Time to spend from HSA?

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Topic Author
MrBeaver
Posts: 420
Joined: Tue Nov 14, 2017 4:45 pm

Time to spend from HSA?

Post by MrBeaver »

Current status:

HSA balance: $265k
Current OOP Max with megacorp HDHP: $3k
Ages: 41/43

Below analysis is in present day dollars.

Our current OOP Maximum is < 1.2% of our HSA balance, well within a perpetual safe withdrawal rate. By withdrawing that 1.2% every year (so far we haven’t actually spent our OOP Max every year) over the next 11 years until early retirement, and then withdrawing 10k per year until Medicare (increased OOP Max for cheaper individual insurance) when we are (presumably) eligible for Medicare, with continued $7.3k investment per year until Medicare, it would grow to:

4% return over inflation: ~$600k
6% return over inflation: ~$900k

At that point, perpetual returns (3% withdrawal rate) would be enough for $18k - $27k per year medical expenses while covered by Medicare (I do not expect to have enough taxable income in retirement to be hit by IRMAA) even with no additional contributions. The principal would then be our self insurance for long term care, and any balance at death would be left to charity.

If we do not withdrawal the 1.2%, but still draw down 10k per year after early retirement, the numbers change to:

4% return over inflation: $740k
6% return over inflation: $1150k

If I assume a $18k - $27k (inflation adjusted) withdrawal rate through retirement and move expected returns 1 percentage point lower to adjust asset allocation, that would yield the following balance at the end of a 30 year retirement, in the case that we do spend down the 1.2% per year until retirement:

3% return over inflation: $614k
5% return over inflation: $2205k

And in the case where we do not spend the 1.2% down over the next 11 years:

3% return over inflation: $923k
5% return over inflation: $3113k

The biggest downside risk scenario would be if we lost the ability to contribute to an HSA (never know future tax law or employers insurance). In that case, in the low return scenario, the HSA balance would be only $330k at Medicare eligibility, and would be depleted 27 years after Medicare elligibility such that it would not serve as long term care self-insurance.

Questions:
How should I weigh the low return / loss of HSA contribution scenario depleting the HSA as LTC self-insurance against the high return scenario of ending with $3MM in an HSA?

Is $18k-27k in medical expenses (Medicare premiums and out of pocket) a reasonable upper bound? Obviously predicting these costs decades in advance is tenuous at best, it just seems unlikely that they could go that much higher from a societal perspective for MFJ couples who have 100k or less in taxable income in retirement.

My gut says if we have 3MM in the HSA at end of life from high returns, our other retirement assets will be perfectly adequate to sustain us, so there’s little downside to giving 3MM to charity. Therefore, I should keep covering medical expenses from taxable dollars until the projected balance at retirement with no additional HSA contributions will be enough for a continuing Medicare expense perpetual withdrawal rate. And at that point, start withdrawing and investing more into a taxable account. But that seems super conservative, even from a Bogglehead perspective, given the $18k - $27k expenses under Medicare seem high.
aristotelian
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Re: Time to spend from HSA?

Post by aristotelian »

I don't see any downside to staying invested. Worst case it becomes an additional pretax IRA bucket. I do think it may make sense to hold a portion of your bond allocation to limit growth in the HSA and maximize growth on other accounts. I also see little downside to what you are proposing. Do you have saved receipts that you can withdraw at any time?
jebmke
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Re: Time to spend from HSA?

Post by jebmke »

Assuming the expense ratio is low, no real downside to keeping it.
When you discover that you are riding a dead horse, the best strategy is to dismount.
ChicagoC
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Re: Time to spend from HSA?

Post by ChicagoC »

Stay invested, just start tracking your medical expenses. I keep a google sheet that is tracking my medical expenses. For each expenses I then save the invoice, proof of payment and EOB on my google drive. The HSA then becomes a turbocharged Roth IRA.
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neurosphere
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Re: Time to spend from HSA?

Post by neurosphere »

What happens if you die or become incapacitated? Does your spouse know how/where/when to pay for previous medical spending or to use the HSA for your ongoing medical costs? I changed from hoarding receipts to paying for health care as I go to simplify things for my wife and not "lose" those tax free withdrawals.

And actually, what happens if both of you die? I don't know what happens to HSAs at that point. Can your estate/heirs pay for your previous health spending with the HSA dollars?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
ChicagoC
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Re: Time to spend from HSA?

Post by ChicagoC »

neurosphere wrote: Wed Nov 24, 2021 8:26 am What happens if you die or become incapacitated? Does your spouse know how/where/when to pay for previous medical spending or to use the HSA for your ongoing medical costs? I changed from hoarding receipts to paying for health care as I go to simplify things for my wife and not "lose" those tax free withdrawals.

