How to determine how much to keep in a health savings account

Question

We are a family of healthy people (30s/40s, kids in elementary/middle school). I've got an automatic contribution for my health savings account. The balance grows and grows. We've barely had a chance to spend any of it, aside from dental expenses.

Are there guidelines about how much one should aim to set aside for medical expenses? Are there actuarial figures about what medical expenses are likely to be, over a given period? (Obviously any of us could come down with a horrible chronic disease at any time, and drain the account. The ultimate decision will be balancing risk and opportunity cost, but as it stands I don't have any information about the risk.)

Hilmar · Accepted Answer

There are few different things to consider:

Deductible : Since you have an HSA you are probably on a High Deductible insurance plan. Take a look at your HSA balance and divide by your max out of pocket deductible. That's the number of years you are covered for the "worst case" scenario. I'd say you want at least ten, but 100 years would be excessive. Depends of course on you own risk comfort.
Retirement : health care cost will likely be the single largest expense in retirement and unfortunately it's the hardest to predict and find good data on. A recent fidelity study put the average life time out-of-pocket cost for a couple into the $300.000 range. Other studies quote about $5000-$7000 in today's dollar per year per person on Medicare. Health Care inflation is currently significantly higher than regular inflation, which complicates the math further. Still, it's not unreasonable to have several hundred thousand dollars squirreled away for retirement health care
Coronavirus and shifts in the Health Care system: This is pure speculation at this point, but chances are that the current crisis will have an impact on the way Health Care works and gets paid for in the future. The most drastic change would be a single payer system (as many other countries in the civilized world already have) but it's very hard to predict how an HSA would roll over into this. One of the more plausible scenarios would be to allow a roll over into an IRA but that's all a wild guess at the moment. 
In any case the current system is stretched thin already. The average retiree  spends more than  40% of their social security income on health care and it is getting worse quickly.
Investment: HSA contributions are pre-tax money. In most cases that alone will outweigh any potential investment return. Assuming there is no high interest debt, I would recommend to first max out pre-tax retirement contributions, then pre-tax college savings and then pre-tax HSA. If you have other highly attractive investment vehicle you can consider those too. Stocks are cheap at the moment, although very risky and likely to be volatile for a while.

Looking at the actual medical risk is probably not that helpful. Statistics don't really help if it's just you and your family. Would you be doing anything differently if you knew the risk for a major health disaster is 0.1% instead of 0.2 % ?

Pete B. · Answer

As a person who is nearing retirement, but well under the age to qualify for medicare, I am beginning to think that the answer to the "How much should I put in a an HSA?" question should be "all you can".

After the match on 401K plans HSAs seem superior given similar investment choices.  With 401K dollars, you have to pay tax on them and then use them for health care expenses.  With HSA dollars, you can pay health care expenses as pretax.  However, if you need cash for other things that is available once you pay tax on those dollars.  Just like a 401K.

To me, we will likely go to a single payer health care system sometime in the future, but even as is, there will be costs and co-pays and the like.  Paying for those expenses, pretax with invested dollars seems very attractive to a person that is in your age range.

adamaero · Answer

Savings needed to fund health insurance and health care expenses in retirement

Conclusion
This report provides estimates for savings needed to cover health
insurance to supplement Medicare and out-of-pocket expenses for health
care services in retirement. It finds that a male age 65 in 2008 and
retiring at age 65 will need anywhere from $64,000 to $159,000 in
savings to cover health insurance premiums and out-of-pocket expenses
in retirement if they are comfortable with a 50 percent chance of
having enough money and $196,000 to $331,000 if they prefer a 90
percent chance.
[...]
Women age 65 retiring in 2008 will need anywhere from $86,000 to
$184,000 in savings to cover health insurance premiums and
out-of-pocket expenses in retirement if they are comfortable with a 50
percent chance of having enough money, and $223,000 to $390,000 if
they prefer a 90 percent chance.

https://pubmed.ncbi.nlm.nih.gov/18630312

What Happens To Your HSA When You Die?

Scenario 1: Your spouse is your beneficiary.
In this scenario, your spouse is your primary beneficiary and will
receive 100% of your HSA. That means your HSA will belong to your
spouse and he/she will become the owner. The owner can use the HSA
funds to pay for your qualified medical expenses incurred before
death, as well as future medical expenses of his/her tax dependents.
Your spouse can also get reimbursed tax-free at any time for qualified
medical expenses you paid out of pocket prior to your death and didn’t
reimburse. Even if your spouse isn’t HSA-eligible, they can withdraw
funds to pay for qualified medical expenses.
Scenario 2: Your beneficiary is not your spouse.
If your beneficiary is not your spouse, your HSA will be closed. Your
non-spouse beneficiary will inherit the fair market value of your
account on the date of your death. He/she then has one year to pay
your qualified medical expenses incurred before death. Any amount paid
reduces the inheritance amount and the subsequent tax burden.
Scenario 3: Your estate is your beneficiary.
If you don’t designate a beneficiary, your HSA funds will be
distributed to your estate. Your gross income for that year will be
included in the fair market value of the account. Estate taxes will
also be reduced by the same amount.

https://healthsavings.com/happens-hsa-die

Lastly, you can put a charity (important-tractable-neglected-transparent) as the beneficiary. So if you are an effective altruist, depending on major home/auto/child expenses, it may be of interest to put as much as possible in your HSA. This is ideal for end-of-life giving.

How to determine how much to keep in a health savings account

3 Answers

Savings needed to fund health insurance and health care expenses in retirement

What Happens To Your HSA When You Die?

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