Client Service December 21, 2016

Benefits of HSAs Key to Holistic Retirement Planning

Health savings accounts remained an increasing area of focus for readers of PLANADVISER during 2016. 
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As health care costs continue to rise and outpace inflation, it’s not surprising that more and more people are turning to health savings accounts (HSAs) to complement high deductible health plans (HDHP).

According to research firm Devenir, HSA assets reached $4.2 billion by the end of 2015, representing a 33% increase from the previous year. As saving for health care in retirement becomes more important, some firms predict HSAs are set to follow the growth of 401(k) plans.

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Devenir projects that the HSA market will likely exceed $50 billion, accounting for 30 million accounts, by the end of 2018. Still, HSA adoption will face some of the same challenges 401(k)s did in their infancy—and some unique ones. 

Experts say plan sponsors and advisers can best make the argument for HSAs by relaying so-called triple tax advantage, wherein contributions are made tax-free, earnings on investments grow tax-free, and distributions to pay for qualified medical expenses are tax-free as well.

With this advantage, HSAs can serve as powerful savings accounts for health care expenses that can be combined with retirement plans and other benefits programs as well as employer matches to support a comfortable and healthy retirement.

These benefits, along with improving HSA portability, can’t be ignored in light of estimated retiree health care costs reaching record levels—even for healthy couples. Fidelity projects a 65-year-old couple retiring in 2016 will need an estimated $260,000 to cover health care costs throughout retirement, a 6% increase from last year’s estimate and the highest since the firm began making projections in 2002.

NEXT: HSAs help combat deductible growth 

Employer health care deductibles increased by 50% in 2016, according to the latest Health Plan Survey released by United Benefit Advisors (UBA), an independent employee-benefits advisory organization.

Medicare Part B premiums also went up in 2016, further driving the argument for investing via HSAs. Health care inflation including Medicare Part B is expected to grow at an annual rate of 6% for the next 10 years at least, according to HealthView Services, a provider of software that projects health care costs.

At the same time, it’s important to note that several studies suggest Americans are living longer, raising concern that longevity could erode retirement income. 

Not surprisingly, more than half of Americans are terrified about health care costs in retirement, according to the latest Nationwide Retirement Institute survey conducted by Harris Poll. But this trend may be reversed through targeted education and communication that can relay the benefits and advantages of HSAs. Effective strategies can help investors grasp the long-term potential of HSAs in order to avoid underutilizing them. 

Data & Research December 21, 2016

Should Clients Be Preparing to Pay Student Loan Debt in Retirement?

A GAO analysis finds the number of borrowers, especially older borrowers, who have experienced offsets of Social Security benefits to repay defaulted federal student loans has increased over time.
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While many studies report about the burden of student loan debt on Millennials and how this may affect their retirement savings, an Aon Hewitt study found student loan debt and the associated consequences are issues that span generations, with 44% of Millennials reporting having student loans along with 26% of Generation Xers and 13% of Baby Boomers.

Now, a report from the Government Accountability Office confirms that student loan debt can follow Americans into retirement and affect their retirement income.

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GAO says older Americans—those in or approaching retirement—and other borrowers who default on their federal student loans are subject to a number of actions to recover outstanding debt, including Social Security offsets. In fiscal year 2015, 49.7% of collections of defaulted student loan debt was generated from offsets of federal payments through the Treasury Offset Program, including but not limited to Social Security offsets.

GAO’s analysis of data from Education, Treasury, and the Social Security Administration (SSA) shows that the number of borrowers, especially older borrowers, who have experienced offsets of Social Security benefits to repay defaulted federal student loans has increased over time. From fiscal years 2002 through 2015, the number of defaulted federal student loan borrowers of any age with Social Security offsets increased from about 36,000 to 173,000.

NEXT: Student loan offsets bite into retirement income

About 44% of borrowers 50 and older at the time of their initial offset saw the maximum possible amount of their Social Security benefit withheld, equal to 15% of their benefit payment. The offset for the remaining 56% was less than the maximum 15% of their benefit payment. Most of these borrowers had between 10% and 15% of their benefit payment offset.

Older borrowers who remain in offset may increasingly experience financial hardship. Such is the case for a growing number of older borrowers whose Social Security benefits have fallen below the poverty guideline because the offset threshold is not adjusted for increases in costs of living. In fiscal year 2004, about 8,300 borrowers in the 50 and older age category had benefits below the poverty guideline compared to almost 67,300 in fiscal year 2015. As a share of borrowers in the 50 and older age category, this growth was equivalent to an increase from 38% in fiscal year 2004 to 64% in fiscal year 2015. In addition, a growing number of these older borrowers already received Social Security benefits below the poverty guideline before offsets further reduced their income.

The GAO noted that nearly one-third of older borrowers were able to pay off their loans or cancel their debt by obtaining relief through a process known as a total and permanent disability (TPD) discharge, which is available to borrowers with a disability that is not expected to improve.

The GAO suggests that Congress consider adjusting Social Security offset provisions to reflect the increased cost of living. It is also making five recommendations to Education, including that it clarify documentation requirements for permitted relief resulting from disability. Education generally agreed with GAO's recommendations.

The GAO report may be downloaded from here.

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