And actually, what happens if both of you die? I don't know what happens to HSAs at that point. Can your estate/heirs pay for your previous health spending with the HSA dollars?
My understanding is that the beneficiary needs has up to 12months to use the HSA for qualified medical expenses of the account holder. While I haven’t discussed with a financial planner or estate lawyer, my understanding is that the beneficiary would be able to withdraw the accumulated medical expenses tax free.

You bring up a good point though - my wife is really in the dark on our financial plan and probably need to create some instructions to help her navigate things in the event I can’t run the show any more.
jebmke
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Re: Time to spend from HSA?

Post by jebmke »

neurosphere wrote: Wed Nov 24, 2021 8:26 am What happens if you die or become incapacitated? Does your spouse know how/where/when to pay for previous medical spending or to use the HSA for your ongoing medical costs? I changed from hoarding receipts to paying for health care as I go to simplify things for my wife and not "lose" those tax free withdrawals.

And actually, what happens if both of you die? I don't know what happens to HSAs at that point. Can your estate/heirs pay for your previous health spending with the HSA dollars?
This is why I decided, at ~60 to discontinue the "save receipts" strategy and flushed our HSA over a couple of years. After watching my wife deal with a lot of the details of settling two family estates, I decided I wanted to take this off the table. In fact, over the past few years I've been trying to simplify everything possible.
When you discover that you are riding a dead horse, the best strategy is to dismount.
eagleeyes
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Re: Time to spend from HSA?

Post by eagleeyes »

Just as aside, are nursing home expenses covered under HSA?
Topic Author
MrBeaver
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Re: Time to spend from HSA?

Post by MrBeaver »

aristotelian wrote: Wed Nov 24, 2021 7:15 am I don't see any downside to staying invested. Worst case it becomes an additional pretax IRA bucket. I do think it may make sense to hold a portion of your bond allocation to limit growth in the HSA and maximize growth on other accounts. I also see little downside to what you are proposing. Do you have saved receipts that you can withdraw at any time?
I do have some receipts saved. But they only total about $9k. Benefits of starting young and being healthy, I suppose.

I like the idea of putting bonds in the HSA if it obviously gets over-funded once my allocation starts to grow more bond heavy (I’m hoping interest rates won’t be zero by the time that comes). That certainly helps avert the $3MM scenario I laid out.
Topic Author
MrBeaver
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Re: Time to spend from HSA?

Post by MrBeaver »

aristotelian wrote: Wed Nov 24, 2021 7:15 am I don't see any downside to staying invested. Worst case it becomes an additional pretax IRA bucket. I do think it may make sense to hold a portion of your bond allocation to limit growth in the HSA and maximize growth on other accounts. I also see little downside to what you are proposing. Do you have saved receipts that you can withdraw at any time?
To be clear, withdrawing to pay for medical expenses wouldn’t change ‘how invested’ I am, or how much I save each year. It would simply move some assets from the HSA into a taxable brokerage by withdrawing from the HSA each year and buying more index fund shares in my taxable account. Therefore, more of my portfolio would be subject to dividend tax drag, but benefit from lower tax rates when selling, be easy to give appreciated shares to charity before death, and be a better option for bequeathing to others at my death.
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PaddyMac
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Re: Time to spend from HSA?

Post by PaddyMac »

If you don't need the money and are just going to move it into your taxable account, I would leave it in the HSA.

Retire early and use it as a tax-free boost.
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grabiner
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Re: Time to spend from HSA?

Post by grabiner »

MrBeaver wrote: Wed Nov 24, 2021 11:21 am To be clear, withdrawing to pay for medical expenses wouldn’t change ‘how invested’ I am, or how much I save each year. It would simply move some assets from the HSA into a taxable brokerage by withdrawing from the HSA each year and buying more index fund shares in my taxable account. Therefore, more of my portfolio would be subject to dividend tax drag, but benefit from lower tax rates when selling, be easy to give appreciated shares to charity before death, and be a better option for bequeathing to others at my death.
If you are charitably inclined, making a charity the beneficiary of your HSA eliminates much of the tax risk of having too large an HSA.

At your age, I wouldn't recommend withdrawing from the HSA. If you move the money to a taxable account, you will have 40 years of dividends ahead of you, which is a significant tax cost even on a stock index fund; you will also lose capital-gains tax if you need to spend the money (although not if you leave it to your heirs or charity).
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gasdoc
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Re: Time to spend from HSA?

Post by gasdoc »

I plan to begin spending down my HSA during the first year of my retirement (age 62), mostly in order to simplify things by the time I am in my 70's.
GoldenGoose
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Re: Time to spend from HSA?

Post by GoldenGoose »

With HSA you can also withdrawn it for non med purposes, subjected to taxes. So it is like another 401k. Is my understanding right?
britcoal
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Re: Time to spend from HSA?

Post by britcoal »

Yes, that's correct Goose.. but only after age 65.
GoldenGoose
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Re: Time to spend from HSA?

Post by GoldenGoose »

Thanks. I know it has to be after 65. I have been treating it as another 401k saving for now.
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