Health Savings Accounts Could Help
Boomers Invest For Retirement
Some boomers may be able to protect themselves against unexpected medical expenses and beef up their retirement nest eggs by opening health savings accounts.
Many commentators have implied that HSA holders will be emptying their HSA asset accounts each year or socking their HSA assets away in bank accounts that will earn a very low interest rate. But, in theory, boomers should be able to invest HSA assets in roughly the same types of products they include in their 401(k) plans or individual retirement accounts.
Healthy boomers could use HSAs to give their retirement savings a significant boost, and boomers who get sick may like having the ability to take out cash without worrying about all the red tape and penalties involved with hardship withdrawals from ordinary retirement plans.
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State Bank of Howards Grove, Howards Grove, Wis., a company that has converted its medical savings account custodial account program into an HSA account program, has found that the share of HSA clients who invest account assets in vehicles other than traditional bank accounts has dropped to about one-quarter, from about one-third when the tightly restricted MSA pilot program for small businesses and self-employed taxpayers was the only game in town.
We have seen that [percentage] drop a little just because the HSA has a little different market, says Becky Pahl, State Banks marketing director.
Most of the MSA holders were self-employed people. Today, employers are starting to make HSAs available to employees, Pahl says.
But one-quarter of State Banks health account customers do choose non-vanilla account options, and John Valines, president of Health Savings Administrators L.L.C., Richmond, Va., an HSA plan administrator, says a firm service that provides access to no-load mutual funds from Fidelity Investments, Boston, is already extremely popular.
Although HSA fund investments are not for everybody, at Health Savings Administrators, our clients want to go [into funds] from the first dollar, Valines says.
The typical HSA fund investor is a healthy, risk-tolerant boomer with no children or grown children who is interested mainly in long-term asset growth, according to Fred Adams, vice president of marketing at HSA for America, a Fort Collins, Colo., health insurance broker.
Theyre not worried about paying a few doctor bills out of pocket, Adams says.
A 40-year-old boomer who starts an HSA today, seldom if ever gets sick, contributes an average of $2,000 per year for 25 years and earns an average rate of return of 10% could accumulate more than $200,000, according to a savings calculator on the Web site of the Employee Benefit Research Institute, Washington.
Even if inflation cuts the real rate of return to 5%, the boomer could end up with the equivalent of more than $90,000 in 2004 dollars.
President Bush brought HSAs to life Dec. 8, 2003, when he signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003. One section of the act replaces the MSA pilot program with the new HSA program. The HSA program lets eligible taxpayers who buy high-deductible health insurance policies exclude HSA contributions from taxable income and spend HSA cash on qualified expenses without paying income taxes on the distributions.
Boomers can spend the cash as they go along, or they can keep the cash in the accounts until they retire. Healthy retirees who are lucky enough not to need the HSA assets to pay for medical expenses can take out cash, pay income taxes on the distributions and spend the money however they want.