Should I Invest in a Target Date Fund in my Health Savings Account?
And While We are at It, What is a Glide Path?
Target date funds (TDF’s) have achieved massive popularity in retirement plans, such as your employer sponsored 401(k) and your individual IRA. You likely have four or five to choose from. These self-driving retirement investment vehicles are the latest embodiment of behavior science, and when used properly are a solid option for many.
However, do they have a place in your Health Savings Account retirement investments?
Recall a Target Date Fund is meant to change your portfolio allocation over time, generally shifting from more volatile equity to less volatile bonds and cash as you approach retirement age (referred to in the industry as the “glide path” — see fun image — and successfully land without “fowling” the deck). Note there is a distinction between “through” and “to” in TDF design, with the former continuing to step down the equity allocation beyond retirement date, while the latter is meant to drop you off at the gates of your retirement, mostly in cash. However, in both instances there is an implicit assumption on your rate of retirement spend, post that magical moment.
Generally speaking, this is not how health expenses appear as you age.
Instead, as many have reported (examples here and here) much of our spending occurs in the last year or two of life, when chronic conditions drive expensive, life-sustaining treatments. An uneven and back-end distribution of expenses, coupled to the tax-free withdrawals of a health savings account, suggests we might look for a different investing approach when it comes to equity allocation.
Consider this — According to the 2010 Social Security Actuarial Life Table (here) the average 65-year old male lives another 18 years, while a similarly aged female would live another 20 years. 20 years is a long time to continue building wealth. You could conceivably quadruple your savings during that time (Rule of 72) with a 7% growth rate.
Of course, even with health expenses skewing towards the end, there is overall upward pressure on retirement health expenses. Indeed, out of pocket health expenses are expected to rise overall, consuming 60% of the “growth in…real household incomes between 2010 and 2040.” (Urban Institute study here). Clearly there is much to consider.
Health savings accounts provide an opportunity to grow your retirement balance tax free, not simply tax deferred. While Target Date Funds are a convenient option, you and your financial advisor may want to consider a more aggressive line-up. As Benjamin Franklin wisely observed, “nothing can be said to be certain except death and taxes.” With Health Savings Accounts you can cut that old saw in half. Plan accordingly.
Thanks for reading. Comments and suggestions on this and other topics welcome.
Other blogs in this genre include my review of John Bogle’s, the founder of Vanguard, “The Clash of Cultures: Investment vs Speculation” here, as well as my review of Ric Edelman’s “The Truth About Money: Everything You Need to Know About Money” here.
For a completely different approach to thinking about retirement healthcare costs, read Atul Gawande’s fantastic “Being Mortal: Medicine and What Matters in the End.” My review here.
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