Author Topic: Investing HSA  (Read 5135 times)

mcampbell

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Investing HSA
« on: October 22, 2015, 11:14:16 AM »
So we usually max out our HSA and rarely use it. This year we had a baby and had $5k+ in medical bills, does it make sense to withdraw from HSA. Or if i don't need the money just leave it in there and invest it? Basically I would take out the money and invest it but post tax, maybe that would be better?

Jack

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Re: Investing HSA
« Reply #1 on: October 22, 2015, 11:56:02 AM »
If you pay the medical bills without withdrawing from the HSA, do so. Then save your receipts, and cash them in after you retire. That way, not only can the money in the HSA grow tax-free until retirement, you can get living expenses in retirement totally tax-free too.

Timodeus

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Re: Investing HSA
« Reply #2 on: October 23, 2015, 07:10:53 AM »
If you pay the medical bills without withdrawing from the HSA, do so. Then save your receipts, and cash them in after you retire. That way, not only can the money in the HSA grow tax-free until retirement, you can get living expenses in retirement totally tax-free too.

This is a good strategy but any earnings off that money will be taxed as regular income once you draw upon it at age 65+. Also you must retain the receipts for tax reasons in case of audit (unlikely but still a risk). I highly recommend scanning these and placing them in backed up storage, also, who knows when this loophole will be closed. In my case I max out my HSA and any medical expenses I have to pay I first use a cash back credit card, then immediately transfer the amount out of the cash portion of my HSA which I in turn transfer into another tax advantaged account if possible, or into a taxable account. That way any earnings from that amount can be used in the near future of an early retiree and you don't have to wait until you're 65 while still preserving the excellent tax advantages of the HSA. Also, if investing in US stocks, dividends and capital gains can receive a more favorable income than the post-65 withdrawal from the HSA. For my family, being in the 15% tax bracket and living in PA, I'll pay 3.07% total (state tax) on the income.

DavidAnnArbor

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Re: Investing HSA
« Reply #3 on: October 23, 2015, 06:13:24 PM »
This is a good strategy but any earnings off that money will be taxed as regular income once you draw upon it at age 65+.

I'm pretty sure this is an incorrect or incomplete statement.

When you withdraw the money for medical reasons there is no tax to pay regardless of your age.

If you withdraw the money for non-medical reasons as defined by the IRS, then you pay a penalty + income tax on the withdrawal before age 65, and ordinary income tax on the withdrawal after age 65.

Jack

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Re: Investing HSA
« Reply #4 on: October 24, 2015, 08:13:20 PM »
Okay, so I can see how if your tax bracket is currently so low that investing in a traditional 401K or IRA doesn't make sense (as opposed to a Roth), then investing in an HSA excessively to the point that you don't expect to eventually spend the money on health care wouldn't make sense either. But that seems to me like it would only apply to very unlikely circumstances, especially among the kind of people who are in a position to consider the issue to begin with (as opposed to living paycheck-to-paycheck).

Bellatrix

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Re: Investing HSA
« Reply #5 on: October 25, 2015, 08:39:52 AM »
I have no intention of touching my HSA and will pay any medical bills out of pocket. I want my HSA to grow so that I have a nice stash of money for later on. 

Timodeus

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Re: Investing HSA
« Reply #6 on: October 26, 2015, 07:22:11 AM »
This is a good strategy but any earnings off that money will be taxed as regular income once you draw upon it at age 65+.

I'm pretty sure this is an incorrect or incomplete statement.

When you withdraw the money for medical reasons there is no tax to pay regardless of your age.

If you withdraw the money for non-medical reasons as defined by the IRS, then you pay a penalty + income tax on the withdrawal before age 65, and ordinary income tax on the withdrawal after age 65.

Given the complexities of taxes and tax advantage accounts, just about every statement is incomplete without a lengthy explanation. What I say is correct though, if you withdrawal HSA funds after age 65, you will be taxed at regular income tax rates (like a Traditional IRA). It is a given that medical expenses are not taxed, but since this forum revolves around early retirement, I'm assuming this account will be used for other things besides purely medical reimbursements. I'm simply stating that not withdrawing the money for current medical expenses leaves the earnings unavailable under normal circumstances until age 65, and you can enable the use of that money sooner (and its earnings) by withdrawing now and investing in a different account.

In my own circumstances, by following the strategy I reduce the ultimate taxes on the HSA withdrawn funds' earnings from 18.07% to 3.07%. This also leaves open the use of these earnings without the need of qualified medical expenses to withdraw them as well as the tax free withdrawn HSA funds principle.

Gin1984

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Re: Investing HSA
« Reply #7 on: October 26, 2015, 08:36:41 AM »
This is a good strategy but any earnings off that money will be taxed as regular income once you draw upon it at age 65+.

I'm pretty sure this is an incorrect or incomplete statement.

