Even younger clients are sometimes stunned by the impact health care costs can have on their retirement planning. Berg has a client who is about 35 years old, and making $250,000 a year, who came into his office feeling he was all set to retire at 55. Then Berg started plugging in numbers. He projected an 8% to 10% annualized return on assets and a general inflation rate and annualized increase in salary of about 3% to 4% each. Then came the monkey wrench that the client hadn't considered: a projected 14% increase in health care costs.
When everything was totaled up, including his expense projections, Berg found that the client and his wife would run out of money when he hit the age of 85. That's a perilous situation in the minds of many advisors, who like clients to have enough money to fund retirement until the age of 95 or 100.
The client was stunned by the analysis. One reason he hadn't factored in health care costs, Berg says, is that his company-sponsored plan is generous and includes very little out-of-pocket expenses for employees.
That's why, Berg says, many employees these days value good medical plans more than perks such as signing bonuses. He notes that when Caterpillar, a large local employer, downgraded their retiree employee insurance plans last year, it sparked a rash of early retirements. "People retired early just to get the rich medical coverage," he says.
Advisors interviewed had differing views on the value HSAs will have as they become more available to the general public. One advantage advisors noted is that HSAs, unlike medical savings accounts, are not "use it or lose it" from year to year. In that sense, HSAs can act as a viable pre-tax savings vehicle that can provide significant reductions in annual health insurance premiums. This, however, is offset by the fact that clients will be facing high deductibles in the event that medical needs arise.
That's why some advisors feel that HSAs will be most utilized by younger, healthier individuals who will focus on HSAs as a savings vehicle. They note that money can be withdrawn from an HSA for non-medical purposes, and without penalty, after an individual attains Medicare eligibility. Cooper, who believes HSAs won't provide a good tradeoff for the average client, feels the people who will get the most from HSAs are doctors, who usually get their medical treatment free as a "professional courtesy."
"If you're a doctor and maxed out at $40,000 a year on a pension plan, this is a great opportunity," Cooper says. "Those are the only people it works for."