Tips for Today’s Younger Generations: Save and Spend Pre-Tax
One of the better ways for younger employees to preserve and grow wealth is by saving, specifically, with healthcare-directed savings accounts. For those with access to employer-sponsored programs, Health Savings Accounts (HSAs), Flexible Savings Accounts (FSAs), and Health Reimbursement Accounts (HRAs) each allow for pre-tax dollars to be directed toward qualified medical and healthcare needs.
For those with HSAs, did you know that you can benefit from a triple tax savings? Participants can currently save up to $4,150 each year ($8,300 for family coverage) and not only do HSAs invest as pre-tax dollars, but they can grow in perpetuity within the account tax free, and withdrawals are not taxed if they are used for qualified medical needs. Such items may include everything from preventative care to well-being items ranging from prescription eyewear to fitness trackers.
You can learn more by visiting the IRS website, or by contacting your company’s HR representative.
Preparing for Retirement? Avoid the Folly of False Financial Planning
For those nearing retirement, it is important to realistically evaluate your current lifestyle, healthcare needs, and future lifestyle ambitions. Retirees often have a U-shaped spending curve over the course of retirement, meaning they spend more in the early years of retirement when they are still active, but spending slows as they get older and less active. Spending may then rise again as they age due to increased healthcare and long-term-care costs.
Therefore, factor healthcare into your income-generation retirement needs, and perhaps even set aside additional “buckets” of assets to account for large and/or unexpected healthcare costs. With today’s higher inflation and its impact on wage growth, future expenditures such as long-term nursing or assisted living care may well exceed their current levels (~$8,900 and ~$4,500 per month, respectively, according to Genworth) by the end of the decade.
Medicare: Three Things All Generations Need to Know
Medicare provides healthcare coverage to more than 57 million Americans aged 65 and older, as well as approximately seven million people with disabilities. Some participants are automatically enrolled, while others may need to pro-actively enroll at or nearing age 65 (especially if you have not elected to receive Social Security).1 With these and other considerations in mind, here are three things that every person needs to understand—and potentially plan for—as part of a well-being strategy.
- Medicare is NOT free: There are many levels of Medicare, and each has different out-of-pocket costs. For example, Medicare Part A (hospital insurance) is free for most, but Part B (medical insurance) requires a ~$165 per-month premium, which is deducted from your Social Security benefits. Premiums for Medicare Advantage Part C (out of pocket) and Part D (drug coverage) each also vary considerably. In total, retirees may need to pay several thousands of dollars each year to cover premiums, deductibles, and other unforeseen costs. To learn more, visit the Medicare site.
- The Inflation Adjustment Act (IRA) and Medicare: As part of the IRA passed into law in 2022, the new law makes improvements to Medicare that will expand benefits, lower drug costs, keep prescription drug premiums stable, and improve the strength of the Medicare program. While this legislation has brought relief from the high costs of select medications for seniors under Medicare Part B and Part D, many of the provisions including the first 10 drugs selected for negotiation2 will likely not take effect until 2026. In addition, not all medications are covered. For more details, visit the Centers for Medicare & Medicaid Services (CMS) site.
- Medicare is Not Infinitely Sustainable: According to the Center for Budget and Policy Priorities, Medicare accounted for over $730 billion of the Federal Government’s $5.8 trillion budget in 2022. Currently, employees pay a 1.45% Medicare payroll tax (plus an additional 0.9% for higher earners) with employers paying a matching 1.45%, and these revenues largely fund Medicare. But with the number of retired Americans eligible to receive Medicare jumping to 80 million by 2030, and life expectancies rising each year, Medicare may (at some point) reach a threshold where current tax revenues do not fully cover the expenditures of programs given the asymmetrical demographic makeup here in the U.S.
For younger generations, it is important to be familiar with the ongoing discussions taking place in Washington and the many credible, non-partisan thinktanks which propose raising these payroll tax rates to help make up any future shortfalls. If and how much any new withholdings rates will be passed into law is uncertain at this time; however, being aware of these considerations is the first step for younger generations to better prepare for their wealth journey.
Healthcare and well-being expenses are increasing each year, but they do not have to limit your wealth generation or preservation objectives. If you do not already have one, now may be a good time to consider a well-being budget as part of your wealth strategy budget. Your William Blair advisor is ready to help you and your portfolio plan for a healthier future.
1www.cms.gov Initial Enrollment Period (IEP): The seven-month period when someone is first eligible for Medicare. For those eligible due to age, this period begins three months before they turn 65, includes the month they turn 65, and ends three months after they turn 65. Coverage begins the month after a person signs up during their IEP.
2www.hhs.gov The 10 prescription drugs currently being considered for price cuts are Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, Stelara, and Fiasp; Fiasp FlexTouch; Fiasp PenFill; NovoLog; NovoLog FlexPen; NovoLog PenFill.