How to best use HSAs as a retirement aid

What does health care have to do with retirement? Plenty, and there’s an investment vehicle out there that can help with it.

Health savings accounts could be an important option, though most people aren’t thinking of them for retirement. As their name implies, these vehicles are designed to help Americans stash cash away for medical expenditures.

Most people use them for near-term costs, while still employed. But medical bills also accumulate in retirement, and the money that builds up can be used to meet such expenditures, very efficiently.

The accounts allow for pre-tax contributions, taxsheltered growth of investment dollars and tax-free withdrawals if used to pay for medical costs. They can help minimize taxes compared to taking withdrawals from other accounts, such as traditional Individual Retirement Accounts.

HSAs increasingly are included in the benefits packages offered by employers. They also may be opened through the government health-insurance marketplaces or exchanges. Either way, HSAs are designed for people who use high-deductible health insurance plans. With open-enrollment season here, now’s the time to investigate.

A new study by the Employee Benefit Research Institute found that while more Americans are turning to HSAs to meet medical expenses, relatively few use them for retirement planning. The study also found that few people are investing their HSA funds for the long haul, and even fewer are maxing out their contributions.

The research was based on nearly 6 million HSAs with $13 billion in combined assets.

How much are people putting into HSAs?

HSAs have been around since 2004 and thus don’t have as long of a track record as IRAs, including Roths, or 401(k)-style workplace retirement plans. More than three in four HSAs were established just within the past four years, according to the institute, a research group that focuses on health, savings and retirement issues.

Participants often use HSAs as a type of checking account, pulling out money to meet short-term health expenditures. Still, even these people typically withdraw less than they contribute, which explains how account balances continue to grow.

For accounts that received at least some contributions during 2017, the average balance rose to $2,764 at the end of the year, up from $1,873 at the start. HSA balances can be rolled over to future years.

Half of HSA owners contributed money in 2017, averaging $1,949, with employer contributions averaging $895, according to the study. But only 13 percent of individuals saved the full allowable limits.

Most account holders keep their balances in cash, further underscoring the checking-account feel. Those who invested in growth vehicles like stock mutual funds and let their money compound had higher balances on average, according to the study. Mutual funds and exchange-traded funds are especially good choices for small HSA balances, providing broad diversification and allowing low minimum investments.

One thing to watch are fees: A Morningstar study

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❚ Tip: Consider the items you want this Black Friday and write them down. Then check Black Friday ads to see whether those products will be on sale. Retailers usually release their ads ahead of time – online, by email or in the mail. If you don’t see what you want at the price you want, think about waiting to buy.

Consider why you’re buying

Of those who plan to shop in stores this Black Friday, 42 percent said they plan to do so because they enjoy the in-store hype (e.g., doorbuster deals, camping outside of stores the night before), according to the NerdWallet study.

Enjoying this annual tradition is one thing, but going shopping “just because” isn’t always a good idea. Even if you’ve set a budget before putting on your comfiest sneakers and standing in the cold, you may be susceptible to making additional purchases once you’re among the merchandise.

On Black Friday, retailers compete for a share of your wallet, says Jeff Inman, a marketing professor at the University of Pittsburgh and editor-in-chief of the Journal of Consumer Research.

Traditionally, retailers draw in Black Friday shoppers with a few great deals – called “loss leaders” – and hope they’ll buy additional items as well. Imagine going for a TV and leaving with clothing and Christmas decorations, too.

While Inman says he hasn’t always seen shoppers with huge baskets on Black Friday, he does point to toys as one category where shoppers may spring for something even if they didn’t see it in a Black Friday ad.

For example, while in the store, you may come across a toy and decide to buy it for your niece for Christmas. This isn’t necessarily an impulse purchase; you already planned to buy a gift for your niece. But since you didn’t know the exact item you wanted to buy, he calls selecting this toy an “impulse allocation” of your holiday shopping budget.

This isn’t a problem if you can afford it, but be conscious of this possibility when you step foot in the store.

❚ Tip: Think about why you want to shop on Black Friday, and whether you’re financially prepared. If you’re not sure you can resist the temptation to overshoot your budget, consider skipping.

Consider when you’re buying

Finally, plan your timing. With deals being launched earlier each year, some Black Friday sales really happen the whole week of Thanksgiving, according to Graham from Shop It to Me.

“To compete with each other, the retailers have been pushing their sales earlier and earlier during that week,” Graham says.

Because of this, sometimes shoppers can get Black Friday-level prices before Black Friday.

❚ Tip: Although this might not be true for every product category, monitor sales in the days leading up to Black Friday for an early shot at a good deal.

To stay or to go?

Once you decide the what, why and when of your Black Friday shopping, you’ll be able to decide whether you should join the crowds or stay on the couch.