IS THERE A CURE-ALL SOLUTION? PLANNING FOR RETIREMENT … Resourc… · Source: Mercer National...

RetirementWellness

IS THERE A CURE-ALL SOLUTION?PLANNING FOR RETIREMENT HEALTH CARE COSTSPresenter NameDate

EMPLOYER PRESENTATION

2

Agenda

01 WHAT DOES THE HEALTH CARE LANDSCAPE LOOK LIKE?

02 HOW CAN EMPLOYEES SAVE / PLAN FOR HEALTH CARE EXPENSES?

03 WHY INCLUDE HEALTH CARE IN YOUR RETIREMENT SAVINGS STRATEGY?

Health Care Landscape

4

1 T. Rowe Price Retirement Savings and Spending Study (2018). Representative national study of 3,005 adults 21 years old or greater, never retired, currently contributing to a 401(k) plan or eligible to contribute and have a balance more than $1,000. Survey was conducted online July 24-August 14, 2018.

2 U.S. Census Bureau at al. 2014.3 Sophie Bethune, “Money Stress Weights on Americans’ Health”, Monitor on Psychology, Volume 46, No. 4, Page 38, 2015, American Psychological Association. Reprinted with permission.4 Bankrate Money Pulse survey, December 2015.

The Average Employee Is Unprepared For Retirement

63%

expect to run out of money1

can’t afford to contribute more to their plans1

of wages go to consumer debt payments2

don’t have enough savings to cover a $1,000 emergency4

say finances are the largest source of stress in their life3

24%

25% 57% 64%

5

Top Five Fears About Retirement

Source: Employee Financial Wellness Survey, PwC US, 2019.

51%

Running out of money

1

28%

Health care costs

2

25%

Inability to meet monthly

expenses

3

25%

Inability to maintain standard

of living

4

24%

Health issues

5

6

Health Care: One Of The Greatest Expenses In Retirement

Source: U.S. Bureau of Labor Statistics, A Closer Look at Spending Patterns of Older Americans, 2016.

EXPENSES FOR AMERICANS AGE 75+

36%

16%14%

12%

4%2%16%

Housing

Health Care

Transportation

Food

Entertainment

Clothing

Miscellaneous

7

How The Health Care Dollar Is Spent

Source: Centers for Medicare and Medicaid Services, National Health Expenditures, 2017.

33%Hospital Care

28%Other20%

Doctor Visits and Services

10%Prescription Drugs

5%Nursing Home

4%Dental Services

8

A Closer Look At Medicare

Part Acovers room and board in the hospital

Part Chelps reduce expenses through private health insurance plans

Part Dhelps lower the cost of prescription drugs

Part Bcovers outpatient services deemed medically necessary, such as lab tests and doctor visits

9

Medicare is representative of Part A and Part B coverage. Source: Medicare.gov 2018.

Medicare Alone Won’t Be Enough

MEDICARE COVERS MEDICARE DOES NOT COVER

Inpatient hospital costs Hearing aids

Surgeries Most vision care

Lab tests Personal aid services to help you stay in your home

Preventive screenings Most nursing home and other long-term care

Equipment, such as wheelchairs Assisted living

Doctor visits Most dental care

10

Health Care Costs In Retirement Fall Into Two Categories

Variable

Fixed1

2

11

Source: T. Rowe Price estimates based on projected 2020 Medicare premiums and data from the Health and Retirement Study (HRS). Health and Retirement Study, (HRS) public use dataset. Produced and distributed by the University of Michigan with funding from the National Institute on Aging (grant number NIA U01AG009740). Ann Arbor, MI. Premium percentage of total health care expenses includes the median percentage share of individual health insurance premiums (ages 65 and above) for Medicare Parts A, B, and D.

Fixed: Medicare Premiums

2020 MONTHLY PREMIUM COSTS

Part A Subsidized premium

Part B $144.60-$491.60 per person

Part D Varies by state and plan

Medigap (supplemental)

Varies by state and plan

76%of total health care expenses go to premium costs

12

Fixed 2020 IRMAA Brackets

Individual MAGI Couples MAGI Part B Part D

< $87k < $174k $144.60 Premium (varies)

$87k - $109k $174k - $218k $202.40 (40%) Premium + $12.20

$109k - $136k $218k - $272k $289.20 (100%) Premium + $31.50

$136k - $163k $272k - $326k $376.00 (160%) Premium + $50.70

$163k - $500k $326k - $750k $462.70 (220%) Premium + $70.00

>$500k >$750k $491.60 (240%) Premium + $76.40

Source: Medicare Board of Trustees.

