How HSAs Can Enhance Retirement Security | Capital Group

How HSAs Can Enhance Retirement Security


Health savings accounts (HSAs) are tax-advantaged accounts that can be used to pay for current and future health expenses. If invested and grown over a number of years, HSAs can help employees better absorb rising health costs in retirement. Here are some key considerations for making HSA accounts part of a retirement strategy:
  • Position HSAs as a complement to a defined contribution (DC) plan.
  • Effectively educate employees on HSAs.
  • Review the HSA investment options to ensure they are appropriate and address a range of objectives (similar to the DC plan investment structure).

Health care costs threaten retirement readiness

Rising medical expenses can erode retirement readiness by crowding out retirement plan contributions during working years and consuming assets post-retirement. Consider these statistics.1


Percentage of workers that reported increased health care costs in the past year.


Projected savings many 65-year-old couples will need to cover health expenses in retirement.


The amount by which the rise in health care premiums has outpaced the growth in wages since 1999

The role of health savings accounts

To help contain these costs, many companies have moved to Consumer-Driven Health Plans (CDHPs), which carry lower premiums but higher employee deductibles. Such plans are often paired with a tax-advantaged HSA to cover out-of-pocket expenses. Although HSAs were originally introduced as a cost-saving measure, many employers are realizing that the accounts can work effectively with a DC plan to seek better retirement outcomes.

HSAs offer a number of advantages

  • Triple-tax free status: Employees enrolled in CDHPs can contribute to HSAs with pre-tax money. Principal and earnings are not taxable. Unlike DC plans, distributions are not taxed if used for qualified medical expenses. While there are annual contribution limits, there is no cap on how much can be invested and retained in the account.
  • “Stow it and grow it”: HSA assets can be withdrawn at any time with no penalty (for qualified health care expenses), and unused balances can accumulate. Employers often contribute to an employee’s HSA. Money can be used on a wide range of health spending.
  • Long-term investing: HSA assets can be invested to help build up savings that can be used for a wide variety of health care expenses. For short-term investments, a rule of thumb is to set aside one year of maximum health care insurance deductibles. Amounts beyond that can be invested for growth for overall financial wellness and to cover medical expenses in retirement.

HSA assets are growing

Total HSA assets (billions)

Rising health care costs can affect retirement readiness Rising health care costs can affect retirement readiness

Source: Devinir Research.

Employee education is key to success

Robust education programs are needed to help employees fully understand the potential benefits of HSAs. Here are some points to stress:

  • Clearly distinguish HSAs from other health savings vehicles, such as “use-it-or-lose-it” flexible spending accounts.
  • Explain the differences in tax treatment between HSAs and DC plans.
  • Outline ways to distribute contributions among HSAs, DC plans, and other benefits. For example, employees might first put in enough in the retirement plan to maximize the employer match, then put in enough in an HSA to meet the deductible and then invest part of the HSA.

Investing for future health care costs

As HSAs grow, plan sponsors are considering the investment options in a manner similar to those in a DC plan. Somewhat akin to saving for retirement, HSA enrollees have varying risk tolerances and financial situations when investing for future health costs. Therefore, they may have investment goals that can be met by the defined contribution plan's target date series. Plan sponsors could analyze whether strategies in the HSA lineup could address various investment goals. Ideas for HSA menu arrangements include:

  • Target Date: The target date series used in DC plans may be an effective way of investing for long-term health care costs in a single investment solution. 
  • 401(k) Mirroring: Offering a core investment menu similar to the DC plan organizes the benefits package for employees and simplifies the due diligence process for employers.
  • A Mix of Investment Options: Risk and financial situation are highly individualized, so the menu should contain a range of choices, including some that focus on stable investments.
Employees enrolled in a HSA-linked health plan might have very different investment goals based on their age. Here is a age-based framework to consider.

Hypothetical HSA account balance over investor lifetime

HSA account balance investing strategies HSA account balance investing strategies

A holistic approach to wellness

The achievement of a healthy retirement requires looking beyond the traditional retirement plan to maximize other plan benefits and investment solutions. Plan sponsors have the opportunity to think about financial wellness holistically, considering the HSA as a pillar for retirement security  -- not just a health care benefit. 


1Source for 48%: Employee Benefit Research Institute Notes “Workers Rank Health Care as the Most Critical Issue in the United States. Survey conducted in June of 2017. Source for $265,000: Employee Benefits Research Institute Notes “Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $350,000.” Based on a couple with median prescription drug prices who aim to have a 90% chance of covering health expensese in retirement. Source for 4x statistic: The Henry J. Kaiser Family Foundation’s Employer Health Benefits Survey 2017.

About the authors

Sue Walton Senior Vice President, Retirement Strategy Group
Ryan Tiernan Senior National Accounts Manager

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Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the mutual fund prospectuses and summary prospectuses, which can be obtained from a financial professional, and should be read carefully before investing. Similar information about collective investment trusts can be obtained from Capital Group or participants’ plan provider or employer. 

Although the target date portfolios are managed for investors on a projected retirement date time frame, the allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year that corresponds roughly to the year in which an investor is assumed to retire and begin taking withdrawals. Investment professionals manage the portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the target date gets closer. Investment professionals continue to manage each portfolio for approximately 30 years after it reaches its target date. 

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