HSA and Asset Allocation

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Topic Author
Seananigans
Posts: 42
Joined: Tue Apr 16, 2019 11:57 pm

HSA and Asset Allocation

Post by Seananigans » Tue Jun 30, 2020 4:12 pm

Hi all,

I have some questions regarding the use of an HSA, and the placement of one within an investment strategy. My wife and I recently signed up for an HSA (and HDHP) through my employer; we also have 2 small children. My employer will put $2,000/year into it, and we will be funding it with approximately another $3,250/year. Our plan is to use what we need for medical expenses throughout the year, and invest the rest, hopefully building a nice additional sum that we can use for medical expenses in retirement years, or possibly use as an extra traditional IRA after age 65.

Additional details about our current situation, if needed: We both have Roth IRAs, my wife has a 401k, and I have a 457. I will also be receiving a pension in retirement. We also have a fully funded emergency fund, and maintain a balance of 3-6 months' expenses, and have 529s set up for both children. Our time horizon is approximately 20-25 years to retirement, and our current asset allocation is:

64% in U.S. Stock Index Funds
16% in International Stock Index Funds
20% in Bond Market Index Funds

Given all of that, I'm not entirely clear how an HSA fits within the context of an investment plan, given that it is primarily used for medical expenses, but has investment potential as well. A couple questions:

1. Given that we will be using part of the funds in the HSA for medical expenses going forward, should we consider it part of our portfolio for asset allocation purposes? Or should we consider it a separate part of our investment plan? If separate, do people generally follow a similar glide path with investment choices (aggressive to conservative as time horizon ticks down)?

2. Should we invest only some, or all, of the HSA balance? If some, is it generally advisable to keep our yearly maximum deductible liquid, and invest the rest? Or, if all, is liquidity for medical expenses generally not an issue? Does the bank liquidate investments to use for expenses as they are incurred?

Thanks in advance for any help. I really appreciate it!

-Sean

Chrono Triggered
Posts: 258
Joined: Wed Feb 17, 2016 12:55 pm

Re: HSA and Asset Allocation

Post by Chrono Triggered » Tue Jun 30, 2020 4:25 pm

Are you maxing all your tax advantaged space? If not, then it's best to pay medical expenses out of the HSA, so I would keep the deductible or the out of pocket max in a safe investment, and the rest can be invested in equities. If you are maxing out all your tax advantaged space and can afford to pay your medical expenses out of pocket, then the entire balance in your HSA can be invested in equities if you'd like; invest it like it's an IRA.

I would count the HSA as part of your overall AA.

Wiki on HSAs if you haven't seen it: https://www.bogleheads.org/wiki/Health_savings_account

Edward Joseph
Posts: 100
Joined: Fri Aug 11, 2017 9:52 am

Re: HSA and Asset Allocation

Post by Edward Joseph » Tue Jun 30, 2020 6:18 pm

Inside my HSA, I keep about 1 year’s worth of my max out-of-pocket medical expenses in cash or something reasonably safe. The rest I allocate like I would my 401k.

Topic Author
Seananigans
Posts: 42
Joined: Tue Apr 16, 2019 11:57 pm

Re: HSA and Asset Allocation

Post by Seananigans » Tue Jun 30, 2020 8:18 pm

Chrono Triggered wrote:
Tue Jun 30, 2020 4:25 pm
Are you maxing all your tax advantaged space? If not, then it's best to pay medical expenses out of the HSA, so I would keep the deductible or the out of pocket max in a safe investment, and the rest can be invested in equities. If you are maxing out all your tax advantaged space and can afford to pay your medical expenses out of pocket, then the entire balance in your HSA can be invested in equities if you'd like; invest it like it's an IRA.

I would count the HSA as part of your overall AA.

Wiki on HSAs if you haven't seen it: https://www.bogleheads.org/wiki/Health_savings_account
Makes a lot of sense---thank you! We are not maxing all of our tax-advantaged space, so I think we will follow your advice, and keep the deductible in a safe investment, and invest the rest in equities. And we will count it in as part of our AA. Thanks also for the link to the wiki---I hadn't seen it! I really appreciate your time.

Also, I love the name. Probably my all-time favorite game ever.

