I used to attend “Broke University” where most of my financial decisions were short-sighted, based on what I could afford today and ultimately resulted in a poorer me. I couldn’t see past what I needed right now. It was survival mode always and I often borrowed from Peter to pay Paul. There was no room for optimization or cost/benefit analysis in this lifestyle. I was stuck in the bottom level of the Mad Fientist’s Hierarchy of Financial Needs.
As an attendee of Broke University, I didn’t really think about an HSA (Health Saving Accounts). The only experience I had with them was with one particular employer who funded my HSA. I thought it was okay since I was given money to use towards my health care expenses. But, I can tell you what I was NOT thinking about:
- Tax optimization
- Maxing it out
- Investing the HSA money
This is why, in stark contrast, the following cost/benefit analysis regarding my healthcare is so doggone amazing. When you’re not living paycheck to paycheck and you’re not a slave to any lenders, you can think about things a bit differently.
Although I have a pretty good health care plan, I thought there might be room for more optimization. My boss is generous with many things, healthcare being one of them. While he buys a high deductible plan from a carrier ($6,550) he pays the first $1,000 of my deductible, then splits the next $4,000 50/50 with me, and then pays the final $1,550. Oh, and he pays 100% of the premium. My maximum potential yearly medical exposure is $2,000 and that is only if I have $5,000 in claims. Not too bad, eh?
Now that I’m investing and looking for ways to get to FI quicker, I want to max out all of the tax-deferred accounts I can get my hands on. HSAs are stellar investment accounts as they are the only vehicle in which you can contribute pre-tax dollars and pull the funds out for qualified medical expenses, without paying tax. Furthermore, certain HSA accounts allow you to invest the funds into low-cost index funds rather than just using it as a savings account.
The Word On the Street Regarding HSAs:
- Contribute the annual maximum to an HSA account (for 2018 -$3,450 single/ $6,850 family)
- Invest the HSA in low-cost index funds
- Pay cash for medical expenses and allow the HSA account to grow tax-free
- Save all receipts (electronic copies) for qualified medical expenses
- Withdraw the money in early retirement using the above receipts
- If all else fails, withdraw the money at age 65 for non-qualified medical expenses and pay the tax
Sounds like a great plan! There is only one problem for me–being that my boss pays the first $1,000 of my deductible, I don’t qualify to open an HSA.
So this got me to thinking…what if I ask my boss to allow me to be responsible for the first $1,350 of the deductible making me HSA qualified.
My Plan
Because I didn’t want to make a foolish offer, I did the math. Let’s consider the two health care options I am facing:
- Option 1: $1,350 deductible HSA qualified plan. My annual max out of pocket is $1,350.
- Option 2: Current plan (Boss pays first $1,000 of my deductible, then splits 50/50 of next $4,000 and pays final $1,550). My annual max out of pocket is $2,000.
