The average 65-year-old retired couple in 2021 will need around $ 300,000 to cover their health costs in retirement. This is a big number that is causing the budget to explode. Worse, the estimate does not take into account long term care, which can cost thousands per month.

A Health Savings Account (HSA) can help you prepare for these costs, but there’s a catch: Saving probably isn’t enough – you need to invest those savings as well.

Unfortunately, many HSA account holders do not use their account’s investing features. Devenir Research report concludes at average HSA investor hid almost $ 18,000 which is great. But the same report also reveals that 71% of HSA assets are uninvested and less than 6% of HSA accounts invest their holdings. This will turn out to be a costly mistake.

HSA, for now and later

Granted, an HSA account is not the easiest account to manage as you have competing priorities for these funds. Are you now making tax-free HSA withdrawals to cover current year medical expenses or leaving funds in the account for your long-term health needs?

There is a strong case for earmarking most of these funds in the future. Let’s go over some numbers:

1. Suppose you have an HSA balance of $ 17,975 and decide to invest 75% of the balance. You would have approximately $ 4,495 in cash and invest $ 13,480.
2. Invest $ 13,480 in equity index funds that grow 7% per year on average, and the balance would almost double in 10 years. You would have an additional $ 13,000 on hand for your efforts.

Note that investing 75% of your HSA funds is not the right strategy for everyone. If your medical expenses for the current year are low, you could invest more. And if you’re spending a lot on health care right now, you might be investing less.

You can use a compound interest calculator like this to figure out how much you can get out of your investments.

Minimum cash to invest

The process of investing your HSA funds is like investing in your 401 (k), with one exception. Your HSA may require that you reach a minimum cash balance before investing, which is not necessary with a 401 (k).

As with your typical 401 (k), you choose your investments from a fixed menu of available funds. Once this is done and you meet the minimum balance requirement, your future contributions should automatically be invested in the funds you have selected.

How to choose HSA investments

Your risk tolerance, investment schedule and wealth goals should influence your fund selections. Also remember this rule of thumb: Equity funds produce higher returns than bond funds, but they come with more risk.

The 7% growth rate used in the example above implies an HSA portfolio with a high equity content – 7% is the long-term average growth rate of the stock market after inflation. You could target this growth with a S&P 500 Index Fund, for example. This approach would be appropriate if you can handle some volatility and have 10 years or more between now and retirement.

If your maturity is less than 10 years, you could hold an S&P 500 index fund alongside a more secure US Treasury fund. Your growth will be lower, but you won’t see the balance fluctuate as much.

Build wealth in your HSA

The investment capabilities of your HSA are powerful. Use them to start building wealth for your retirement years. A large balance that you can access tax-free for medical bills could be the surprise hero of your retirement plan.