If reading the financial headlines lately has made you nervous or made you rethink investing in the market, you’re not alone. Since March of 2020, the U.S. has experienced a prolonged period of high economic policy uncertainty that we haven’t seen in over 30 years. It’s true, in July of 2022 inflation was 8.5% year-over-year and any graph of stock prices looks like a rollercoaster ride. But it’s not time to panic. It’s time to buckle in and use a Health Savings Account (HSA) and other tax-advantaged accounts as a way to hedge against inflation in the short-term and market volatility in the long-tem.
What is an HSA?
An HSA is a savings and investment account into which you deposit pre-tax money. You can either invest this money in the market or keep it in a savings account as one way to build toward financial security. Your money grows tax-free in your HSA and, prior to age 65, any distributions you take to pay for qualified medical expenses (deductibles, prescriptions, etc.) are tax-free as well. Once you turn 65, you can use your savings to pay for anything you want. Distributions for qualified medical expenses remain tax-free and money used for anything else is subject to the appropriate income tax rate.
How your HSA can help you hedge against inflation in the short-term
There are two characteristics of your HSA that help you hedge against inflation:
Tax-free contributions and growth. The money you contribute to your HSA is deducted from your gross taxable income in the year they’re made. That means even if you use the money before it can experience much growth, you can save up to 30% (depending on your tax rate) on the expenses for which you use that money. The lowest tax bracket is 10%, so with inflation at 8.5%, you’re still able to save money on your medical expenses by using an HSA. If you are able to leave your contributions in your account to grow over time, you get to keep 100% of that growth because you won’t pay taxes on your gains. Which leads to an even greater hedge against inflation and to our next HSA feature.
Ability to invest your contributions. Given the recent market volatility, this might not seem like a “feature”. But what if we told you this volatility is completely normal? In fact, you’ve probably heard the adage that the market grows 10% per year. That’s a colloquial phrase that means, on average, when taking all of the market’s ups and downs into account, your money, if left where it is, will grow at an average rate of 10% per year over time. But you can see from this chart the yearly performance of the market varies widely. By investing your HSA contributions over the long-term, you can grow your savings at a rate that will outpace inflation. Combined with the tax-free nature of those contributions and growth, you can end up saving a lot of money on medical expenses you would have had to pay for anyways.
How your HSA can hedge against market volatility in the long-term
Another great feature of your HSA is that it rolls over from year-to-year and has the ability to be used as a retirement account. That means, if you can max out your contributions every year and save more than you spend, you can build a nest egg over the long term. By investing your contributions, you can grow your savings faster than it would grow in a savings account. But, when you take a look at the yearly market performance chart, you can see that the market might grow 20% one year and only 2% the next (or even contract).
It might be tempting to think, “I’ll just pull my money when the market starts to turn and put it back in when it starts to recover,” but it’s important to remember that even expert investors have a difficult time timing the market so they always “put their money in” during those 20% years. When investing, it's important to “take the long view”. That means planning to keep your money invested over many years so you capture as many of the high growth periods as possible. These high growth years should even out the years of low growth and market contraction to give you a nice average return.
Another feature of Lively’s HSAs that can help hedge against market volatility is the ability to diversify your investment portfolio. That way if one or two sectors experience a downturn, you’re protected.
What if I have medical expenses but want to leave my money invested?
If you have an HSA that allows investing, you technically have two accounts: a savings account into which your contributions are deposited and from where you pay for qualified medical expenses, and an investment account from where you buy stocks, bonds, and other types of investment funds. You fund your investment account from your savings account.
If you have a Lively HSA, you have two options. First, you can always leave a portion of your contributions in the savings account to prevent from having to sell investments before you’re ready. Or, you can invest all of your contributions to maximize growth, then pay for the medical expenses yourself, reimbursing for them later when you’re more comfortable selling investments.
It’s easy to feel uncertain during what seems like unprecedented times (even if it’s historically normal). But there are ways to hedge against both inflation and market volatility by using your HSA to not only pay for qualified medical expenses but to invest for the future as well. If you have questions about HSAs generally or Lively’s accounts specifically, reach out today! We’re here to help.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.