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Variable: Out Of Pocket Costs

Source: T. Rowe Price estimates based on projected 2020 Medicare premiums and data from the Health and Retirement Study (HRS). Health and Retirement Study, (HRS) public use dataset. Produced and distributed by the University of Michigan with funding from the National Institute on Aging (grant number NIA U01AG009740). Ann Arbor, MI. All costs are rounded to the nearest hundred and include Medicare Parts A, B and D. Costs of long-term care are not included in the analysis.

2020 ESTIMATED OUT OF POCKET EXPENSES (INDIVIDUAL)

$300 $800

$2,400

$4,700

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

Out of Pocket

Out of Pocket25th Percentile 50th Percentile 75th Percentile 90th Percentile

14

Health Care Is A Huge Expense For Employers

Source: Mercer National Survey of Employer-Sponsored Health Plans, 2018; PSCA Health Savings Accounts and Retirement Plans, 2017. CDHP is Consumer directed health plan.

AVERAGE MEDICAL PLAN COST PER EMPLOYEE (LARGE EMPLOYERS)

75% of employers view HSAs as part of a retirement benefits strategy

$12,486$11,580

$10,357 $10,826

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

PPO HMO HSA-eligibleCDHP

PPO with deductiblegreater than $1,000

How To Save / Plan For Health Care Expenses

16

The chart reflects Roth and pretax employer-sponsored plans (as opposed to IRAs) unless noted. Advantages of account type (relative to the others) shown in blue. All three types grow tax-deferred. These are not the only options when it comes to saving for health care and/or medical related expenses in retirement. Note that while HSAs are structured for the individual to save or invest for health costs, this is not the intended primary purpose of a defined contribution plan or an IRA. Individuals should evaluate their health coverage needs and other factors before seeking tax benefits of an HSA. HSAs are only available if you are covered by a high-deductible health care plan. Source: IRS documents. 1Federal income taxes. State laws vary. HSA contributions through an employer may be excluded from FICA taxes. 2Subject to income limitations on participation (Roth IRA) or deductibility (Traditional IRA). Amounts do not include catch-up contributions. 3Penalties end at age 65 for HSA and generally at age 59 ½ for Roth and Pretax. Distributions of contributed assets from Roth accounts are tax- and penalty-free. 4Early distributions from retirement plans or IRAs may be subject to taxes and penalties unless an exemption applies. 5Once you reach age 59 ½ with an account that has been opened for at least five years, you may qualify for tax-free withdrawals of both Roth contributions and any accumulated earnings. 6By April 1 following the year you reach age 72 (70½ if you were born before July 1, 1949) you must begin to withdraw a certain amount of money annually from your retirement account(s). If you are still working with the company that sponsors your plan, you may be allowed to delay your first RMD until the April 1 following the year in which you retire. For each year following the year you reach your RMD age (or retire, if later—as applicable) the deadline is December 31. 7Roth IRAs have no RMDs for original owner. For additional information please reference T. Rowe Price’s “Using Health Savings Accounts Wisely”. Chart is for illustrative purposes only.

Saving For Retirement Health Care Expenses

PRETAX

Contributions Excluded from taxable income1

2020 Maximum AnnualContributions2

$19,500 retirement plan$6,000 IRA2

Early Distribution Penalty3 10%

Early Distributions Limited access4

Taxes on Distributions Ordinary rate

Required MinimumDistributions (RMDs)

Begin at the later of age 72 or retirement6

Tax Treatment forNon-spouse Heirs

Ongoing tax deferral(subject to RMD requirement)

PRETAX ROTH


Not excluded from taxable income1




Early Distribution Penalty3 10% 10%

Early Distributions Limited access4 Limited access4

Taxes on Distributions Ordinary rate Tax-free if qualified5



Begin at the later of age 72 or retirement6,7



Ongoing tax-free(subject to RMD requirement)

PRETAX ROTH HSA



Excluded from taxable income1




$3,550 individual$7,100 family

Early Distribution Penalty3 10% 10% 20%

Early Distributions Limited access4 Limited access4 Qualified medical expenses(QME): No tax or penalty

