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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.)

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There are few different things to consider:

  1. 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.
  2. 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
  3. 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.
  4. 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 % ?

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  • Nitpick with point 4: For anyone young enough (early 30s would be on the edge so for the exact purpose of the OP you'd be right) a Roth IRA is likely the better choice. Still good answer ! – xyious Apr 7 at 17:35
  • @xyious Growth in HSA is also tax free, so doesn’t it offer all the benefits of a Roth IRA in addition to the extra benefits of the contributions being tax deductible? Of course, the ideal situation is to max out both each year. – GendoIkari Apr 8 at 5:00
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    @GendoIkari yes, max out both. HSA will only let you use the money for medical expenses, so if you like food you're out of luck. Also if you want to retire early you can withdraw contributions from a Roth tax free. Assuming we will never have universal health insurance in this country (which is a depressing thought) you have a point though, HSA is likely better than a Roth – xyious Apr 8 at 14:52
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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.

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