First thing I did was take an average of how much my boss has paid for me in medical claims over the past five years:
Claims Boss Paid For Me Over Last 5 Years |
|||||
| Annual Average Claims over five years | 2017 | 2016 | 2015 | 2014 | 2013 |
| $1,041.98 | $924.22 | $347.27 | $243.79 | $1,532.41 | $2,162.20 |
Next, I wanted to do a cost-benefit comparison of two investment strategies over the next five years concerning the two different healthcare options:
- Option 1: Open an HSA account and max it out ($3,450)
- Option 2: Stay on the current plan and invest the average amount of claims my boss is paying for me annually ($1041.98)
Option 1: invest $3,450 of my HSA funds in low-cost index funds the first year and subsequent 4 years with a 7% rate of return:
Compound Interest Calculations of HSA Investments over 5 Years |
|
| Initial Investment | $3,450.00 |
| Annual interest rate | 7.00% |
| Compounding periods per year | 12 |
| Years | 4 |
| Additional contributions | $287.50 |
| Additional contributions type:
0 – at the end of the period 1 – at the beginning |
1 |
| Balance | $20,526.33 |
Option 2: invest $1,041.98 (average amount my boss pays for my claims) in low-cost index funds the first year and subsequent four years with a 7% rate of return:
Compound Interest Calculations of Investing Average Claims (that boss will pay) |
|
| Initial Investment | $1,041.98 |
| Annual interest rate | 7.00% |
| Compounding periods per year | 12 |
| Years | 4 |
| Additional contributions | $86.83 |
| Additional contributions type:
0 – at the end of the period 1 – at the beginning |
1 |
| Balance | $6,199.42 |
There are few more things to consider with option 1 to get a full picture:
| 5 Year Tax Savings | $2,600.00 |
| 5 Year Deductible (Worst Case where I spend $1,350 annually on medical claims) | -$6,750.00 |
Final Numbers:
| Option 1 | Option 2 | ||
| Investment Balance After 5 Yrs | $20,526.33 | Investment Balance After 5 Yrs | $6,199.42 |
| 5 Year Tax Savings | $2,600.00 | ||
| 5 Year Deductible (Worst Case) | -$6,750.00 | ||
| Sum | $16,376.33 | $6,199.42 | |
| $ Difference | $10,176.92 | ||
| % Difference | 164.16% |
Okay, that proves option 1 is a big win for me!!
Is This a Good Deal For My Boss?
While this is a good deal for me, I also had to calculate if this is also a good deal for my boss. Especially since he’s taking on more liability for me with option 1. With option 1 my max out of pocket is $1,350 where with option 2 it is $2,000. Being that this is employer funded under a $6,500 deductible plan, my boss has $5,200 in max exposure for me with option 1 where he only had a maximum exposure of $4,550 on option 2.
At first blush, option 1 is more attractive to my boss since I am paying first dollar coverage. He doesn’t start paying claims for me until I meet my $1,350 deductible.
However, let’s dig deeper. Remember how I looked at the claims he paid for me over the last 5 years? I needed to show him how much less he would have paid for me if I had option 1 over the last 5 years.
| Year | 2017 | 2016 | 2015 | 2014 | 2013 |
| Ms. FI-ology’s Total Claims | $924.22 | $347.27 | $243.79 | $2,064.82 | $3,324.40 |
| Boss Paid with Option 2 | $924.22 | $347.27 | $243.79 | $1,532.41 | $2,162.20 |
| Ms. FI-ology Paid | $0.00 | $0.00 | $0.00 | $532.41 | $1,162.20 |
| Boss Would Have Paid With Option 1 | $0.00 | $0.00 | $0.00 | $714.82 | $1,974.40 |
| Total Amount Boss Paid For My Claims Over 5 Years With Option 2 | $5,209.89 |
| Total Boss Would Have Paid For My Claims Over 5 Years With Option 1 | $2,689.22 |
| $ Difference | -$2,520.67 |
| % Difference | -48.38% |
The above analysis hinges on the premise that my next five years of healthcare usage will be similar to my last five. Since we can only look in the rear-view mirror (and that is what we do with our clients), this proves to my boss that option 1 is a deal for him!
In Conclusion
This turned out to be a win/win scenario. Worst case I will have a net gain of $10,176.92 over five years and my boss has a potential savings of $2,520.67. His savings will increase if I remain healthy and decrease if my health fails. I am happy to report that he said yes to this experiment! He is willing to take this small amount of risk for me when I showed him his potential savings. And, of course, he is the boss and can re-evaluate this each year.
Broke me wouldn’t have had the brain power to conduct such an analysis. Not because I wasn’t smart enough to calculate it, but because I couldn’t fathom taking on a $1,350 annual risk for a greater future return.
However, Ms. FI-ology can take on a little risk now in return for a greater reward later.
This analysis was so rewarding for me in many ways. I never want to forget where I came from as it keeps me grateful and hopeful of how we can all transform.
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