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How HSAs can Help Americans Bridge the $7 Trillion Retirement Savings Gap

Lauren Hargrave · August 22, 2023 · 6 min read

retirement planning with hsa

Americans are woefully financially underprepared for retirement. According to the National Retirement Risk Index, about 50% of working age Americans won’t be able to maintain their pre-retirement standard of living if their saving levels don’t increase. The gap between what those Americans have saved and what is estimated they will need is called the “retirement gap” and is estimated to be about $7 trillion.

In this post, we’ll explore the reasons why the gap exists and how HSAs are crucial to helping workers set themselves up for retirement, even if they have a 401(k).

What is the “retirement gap”?

The retirement gap is the difference between what it is estimated workers should have saved (based on their salaries and age) in order to maintain their pre-retirement lifestyle. Fidelity recommends that workers aim to save at least one year’s salary by the age of 30, 3 years’ salary by the age of 40, 6 years’ salary by the age of 50, 8 years’ salary by 60 and 10 years’ salary by 67.

The amount of savings individual workers will need will depend on a wide variety of factors including, but not limited to, the lifestyle they want to lead, whether or not they own their home free-and-clear once they retire, and their healthcare needs. In fact, healthcare needs alone are expected to take up a big chunk of retirees’ savings. In fact, the average 65 year old couple retiring in 2023 can expect to pay an estimated $315,000 in medical bills over the course of their retirement.

The recent National Retirement Risk Index found that 47% of all workers weren’t saving enough, and the households at greatest risk were those where the head of household was aged 30-39 years. The reasons are many, but most boil down to the recent economic climate, including the Great Recession and the Covid pandemic, and the fact that many people’s retirement strategy hinges on contributing to a 401(k).

Why 401(k)s shouldn’t be workers’ only savings vehicle

When most people hear the phrase, “retirement savings account,” they automatically think of a 401(k). That’s because the 401(k) has become the dominant retirement savings vehicle since the 1970’s when the account type was created. It was modeled after the pension and meant to provide workers that stayed at a company for a long time, a way to save for retirement. But here are some statistics on how the 401(k) is functioning in today’s work environment:

  • In 2020, 40% of the workforce participated in a 401(k).

  • In 2021, 68% of private industry workers had access to any retirement plan, only 51% chose to participate.

  • $92 billion is cashed out of 401(k)s every year at job change.

  • Approximately 58 million Americans that are gig workers (38% of all workers) are locked out of participating in a 401(k).

The 401(k) is a great savings vehicle if the worker has access to one through their employer (especially if that employer matches contributions), and if that worker stays at their employer for many years. But once the worker leaves their employer, they lose the ability to contribute to their 401(k). Their options are:

  1. They can roll their account into a new 401(k) if their new employer offers one, and their plan allows rollovers. There is sometimes a fee associated with this.

  2. They can roll their account into an IRA.

  3. They can cash out their balance (and pay a hefty tax penalty).

  4. They can manage multiple retirement savings accounts from multiple employers. That means they’re paying fees on multiple accounts, and can be invested multiple times in the same funds.

  5. They can abandon their account.

Right now, the average millennial and gen Z workers stay at a company for 2.75 years. In addition, 38% of all workers are considered 1099 employees and are thus ineligible to participate in a 401(k). That means a large percent of the working population needs a way to save for retirement (especially medical care in retirement) that is portable and flexible. That’s where an HSA comes in.

Why an HSA is an essential part of every workers’ retirement savings strategy

A Health Savings Account (HSA) is a powerful savings tool that can be used in the present moment to pay for qualified medical expenses and to save for the future. Here are the HSA basics:

  • Contributions made to HSAs receive a triple-tax advantage from the IRS. They are tax-free the year they’re made, they grow tax-free and when they’re used to pay for qualified medical expenses, those distributions are tax-free as well (even in retirement).

  • The only requirements for contributing to an HSA are: participants are covered by a High Deductible Health Plan (HDHP), they are 18, they are not considered a dependent on someone else’s tax returns, and they are not enrolled in Medicare. That means 1099 workers are free to use this account to save.

  • The HSA balance rolls over from year-to-year enabling account holders to build a medical safety net.

  • Account holders own their accounts so they never lose access to their HSA, even when they leave their employer. They can also use their savings to pay for qualified medical expenses once they’re no longer covered by an HDHP. However, they must be covered by an HDHP, and that must be their only insurance coverage, in order to contribute to their account.

  • Once participants reach age 65, the HSA converts to a traditional retirement account in that savings can be used for everyday expenses. Qualified medical expenses remain tax-free and everything else is taxed at the appropriate income tax rate.

  • Contributions can be invested, allowing participants to grow their account balances at the rate of the market.

If workers have access to and are participating in another form of retirement savings account(s), an HSA can help augment those accounts by providing them a tax-free way to pay for medical expenses in retirement, as well as giving them another tax-advantaged savings vehicle if workers are bumping up against their annual retirement contribution limit. In addition, HSAs give workers that don’t have access to a 401(k) a way to save for retirement.

An HSA can be a powerful savings tool and should be a part of every worker’s retirement savings strategy. If you have questions about how Lively can help you, your employees or your clients to save for retirement (as well as on qualified medical expenses), reach out to us today.

Lauren Hargrave

Lauren Hargrave

Lauren Hargrave is a writer from San Francisco who focuses on technology, finance and wellness. She follows comedians like most people follow bands and believes an outdoor sweat session can cure almost any bad mood. She’s also been writing her first novel for so long, her mom doesn’t ask about it anymore.

piggy bank on pink background


2024 and 2025 HSA Maximum Contribution Limits

Lively · May 9, 2024 · 3 min read

On May 9, 2024 the Internal Revenue Service announced the HSA contribution limits for 2025. For 2025 HSA-eligible account holders are allowed to contribute: $4,300 for individual coverage and $8,500 for family coverage. If you are 55 years or older, you’re still eligible to contribute an extra $1,000 catch-up contribution.

comparing hsa versus fsa


What is the Difference Between a Flexible Spending Account and a Health Savings Account?

Lauren Hargrave · February 9, 2024 · 12 min read

A Health Savings Account (HSA) and Healthcare Flexible Spending Account (FSA) provide up to 30% savings on out-of-pocket healthcare expenses. That’s good news. Except you can’t contribute to an HSA and Healthcare FSA at the same time. So what if your employer offers both benefits? How do you choose which account type is best for you? Let’s explore the advantages of each to help you decide which wins in HSA vs FSA.

Benefits of HSA employer matching

Health Savings Accounts

Ways Health Savings Account Matching Benefits Employers

Lauren Hargrave · October 13, 2023 · 7 min read

Employers need employees to adopt and engage with their benefits and one way to encourage employees to adopt and contribute to (i.e. engage with) an HSA, is for employers to match employees’ contributions.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.



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