-Sean

Topic Author
Seananigans
Posts: 42
Joined: Tue Apr 16, 2019 11:57 pm

Re: HSA and Asset Allocation

Post by Seananigans » Tue Jun 30, 2020 8:20 pm

Edward Joseph wrote:
Tue Jun 30, 2020 6:18 pm
Inside my HSA, I keep about 1 year’s worth of my max out-of-pocket medical expenses in cash or something reasonably safe. The rest I allocate like I would my 401k.
Perfect---I think that idea is terrific! We will plan on doing that also. Thanks so much for taking the time to respond, I really appreciate it!!

-Sean

texasdiver
Posts: 3437
Joined: Thu Jun 25, 2009 12:50 am
Location: Vancouver WA

Re: HSA and Asset Allocation

Post by texasdiver » Tue Jun 30, 2020 8:37 pm

We are in a roughly similar situation as you.

When I started using HSAs I religiously paid expenses out of cash flow to maximize the HSA then kept all the receipts on file for future tax-free withdrawals. After a decade or so I just gave up on that and now just put all the medical expenses on the HSA card and don't save anything. All our expenses are within the same HMO system so records are all maintained anyway if we were ever audited. It just seemed flaky to count on 30 year old receipts to justify tax-free withdrawals some time in the future. I figure if we have a normal long-lived retirement then we will have more than enough opportunity to spend it down in retirement with tax-free medical expense withdrawals. Especially knowing that we will no longer be contributing to it in retirement, just spending it down.

Even with paying all our out of pocket medical expenses, the HSA balance keeps growing because we run it up to the max contributions. So the current balance is in the mid-5 figures. We have a very good corporate HSA that allows me to set my desired cash balance and invest the rest automatically in Vanguard total world stock market. I currently have it set at $2000 cash and the rest is automatically invested. It basically means we can't spend more than $2000 per day on the HSA card which has never come close to happening. I'm not worried about keeping a year's worth of spending set aside in cash. Well, actually for some years $2000 would have covered it anyway. We aren't talking about enormous sums either way. Our family deductible is $4000 so that would be the max theoretical payment on any given day and a bill like that we would have time to pay anyway.

I just treat it as part of our overall asset allocation. I don't try to keep it separately balanced with a separate asset allocation. It is just all one vanguard index fund.

Topic Author
Seananigans
Posts: 42
Joined: Tue Apr 16, 2019 11:57 pm

Re: HSA and Asset Allocation

Post by Seananigans » Tue Jun 30, 2020 9:49 pm

texasdiver wrote:
Tue Jun 30, 2020 8:37 pm
We are in a roughly similar situation as you.

When I started using HSAs I religiously paid expenses out of cash flow to maximize the HSA then kept all the receipts on file for future tax-free withdrawals. After a decade or so I just gave up on that and now just put all the medical expenses on the HSA card and don't save anything. All our expenses are within the same HMO system so records are all maintained anyway if we were ever audited. It just seemed flaky to count on 30 year old receipts to justify tax-free withdrawals some time in the future. I figure if we have a normal long-lived retirement then we will have more than enough opportunity to spend it down in retirement with tax-free medical expense withdrawals. Especially knowing that we will no longer be contributing to it in retirement, just spending it down.

Even with paying all our out of pocket medical expenses, the HSA balance keeps growing because we run it up to the max contributions. So the current balance is in the mid-5 figures. We have a very good corporate HSA that allows me to set my desired cash balance and invest the rest automatically in Vanguard total world stock market. I currently have it set at $2000 cash and the rest is automatically invested. It basically means we can't spend more than $2000 per day on the HSA card which has never come close to happening. I'm not worried about keeping a year's worth of spending set aside in cash. Well, actually for some years $2000 would have covered it anyway. We aren't talking about enormous sums either way. Our family deductible is $4000 so that would be the max theoretical payment on any given day and a bill like that we would have time to pay anyway.

I just treat it as part of our overall asset allocation. I don't try to keep it separately balanced with a separate asset allocation. It is just all one vanguard index fund.
Wow, thank you so much for running through your experience with your own HSA---this was EXTREMELY helpful!!! I've read the strategies as well about paying medical expenses out of pocket, banking receipts, and having the sum grow that much more over time. Truth be told, I have been a little worried about absorbing medical costs into our cash flow, and had not really been considering it for this reason. I'm relieved to hear that NOT doing this has worked out well for you.

Your current strategy sounds like the way I'm hoping to handle ours: maintain somewhere in the realm of our yearly family deductible ($6,000) as cash, and invest the rest. I'm definitely going to consider the investable portion part of our overall portfolio, and just count it as one asset allocation.

Thank you again for taking the time out to respond. It was enormously helpful, and I truly appreciate it. Hope you're having a good night!

-Sean

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