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Question: Too much in an HSA?

My wife and I have been saving money in an HSA (along with the required HDHP) for the past 6 years or so. We've accumulated around $42,000 (we never take money out of it, instead use it for a long-term IRA-like savings vehicle). Is there a realistic risk of having too much money saved for healthcare down the road as we age into Medicare? We are both in our mid-40s.

Response:

Bravo for managing to save that much money in your HSA. I think you’ve asked a fascinating question.

On the surface, the answer seems to be no, there isn’t a realistic risk of saving too much for healthcare as you age. Health care expenses add up even during retirement with Medicare. The mutual fund giant Fidelity estimates that a 65-year-old couple retiring in 2013 will need $220,000 to cover their medical expenses throughout retirement without taking any costs associated with nursing homes into account. Although the $220,000 figure is 8 percent lower than last year’s estimate of $240,000, it’s still a considerable amount of money.

However, my own feeling is that the value of financial flexibility is enormous and often underestimated. To take advantage of the tax-free use of HSA savings the money has to go for medical expenses. The definition of medical expenses is broad, including everything from doctor visits to pharmaceuticals to acupuncture. It’s a safe forecast that health care will continue to be a major expense. Still, at some point--depending on the family and financial circumstances--you don’t want to tie up too much of your savings in restricted accounts. The same concern holds for college savings plans although, in reality, the risk is theoretical for most of us since the bigger concern is finding enough money to put something into a 529 plan or an HSA.

I don’t have a number to give you, but I do have a suggestion for how to think through your savings strategy. First, how are you doing with retirement saving and emergency savings? Do you have an “opportunity fund” to take advantage of investments that come your way, including putting money toward training and education? If you’re skimping on retirement or emergency/opportunity savings to put money into the HSA, I would shift priorities for now.

I would also look at how you’re investing the money in the HSA. Could you get more aggressive with a portion of it. Several years ago, I interviewed finance professor Stephen T. Parente, a health economics specialist at the University of Minnesota's Carlson School of Business. He had an HSA. He had assumed he’d park the money in a low-risk bank money market account, as is typical. But as the sum in his account grew he decided to keep some of it in the bank account to pay medical bills and invest the remainder in longer-term investments like equities. Many plans allow participants to invest in a variety of securities, from certificates of deposit to mutual funds.

The trick here is to keep a financial cushion with your safe money in the HSA in case both of you hit the unlucky lottery and face a lot of medical bills at the same time. You could then invest the remainder in more growth oriented investments, such as a broad-based equity index fund.

Since you have a good foundation with your HSA I would consider tapping the power of compound interest to grow it for your retirement years while putting greater emphasis on establishing a healthy emergency/opportunity fund that you can use for everything from paying all cash for a car to financing a career shift.

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