Generation X is hitting midlife. They are finding out that it’s not such a bad place to be. At the same time, they are starting to consider how they are going to manage a retirement that may stretch out longer than many other generations. Right now, many Gen Xers are helping their own parents navigate longevity, but they need to start addressing this for themselves, says Forbes in the article “Why Those in Their 40s and 50s Need to Factor Longevity Risk Into Their Retirement Planning.”
The 2019 Transamerica Study on Retirement Savings reflects this focus, since 51% of Gen Xers surveyed said they were concerned about outliving their savings. This is at the same time that they are struggling to manage the complexity that comes with midlife financial planning. However, there is a tool that is often overlooked: the Health Savings Account (HSA).
Not only is the HSA triple tax exempt, but it’s a great way to save for future medical costs in retirement. The generation that is most likely to embrace these accounts and make them part of their retirement account is Gen X.
There’s a new phrase in retirement planning: longevity planning. As more Americans are living into their 90s and even 100s, it has become necessary to plan for retirements that can span three or four decades. It’s different from the lifespans when Gen Xers were being born. The average male life expectancy in 1965, according to the Social Security Administration, was 66.8 years for men and 73.8 years for women. By 1980, the average male life expectancy was 69.9 and 77.3 for women. For those born in 2019, life expectancy has grown to 76.6 years for men and 81.3 for women.
For married couple in their 50s today, the man has an 18% chance of living to age 90 and the woman has a 30% chance of living to 90. The chance that one of them will live to age 90 is 42%. Those are good odds. But with these longer lifespans, comes a higher likelihood of medical expenses. How do you plan for that?
HSAs are available to individuals and families who are enrolled in High Deductible Health Care Plans (HDHCP) that are HSA compatible. They can be funded with $3,500 for an individual plan and $7,000 for a family plan in 2019. Those numbers will go up in 2020 to $3,550 and $7,100 respectively. This deposit provides a tax deduction, the funds are tax deferred and if they are used for qualified medical expenses, the distributions are tax free.
How will that work for Gen Xers? Instead of using the HSA for current year medical costs, they need to shift to thinking of the HSA as another retirement account. Investing these funds and letting the money compound will grow a new kind of nest egg that is solely reserved for healthcare costs.
Most people don’t understand how the HSA accounts work and are not maximizing their benefits. Only 7% of all HSA users are investing these funds, says the Employee Benefit Research Institute (EBRI). The average 65-year-old couple today needs about $300,000 to pay for medical expenses during retirement. Therefore, if the Gen Xers start saving this way now, they are likely to get very close to that amount.