Taxes on Distributions Ordinary rate Tax-free if qualified5 Tax-free if used to pay QME



Begin at the later of age 72 or retirement6,7 None




Value immediately subject to ordinary income tax

PRETAX ROTH HSA



Excluded from taxable income1




$3,550 individual$7,100 family

Early Distribution Penalty3 10% 10% 20%

Early Distributions Limited access4 Limited access4 Qualified medical expenses(QME): No tax or penalty

Taxes on Distributions Ordinary rate Tax-free if qualified5 Tax-free if used to pay QME



Begin at the later of age 72 or retirement6,7 None




Value immediately subject to ordinary income tax

Advantages

17

Employers’ Adoption Of High Deductible Health Plans

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016 Estimated 2019

Small employers (10-499 employees) All large employers (500+ employees) Jumbo employers (20,000+ employees)

*Consumer-directed health plan (CDHP). HSAs require the use of a high deductible health plan (HDHP), which is a specific type of CDHP. Source: Mercer National Survey of Employer-Sponsored Health Plans.

PERCENT OF EMPLOYERS OFFERING CDHP* (BY EMPLOYER SIZE)

18

$3 $5 $7 $9 $11 $14 $17 $21 $26 $32 $37$44

$50$58

$66

$3$4

$6$8

$10

$16

$20

$24

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020(est)

2021(est)

Deposits Investments

HSA Asset Growth

Source: Devenir Research, 2019 Year-End HSA Research Report Executive Summary.

TOTAL HSA ASSETS (BILLIONS)

$2 $3 $5 $7 $10

$66

$54

$45$38

$30$24

$19$16$12

$78

$90

19

Source: IRS documents.

HSA Overview

TAX-PREFERRED SAVINGS FOR INDIVIDUALS COVERED BY HIGH-DEDUCTIBLEHEALTH PLANS (HDHP)

KEY FACTS (2020) Individual FamilyEligibility: Under 65, Enrolled in HDHP

HSA Annual Contribution Limit $3,550 $7,100

HSA per-person catch-up contribution limit (age 55) $1,000 $1,000

Minimum deductible for HDHP $1,400 $2,800

Maximum out-of-pocket expense for HDHP $6,900 $13,800

§ Triple tax advantage

§ Contributions excluded from income

§ Assets grow tax-deferred

§ Withdrawals for qualified medical expenses are tax-free

§ Portable and not “use it or lose it”

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Source: Devenir Research, 2019 Year-End HSA Research Report Trends Executive Summary.

HSA Contributions

AVERAGE ANNUAL HSA CONTRIBUTION

§ 27% of all HSA contributions came from an employer

§ 60% of all HSA contributions came from an employee

$880

$2,034

Employer Employee

21

Profile Of HSA Investments

39%

12%9%

9%

8%

7%

7%6% 1% 1% Large-Cap

Lifestyle/Allocation

Small-Cap

International

Money Market

Bonds/Fixed Income

Mid-Cap

Target Date

Real Estate

Other

Source: 2018 Year-End Devenir HSA Research Report.

AVERAGE ALLOCATION (PARTICIPANTS AGE 60+)

22

Employee HSA Scenarios

HSA’S CAN HAVE A RANGE OF OUTCOMES

VERY BAD SUBOPTIMAL

Leaving large balance to non-spouse beneficiary

§ Ordinary tax for heirs

FAIR

Using for nonqualified expenses after age 65

§ Pay ordinary tax

Early nonqualified distributions

§ 20% penalty

23

Employee HSA Scenarios

HSA’S CAN HAVE A RANGE OF OUTCOMES

BESTBETTERGOOD

Contribute the amount of medical expenses

for current year (only spending account)

Contribute more than expected medical

expenses for year and build cushion by only

using assets for large or unusual medical expenses

Contribute at or near the maximum and invest

for long term

§ Full triple-tax benefit

24

HSA Appropriateness

Source: T. Rowe Price “Using Health Savings Accounts Wisely. “High-Deductible vs. Low-Deductible Plans”; “HSA Contributions Based on Potential Qualified Medical Expenses”; “Contribution Strategy Example”. Examples are for illustrative purposes only and are generic in nature.

FOR PEOPLE WITH A CHOICE OF TRADITIONAL AND HIGH-DEDUCTIBLE HEALTH PLANS

Couple with young kids, high medical expenses and

limited saving capacityHealthy empty nesters

in high tax bracketHealthy, successful young

person with saving capacity

KEY DECISION FACTORS:§ Will HDHP cost more than a

traditional plan? § Would they really invest in HSA or

use it for annual expenses?

