How Asset Allocation Impacts Risk and Return
Asset allocation plays an important role in an investment portfolio.
Choosing a health care plan at work can be a bit of a headache. Charts comparing premiums, copays and deductibles are not exactly light reading. One option you might have encountered in this process is the high-deductible health plan (HDHP). The name might sound intimidating. After all, who really wants to pay high deductibles? But when paired with a health savings account (HSA), an HDHP can be a powerful tool to help you save for your health care now and your future.
An HDHP is a type of health insurance plan that comes with lower monthly premiums but higher out-of-pocket costs. In other words, you will pay less each month, but you will be on the hook for more when you actually visit a doctor. These plans shift more financial risk to you in exchange for upfront savings, and they often come with access to an HSA.
An HSA allows you to set aside pre-tax money to pay for qualified medical expenses like doctor visits, prescriptions, dental care and vision services. Unlike a flexible spending account (FSA), which is “use it or lose it,” the money in an HSA is yours to keep. It rolls over from year to year, stays with you if you change jobs and often has investment options.
What makes HSAs especially appealing are their triple tax benefits:
These features make HSAs one of the most tax-efficient savings vehicles available. But there is another way to get more from your HAS. It can serve as a powerful retirement savings vehicle.
Before we get to the benefits of an HSA as an investment vehicle, how do you decide whether to use an HDHP in the first place? Choosing between a traditional plan and an HDHP depends on a few key factors.
First, compare the total potential cost under each plan. That means looking at monthly premiums, deductibles, coinsurance and out-of-pocket maximums. HDHPs typically offer significantly lower monthly premiums but come with higher deductibles. If you are generally healthy and do not expect to need much medical care, this tradeoff could work in your favor.
But be honest with yourself about your cash flow. If you had a sudden medical emergency, would you be able to cover the high out-of-pocket costs until your insurance kicks in? For people with chronic health conditions or frequent doctor visits, a traditional plan might offer more predictable costs.
Once you have maxed out your traditional retirement accounts, an HSA becomes an excellent next stop. HSA contribution limits are $4,300 for self-only coverage and $8,550 for family coverage in 2025. You can leave that money in cash or invest it. You can, of course, use it to pay for qualified out-of-pocket medical expenses at any time. But you can also leave it in the account untouched, letting it grow and enjoy the power of tax-advantaged compounding, just as you would with an IRA or 401(k).
Health care is one of the biggest expenses in retirement. So building a tax-free fund dedicated to future medical needs makes a lot of sense. According to recent estimates, a 65-year-old retiring in 2024 can expect to spend around $165,000 on health care in retirement, and that number is only expected to rise.
Here is the kicker. When you turn 65, you are not limited to using your HSA for medical expenses. You can make withdrawals for non-medical expenses, and these will simply be taxed as income, just like withdrawals from a traditional IRA or 401(k). In short, your HSA can function like a traditional retirement account with the added perk of tax-free withdrawals for medical expenses at any age.
Your HSA is a financial asset, whether it is sitting in cash or invested in the market. As such, it can play an important role in your strategies for long-term asset allocation, diversification and rebalancing. Managed well, it can contribute meaningfully to your future financial security.
This post was written and first distributed by The Writing Company.
DISCLAIMER
Shore Point Advisors is an investment adviser located in Brielle, New Jersey. Shore Point Advisors is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shore Point Advisors only transacts business in states in which it is properly registered or is excluded or exempted from registration. Insurance products and services are offered through JCL Financial, LLC (“JCL”). Shore Point Advisors and JCL are affiliated entities.
Asset allocation plays an important role in an investment portfolio.
Compounding is a powerful force. When returns are reinvested, the investment’s value can grow exponentially over time.