualifying healthcare expenses, but if you withdraw this money and use it on a
non-medical expense, it’s subject to a 20 percent tax penalty. But once you
reach Medicare age at 65, you can withdraw that money without a tax penalty and
it is just taxed as income. So, not only can working professionals fund an
account to cover health expenses, any remainder can be used to fund the user’s
retirement in the future.
A comparison of retirement savings options
Can an HSA really be a standalone retirement option for
millennials? Not on its own. Let’s examine how HSAs stack up against the
earning potential of the most common traditional retirement plan options over
the course of a young professional’s career.
For this exercise, we’ll consider an unmarried professional
who begins saving at age 30, contributing the HSA maximum ($3,450) annually in
2018.
HSA: With an annual contribution
of $3,450 (2018 limits) that earns 2% interest rate — $176,568.00(after
35 years)
401(k): With a starting salary
of $50,000, a contribution rate 6.9% ($3,450/year), an average salary
increase of 4% an average rate of return of 7% and a 0% employer match — $803,051 (after
35 years)
Traditional IRA: With
an annual contribution of $3,450 and average rate of return of 7% — $510,301(after
35 years)
The takeaway
While HSA enrollment rates are taking off and their
retirement savings potential is finally getting the attention it deserves, HSAs
should be seen as more of a supplemental retirement option rather than a
primary solution to long-term savings. There’s certainly more fluctuation in
the aforementioned numbers for avid investors looking for a larger return. But
for those who want a simple, long-term savings plan with little hands-on
management, retirement accounts like IRAs and 401(k)s are still the best
options for long-term savings.
It’s important for millennials and Gen Z employees to
understand that, while HSAs won’t provide the major retirement windfall they
may have hoped, enrolling in a qualifying high-deductible health plan with an
HSA is still a valuable addition.
Ease of use
Employees of all ages, but in particular millennials and
Gen Z employees, are looking for online options to manage all aspects of their
lives and to connect the disparate areas of their lives in an effort to
streamline and simplify. Numerous online HSA tools exist for this purpose,
including those that allow account holders to select the best HSA for their
needs, to estimate their long-term HSA earnings, and to manage their HSA
utilization and investments.
Click
here for the original article from HR Morning.