The Intersection of Health and Wealth Planning

August 21, 2012

An interesting topic I heard repeatedly at this month’s ISCEBS Symposium in San Francisco had to do with the concern of future health care costs becoming a critical variable in the retirement income equation.  Several of the major plan providers held sessions that focused on the next generation of retirement planning tools that will be needed to recognize and personalize health-related issues.  By now, most of us have heard the estimate of close to a quarter million dollars that a 65 year old married couple may face in out-of-pocket health costs throughout the rest of their lives.  But since that’s an average, some will need much more. Some will need much less.   This will depend on the health and medical needs of the retired couple, so that is why Putnam Investments has recently introduced a new retirement calculator that incorporates 7 data points from a health risk assessment into the income needs formula to estimate future projected healthcare expenses. 

Putnam Regional Director Michael Goyer shared this new focus on healthcare costs during his session on Wealth Meets Health:  Why Income Replacement Benchmarks – Including Personal Healthcare – Can be Critical to Your DC Plan Success.  Instead of the standard 80% income replacement that most financial experts suggest, a healthy employee with no red flags on their health risk assessment may be able to be financially secure on only 70% income replacement, but an unhealthy employee may need to target replacing 90% or more in order to offset their higher expected healthcare expenses.

Christi Wise,  Senior Vice President for Fidelity’s Chicago office, put a new spin on health savings accounts by stressing that the savings in a HSA should be looked at as a supplemental retirement fund, not just short-term money to cover current out-of-pocket medical costs.  Her session on What to Do Now – The Benefits Spend on Health Care vs. Retirement Are Now Upside Down looked at the shift in the cost curve for employers, which is tilting to more funds being allocated to employer costs for healthcare than for the company retirement plan.  According to Christi, employers spent an average of close to $11,000 per employee on healthcare costs, and 80% of employers believe that healthcare expenses are an issue preventing their employees from retiring.

The solution?  Fidelity’s optimization strategy includes moving to a HDHP and using the premium savings to contribute to an HSA with a matching incentive.  Tracking young employees, Fidelity has found that 34% of younger workers save 90% of their HSA contributions per year, enabling the funds to roll over year after year and grow tax-free.  By moving from a traditional low-deductible PPO plan with high premiums to a HDHP and encouraging employees to fully fund their HSAs with help from employer contributions, Christi illustrated an example of the typical married employee having the potential of increasing their net after-tax retirement income by over $15,000 – since HSA distributions used for qualified medical costs would be tax-free.

When employees were given the responsibility of becoming more aware of their healthcare costs, Fidelity discovered what they call a “culture of savings,” since participants across all income levels actually saved more in their 401(k) plans when their employers sponsored an HSA.  Interestingly, Christi shared a comparison that showed an average of almost 2% higher defined contribution deferral rates for employees who also had an HSA. So take a close look at how your company has designed both your retirement plan and health plan, and see if you have the optimal mix to benefit your employees.  Get your retirement plan manager together with your wellness coordinator, and make sure your employees are hearing the message of Ralph Waldo Emerson, who said “The first wealth is health.”