By Jarrett Suddarth
If you’ve read any of our previous articles, you know that we believe Health Savings Accounts (which I will refer to as HSAs for the remainder of the article) are one of the most tax-efficient tools available for new attending physicians.
So now that you’ve enrolled in and started contributing to your HSA, how do you determine how to invest your HSA account balance?
The short answer is: IT DEPENDS.
It depends on the purpose of your HSA account; it depends on how long you plan to keep the money invested; it depends on your risk level as an investor, and more. Let’s simplify that today by looking at one basic investing principle and how that relates to three investment strategies that we consider for HSAs when helping our physician clients.
Before we talk about those investment strategies, let’s talk briefly about risk and return. Consider for a moment your savings account at a local bank. That money is safe (up to FDIC Insurance limits). No matter what happens to the stock market or economy, your money will be there for you when you need it. However, in exchange for taking no risk, you also receive very little return. For example, my local bank is paying 0.50% interest on savings accounts. If I deposited $1,000 there and left it for one year, I would have $1,005 at the end of the year.
Not much, but it’s safe.
(Important Note: Thankfully high-interest online savings accounts are paying MUCH HIGHER than local banks and are typically FDIC insured. But this might not last if interest rates comes down in the future).
Comparatively, stocks have returned an average of 9.8% annually since 1926 (S&P 500). That’s much more than 0.5% per year! However, it comes with significantly more risk.
Stocks tend to go up and down in price much further and faster than other assets like cash or bonds. It’s rare, but in some instances, a publicly-traded company can even lose all of its value, rendering its stock worthless.
Another key point is that even though stocks have historically returned 9.8% annually, it doesn’t mean that stocks return 9.8% EVERY year. As I mentioned, stocks tend to go up and down in price much further and faster than other assets. They could be up 30% one year and down 30% the next. In fact, that’s what this chart from JP Morgan’s Guide to the Market shows. Over a one-year period, from 1950-2022, the annual return of stocks (S&P 500) was anywhere from +47% to –39%. However, during longer time periods, 20 years, for example, the range of returns was significantly tighter. Here’s a video that we made that further explains the JP Morgan Chart.
So when it comes to investing your HSA, there are two main takeaways: 1) The higher return you’d like over time, the more risk you will have to take to get it, and 2) the longer you hold an investment, the tighter the range of returns.
So how does this relate to investing within an HSA? Good question. Most of our young physician clients utilize one of three investing strategies within their HSA and each depends on how they plan to use their HSA.
Strategy 1: All Cash
Some of our young physician clients decide to keep their HSA entirely in cash.
We most often recommend this strategy when the client is planning on using their HSA funds within the next five years. This could be because they have recurring medical expenses from a chronic illness or because they are saving up the money to use on a specific medical event, like having a baby or getting LASIK. This strategy is great for young attendings who desire safety for their funds and want the peace of mind that their money will be there when they need it. Each HSA plan will have different options for this, but if you decide to implement this strategy, you’ll want to look for the lowest risk option that offers the highest return (compared to other lowest risk options (if available)). This might be a “cash” or “money market” fund but could also be called a “stable value” fund.
Strategy 2: All Stocks
Secondly, other young physician clients decide that they want to pay their medical expenses out-of-pocket and let their HSA balance grow until they reach retirement. As we’ve highlighted before, one of the major tax benefits of an HSA is the tax-free growth. By choosing to pay for their medical expenses out-of-pocket and let their HSA balance grow, these clients can maximize the tax-free growth within their HSA.
In this situation, we typically recommend investing the entire account in diversified portfolio stock index funds.
With 20+ years until they need to use the money, young attending physicians can afford to invest in riskier assets, like stocks, and let their accounts grow. For example, if a young attending physician contributed and invested $5,000 in their HSA every year, and experienced an average annual return of 8%, their account could be worth over $600,000 after thirty years.
Strategy 3: Mix of Stocks & Cash
Lastly, young attending physicians might consider a mix of both stocks AND cash in their HSA. This strategy would be great for young attending physicians who desire a blend of security from the cash and growth from the stocks.
We recommend this strategy when clients have fixed medical expenses each year from chronic illness (themselves, a spouse, or a child), or want to use money from their HSA to help pay for their deductible. They might even want to use the cash in their HSA as a separate emergency fund just for medical events. By leaving a specific amount secure in cash, it frees up the remaining balance to be invested aggressively for the future. You kind of get the best of both worlds.
Determining how much of your account to keep in cash and how much to invest depends entirely on your situation. You can customize this strategy to fit your needs by adjusting what percent of the money you keep in cash versus investing, now and over time.
Summary
Determining how to invest in your HSA requires careful consideration of your financial goals, risk tolerance, and time horizon. As discussed, the fundamental principle of risk and return plays a pivotal role in shaping investment strategies. There is no one-size-fits-all approach to HSA investments. Each strategy has its merits, and the optimal choice depends on your unique financial situation and objectives. Consulting with a financial advisor can further tailor these strategies to align with your specific needs, ensuring that your HSA serves as a valuable and effective tool in achieving your financial goals as a new attending physician.
Panoramic Financial helps new attending physicians create and optimize their HSA investment strategy. Please click “Work With Us” at the top of the page to learn more.
*The foregoing content reflects the opinions of Panoramic Financial Advice and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security.
**Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
***Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.