KEY DECISION FACTORS:§ Factoring tax rate and time horizon,

does value of HSA tax treatment outweigh risk of high out-of-pocket costs?

KEY DECISION FACTORS:§ Given young age, is there a

possibility of accumulating too much in an HSA?

§ Are there other financial priorities to consider?

LIKELY CONCLUSION:§ HDHP/HSA not beneficial

LIKELY CONCLUSION:§ Choose HDHP and invest the

maximum allowed in HSA

LIKELY CONCLUSION:§ Invest in HSA, but possibly not at

maximum level

Why Include Health Care in Retirement Savings Strategy

26

Considerations For Adding HDHP

Potential Action Items§ Review HSA providers§ Educate employees periodically on health care savings options § Explore ways to provide employees with HSA investment education

Review Current Health Care Offerings

§ Cost§ Usage§ Employee Input

Assess Demographics

§ % younger, healthier workforce

§ % HNW employees

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Reframe Your Benefits Philosophy

Ample Retirement and Health Care SavingSavings GoalsFinancial Wellness

Recruit: Attract the best employees with a comprehensive and flexible benefits package

Retain: Healthy executives appreciate the potential HSA tax advantages

Retire: HDHP/HSA may provide added financial support for retirees without a DB/Pension

RECR

UIT

RETIRE

RETAIN

28

Hsas Paired With A HDHP Can Be Part Of A Competitive Benefits Package

1Mercer National Survey of Employer-Sponsored Health Plans. Small employers have 10-499 employees; large employers 500-19,999 employees; jumbo employer is 20,000+ employees. 2 © Society for Human Resource Management (SHRM), Talent Acquisition Benchmarking Report, 2017. 3 T. Rowe Price/Brightwork Partners, LLC, Plan Sponsor Pulse Survey, April 2016. Survey of 155 401(k) plan sponsors with assets of $100 million or more,conducted online, March 22–April 1, 2016. 4Employee Financial Wellness Survey, PwC US, 2018.

Retain

§$4,425 is the average cost of onboarding a new hire2

§69% of employers consider retaining employees a major objective3

Retire

§61% of employees think health care costs will impact their retirement4

– 59% Millennials– 64% Gen X– 57% Baby Boomers

§Employees delaying their retirement is a significant financial burden for employers

Recruit

§Potential to lose talent to employers who already offer HSA

§Differentiate your company by offering HSAs– 87% of jumbo employers– 72% of large employers– 34% of small employersplanned to offer HSAs by 20191

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Considerations for Plans With HDHP

Arrange for fair and balanced reviews of health care savings options, strategies, and benefits to employees

Review education materials to ensure they are clear and comprehensive

Connect the health care conversation to retirement and financial wellness

Evaluate adoption and usage data

Explore ways to provide employees with HSA investment education

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Current Health Care Savings Advice

Source: T. Rowe Price Retirement Savings and Spending study (2018).

of people who have used a financial professional have

received advice from them on health care expense planning

16%Only

of respondents would find advice on saving to fund health care expenses in

retirement useful

74%

31

Summary

Health care expenses are very top of mind§ Huge concern for employees; with waning

confidence§ Biggest (and growing) benefits expense

for employers § Consist of fixed (premiums) and variable

(out-of-pocket) expenses

Several savings options exist § Pretax and Roth contributions § Health Savings Accounts (HSAs)§ Increased savings levels

Health Savings Accounts (HSAs)§ Increasing employer and employee

adoption § Offer triple tax advantage§ Appropriate for many – but not all – who

have access to them

Considerations for employers§ Evaluate and analyze work force health

care needs and options§ Reframe your benefits package§ Work with your retirement plan financial

professional to provide transparent education and communication

§ Explore holistic retirement savings strategy

THANK YOU

This material is provided for general and educational purposes only, and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies or account types; and not intended to suggest any particular investment action is appropriate for you. Please consider your own circumstances before making an investment decision.

T. Rowe Price Investment Services, Inc. is not affiliated with the third party financial professional or firm.

© 2020 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectivelyand/or apart, trademarks of T. Rowe Price Group, Inc.

T. Rowe Price Investment Services, Inc., Distributor.

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