This post is one two of two in the HSA Series:
- DoD Health Savings Account (HSA) 101: What, How, and Why You Should Take Advantage
- Duke of Dollars HSA Investments 101: How to Open an Account and Start Investing!
Welcome to part two of our HSA series on the path to Build Your Kingdom! Opening an HSA and picking HSA investments!
In part one, we explained what in the world an HSA actually is and the history behind its inception.
In part two, we will be taking you through what you should look for in an HSA account, the long-term strategy for utilizing the account in your older days, and our hsa investment recommendations to take advantage of the wonderful tax benefits it provides while building your kingdom!
Opening an HSA
If you have a qualifying high deductible healthcare plan (HDHP) through your employer, the company may offer a prebuilt HSA option. This option may or may not be your best bet for opening an HSA.
You are not required to use your employer’s HSA. You can open your own HSA anywhere.
With this in mind, how do you find the optimal account?
What to look for in an HSA account
HSA accounts are trickier and come with more terms and conditions than, say, a checking account. It’s important to read carefully through account providers’ terms and conditions. That said, what are you looking for?
- Free Money – First, if applicable, explore your employer’s contribution offer. That’s free money that you need to weigh against the pros, cons, costs, and opportunities available on the open market for HSA accounts.
- Low Fees – HSA accounts can come with a bevy of fees. For example, some accounts charge a maintenance fee if you’re under a required balance.
- Investment Options – Some HSA accounts allow investing, but only in a limited selection of funds. Others operate much like a brokerage. Determine the type of investing that the account has available and what you must pay to access investments.
- Flexibility – Look for rollover procedures and forms. Are there any fees with accepting money into or transferring money out of the account? Can you spend your available cash balance with a debit card?
The Thematic HSA
Healthcare for life – The Strategy for HSAs
The Health Care Savings account (HSA) is the best account available in the USA. Contributions are pre-tax, growth is tax-free, and distributions are tax-free if you can qualify for some of the simple withdrawal stipulations.
When you add in the fact that HSA providers have teamed up with brokerage firms to allow for investing, this account becomes a bonanza – especially for healthy millennials.
Every year that you can qualify for an HSA through high deductible health insurance plans (HDHP), you should max out your HSA. As of 2018, the limit is $3,450 for singles and $6,900 for married couples. For three extremely healthy years of our 20’s, my wife and I managed to sock away about $19,000 into this wunderaccount. And now, I’ve invested it with a special theme. You guessed it, healthcare equities.
Potential results of long-term HSA Investments
Not only is healthcare a bonanza for investors, one of the top sectors vying for your capital, but it also jives with the whole idea of the health savings account. If you treat it as a place you park money and never spend it, it has a chance to grow enormously, to the point that it can pay for the entirety of your health care expenditures in old age. Let’s do some quick calculations.
The $19,000 we originally contributed grew to about $25,000 as of early 2017. Thirty years of 8.0% growth puts the balance just a shade over $250,000 right around the time that we begin our sixties. Assuming that we maintain decent health insurance, say with $20,000 out of pocket maximums, this balance would cover over 12 years of disastrous health. The longer we manage to not spend this money, the more it has to compound. Given another 5 years of 8.0% growth, the balance starts to approach $350,000.
I like to invest my HSA dollars in the healthcare industry. It just makes sense (cents?) to me.
I include my HSA account(s) in my overall portfolio and keep an eye on the sector weightings to ensure that I don’t become too overweight in healthcare. Here are a few examples of my investments and my quick thoughts on their viability.
- Johnson & Johnson (JNJ) – the penultimate healthcare company, a dividend machine, and stalwart champion of your wealth, JNJ belongs in and is probably in just about every portfolio. I have a particularly strong weighting of JNJ, and its recent upward movement has helped my 2017 portfolio tremendously. It might not be a great value right now, but keep an eye on dips in JNJ in order to dollar-cost-average into this healthcare megacompany.
- RYH – for those of you that prefer the indexing strategy, this unique index takes $20 out of every $1000 invested and spreads it against 50 different healthcare companies. I love this ETF because of its low fees and diversified approach to pharmaceuticals. I cannot predict which company will produce the next Viagara, but I do know that medical breakthroughs will drive tremendous healthcare returns in the next 30 years. To be a part of this bonanza, I invest a significant portion of my portfolio into this equal-weighted healthcare ETF.
- KMB – Kimberly Clark makes Depends. If you believe that demographics drive sales, then it might follow that the aging baby boomer population should soon start helping Kimberly Clark’s sagging revenues, as soon as the grey-haired golfers start losing control and need something to depend on instead. KMB is more of a personal care conglomerate than a healthcare magnate, but keeping one’s body clean is an activity that will stand the test of time. Mr. Market is feeling down on KMB prospects as of late, and I’m taking the opportunity to fill up on napkins, tissues, feminine hygiene products, and diapers.
- GE – oh GE, what a mess you have been this past decade. Right now, this investment is not for the faint of heart, but with a long enough timeframe, patience, and courage, now might be the time to load up on this reformed industrial giant. Its healthcare division is expected to be a driver of growth going forward, so a thematic HSA would be a good place to take a swing at this fastball.
You’ve made it through the first step in fortifying your kingdom as you continually get closer to financial independence! We’re hoping your journey has been well so far, soon we will be taking the next step to along the roadmap – investing into your IRA.
At this point, decisions begin getting tougher as your money starts become the weapon to wield against the awful gremlins attempting to persuade against you’re traveling down the road, don’t let them!
How do you take advantage of your HSA? What investments do you have in yours? Tell us in the comments!
No stocks mentioned in this article are to be taken as direct financial advice – you are responsible for your own financial decisions. See our disclaimer for more information!