Your health savings account (HSA) is not what you think it is. You may assume it is similar to a flexible spending account, where the balance must be spent each plan year. Perhaps your HSA funds sit in a low or zero-yielding savings account. If that is the case, you are not alone. The lack of helpful HSA education is the very reason HealthyHive exists.
The best-kept financial planning secret is that a health savings account can double as your most powerful retirement savings account. HSA assets can be invested just like a 401(k) or IRA. The HSA tax benefits also represent the most generous of any retirement savings option. HSA distributions are tax-perfect when they are spent on qualified medical expenses.
Simple Case Study
Suppose an HSA owner, Jen, has an average tax rate of 25% and assume she owns an IRA worth $50,000 and an HSA worth $37,500. The two accounts actually have identical spending power. She will pay $12,500 in taxes when she spends through the entire $50,000 IRA. HSA distributions are never taxed provided they cover qualified medical expenses.
Another way to understand this tax benefit is to express it in “additional years of healthcare spending”. Below is a scenario from our HSA tax app. The first image assumes the following:
- Current market value of $37,500
- Jen invests her balance in equities for 20 years, returning 6% annually (a conservative estimate based on historical equity returns)
- Jen projects annual healthcare spending of $19,000 starting in year one of retirement
- She contributes $250 every month until retirement
- 25% tax rate
The tax benefit becomes more real when we express the increased spending power in units of time. She would run out of money after ten years if the HSA withdrawals were taxed in our scenario. Instead, the HSA tax benefit provides her an additional 4.4 years of healthcare spending.
Data-Driven Financial Health
Our slogan “Data-Driven Financial Health” refers to the virtues of price transparency and consumer engagement. It is also a reference to the health and wealth convergence. While our background may be in investing, the real opportunity to increase retirement readiness lies with each and every HSA owner. Improving your consumer engagement and access to price transparency tools can have a much more significant impact to future HSA account value than your mutual fund or ETF selection decision. Let’s use some real data from our site to illustrate the point.
Below is a snippet from HealthyHive’s Diagnostic Financial Health tool. It considers the ‘obstructive sleep apnea’ diagnosis. We estimate that over 13% of total spending for this diagnosis is tied to sleep studies based on our massive medical claims database. The ‘Hypothetical Savings’ column estimates that consumers could save over $2,000 by comparing prices. $2,000! So, what is Data-Driven Financial Health? In this example, it is the future value of $4,865 that results from investing that $2,000 savings for 15 years assuming a 6% investment return. Finally, the IRA tax-equivalent value of the $4,865 is $6,486 when the tax benefit is considered!
HSA owners taking more ownership of their healthcare spending are sitting on a retirement savings jackpot. Assuming more ownership means asking questions of healthcare providers about the price of a service. It means consuming better HSA education. Increased ownership is appreciating that overspending from your HSA is akin to delaying your ability to retire.
A more thoughtful Data-Driven Financial Health framework also represents significant opportunities for self-funded companies. Self-funded companies should obtain de-identified health claims data to empower employees by providing price transparency tools. After all, self-funded companies carry the same fiduciary obligation that exists in conventional company-sponsored retirement plans.
The fusion of Health and Wealth is here. Data is the new oil, as the say. Health claims data can unlock the true potential of HSAs as a specialized retirement strategy. As a society, we have given the healthcare industry a pass for too long. Too often we accept physician advice without considering the financial impact. Our nation’s retirement readiness is in crisis. Healthcare is not “special”. Providers must embrace transparency for their own selfish reasons. Providers rendering lower cost and higher quality services will benefit. Consumers and corporations looking for ways to stretch their spending will be the biggest winners.
Healthcare represents the second highest spending category for retirees after housing (JP Morgan Asset Management). Furthermore, healthcare’s higher inflation rate compared to housing, food, transportation, and entertainment is making the crisis worse each year. Consumers and corporations must be more proactive about demanding better access to healthcare pricing data. Increased competition may not be the silver bullet to solving the crisis, but it can only help.
To learn more about our financial health solutions contact us at email@example.com if you are an individual HSA owner or represent a corporation with an HSA program.