Saving for retirement is often a struggle at any stage in life. Whether fresh out of college or married with children, employees often find someone with their hand out asking for the rent, the tuition payment, the credit card bill, the phone plan and the car note.
On top of all of these bills, healthcare is becoming yet another open hand beckoning brokers, employers and employees alike to pay more and more for lack luster coverage. Tom Park, director of retirement services at Annex Wealth Management, says this problem is twofold, one part being the rise in cost and the second being that as people get older the need for the use of healthcare becomes more and more in demand — requiring higher cost for medical needs that may exceed a consumer’s deductible.
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"It’s kind of a vicious cycle, in retirement, as people get older they tend to use more healthcare because of their age,” Park says. “As the cost of healthcare increases, the savings that people do have in retirement will then funnel back into healthcare once individuals reach the age to acquire it.”
To combat the never-ending healthcare wheel of cost, advisers can offer a number of solutions to help their clients continue to save for their future while also keeping some of that money from going back into healthcare at the age of retirement. Jeff Oldham, vice president of consumer strategy at Benefitfocus, says individuals with an HDHP should invest in the HSA that comes with their plan.
“While the 401(k) plan is a well-established vehicle to provide income during retirement, there are numerous studies that show employees do not factor the additional medical spending associated with retirement,” Oldham says. “According to the AARP, a 65 year old should anticipate $240,000 to cover future medical costs, and as a result, an HSA is an excellent vehicle to use to fund both medical expenses while an employee is working and into retirement.”
Oldham added that because of the unique tax advantages of HSAs, individuals can make them into powerful vehicles for retirement savings, and with the help of an adviser these utilizations can be used to their greatest potential.
“Advisers should make a point to explain the longevity of HSAs — specifically, how they are different from FSAs, which expire at the end of the year and follow a use-it-or-lose-it model,” Oldham says. “Additionally, HSAs are portable and not tied to an employer, even if an employee switches back to a traditional health plan that doesn’t qualify for HSA contributions, the existing funds would still be available to cover qualified medical expenses.”
Working within a budget
Diana Jordan, AIFA, director of client consulting at Unified Trust Company, says planning out how much is being invested into a 401(k) with a financial adviser can give individuals a better idea of where they will stand once they reach the age of retirement and how much they may need to increase in order to be in a comfortable position once the age of retirement arrives.
“Sometimes [employees] have a hard time understanding that number because they work on a budget,” Jordan says. “They get paid and they have a net check that they live on for the next two weeks and if you can explain it to them that they need to invest $20 more or $50 more to either maintain their current deferral rate or even increase it for the next 20 years, gosh that’s where the rubber meets the road.”
Jordan added that the best way to explain to clients that they need to maintain or increase the amount they invest into retirement savings is by comparing it to their out of pocket cost so they can better fit it into their budget.
Park and Jordan agree that younger generations, particularly millennials, understand that retirement savings needs to begin very early because other programs, such as Social Security, will not be enough for them to live off of by the time they reach the retirement age.
“I have been extremely surprised by millennials because they have been totally engaged in retirement savings, some starting off their deferrals with very high rates, and I think it is because their parents started talking to them about saving at a very young age,” Jordan says. “I have an 18 year old who makes $20 thousand a year and started deferring at 10% and I was really shocked because the employer matched only up to 5%.”
Park says that any way people can save money, either through a 401(k), HSA or some other retirement program, they need to start as soon as possible.
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