When you withdraw the money for medical reasons there is no tax to pay regardless of your age.

If you withdraw the money for non-medical reasons as defined by the IRS, then you pay a penalty + income tax on the withdrawal before age 65, and ordinary income tax on the withdrawal after age 65.

Given the complexities of taxes and tax advantage accounts, just about every statement is incomplete without a lengthy explanation. What I say is correct though, if you withdrawal HSA funds after age 65, you will be taxed at regular income tax rates (like a Traditional IRA). It is a given that medical expenses are not taxed, but since this forum revolves around early retirement, I'm assuming this account will be used for other things besides purely medical reimbursements. I'm simply stating that not withdrawing the money for current medical expenses leaves the earnings unavailable under normal circumstances until age 65, and you can enable the use of that money sooner (and its earnings) by withdrawing now and investing in a different account.

In my own circumstances, by following the strategy I reduce the ultimate taxes on the HSA withdrawn funds' earnings from 18.07% to 3.07%. This also leaves open the use of these earnings without the need of qualified medical expenses to withdraw them as well as the tax free withdrawn HSA funds principle.
Why would you assume that?  No one has stated you should do that.  Most have stated keeping your receipts so it counts as a medical withdrawal and you pay no taxes on it.

Jack

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Re: Investing HSA
« Reply #8 on: October 26, 2015, 08:54:57 AM »
I'm assuming this account will be used for other things besides purely medical reimbursements.
Why would you assume that?  No one has stated you should do that.  Most have stated keeping your receipts so it counts as a medical withdrawal and you pay no taxes on it.

Because an investment of $6650 per year, returning an assumed 7%, is worth about $100K after 10 years. If you start maxing your HSA at age 25 and retire at 35, you're probably going to have a hard time finding $100K worth of medical expenses to get reimbursed for. If you retire later and let it compound more, it gets even "worse" (for some definition of "worse" where having too much money is somehow a problem...).

Timodeus

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Re: Investing HSA
« Reply #9 on: October 26, 2015, 08:59:11 AM »
This is a good strategy but any earnings off that money will be taxed as regular income once you draw upon it at age 65+.

I'm pretty sure this is an incorrect or incomplete statement.

When you withdraw the money for medical reasons there is no tax to pay regardless of your age.

If you withdraw the money for non-medical reasons as defined by the IRS, then you pay a penalty + income tax on the withdrawal before age 65, and ordinary income tax on the withdrawal after age 65.

Given the complexities of taxes and tax advantage accounts, just about every statement is incomplete without a lengthy explanation. What I say is correct though, if you withdrawal HSA funds after age 65, you will be taxed at regular income tax rates (like a Traditional IRA). It is a given that medical expenses are not taxed, but since this forum revolves around early retirement, I'm assuming this account will be used for other things besides purely medical reimbursements. I'm simply stating that not withdrawing the money for current medical expenses leaves the earnings unavailable under normal circumstances until age 65, and you can enable the use of that money sooner (and its earnings) by withdrawing now and investing in a different account.

In my own circumstances, by following the strategy I reduce the ultimate taxes on the HSA withdrawn funds' earnings from 18.07% to 3.07%. This also leaves open the use of these earnings without the need of qualified medical expenses to withdraw them as well as the tax free withdrawn HSA funds principle.
Why would you assume that?  No one has stated you should do that.  Most have stated keeping your receipts so it counts as a medical withdrawal and you pay no taxes on it.

Because the whole purpose of paying medical expenses out of pocket and saving receipts is to use the money for something else besides medical expenses...i.e. early retirement. What most say about receipts is correct, all I'm adding is that withdrawing now and investing in US stocks can reduce taxes on the earnings for use in early retirement. The OP asked whether he should keep it in the HSA or take out and invest post-tax. I'm giving him a scenario (my own) where this makes sense.

Gin1984

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Re: Investing HSA
« Reply #10 on: October 26, 2015, 10:58:42 AM »
I'm assuming this account will be used for other things besides purely medical reimbursements.
Why would you assume that?  No one has stated you should do that.  Most have stated keeping your receipts so it counts as a medical withdrawal and you pay no taxes on it.

Because an investment of $6650 per year, returning an assumed 7%, is worth about $100K after 10 years. If you start maxing your HSA at age 25 and retire at 35, you're probably going to have a hard time finding $100K worth of medical expenses to get reimbursed for. If you retire later and let it compound more, it gets even "worse" (for some definition of "worse" where having too much money is somehow a problem...).
Not really, when you take into account that the "average" person is recommended to have $250,000 for medical expenses for retirement after 65.  I fully expect to use my entire HSA for medical.

Gin1984

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Re: Investing HSA
« Reply #11 on: October 26, 2015, 10:59:44 AM »
This is a good strategy but any earnings off that money will be taxed as regular income once you draw upon it at age 65+.

I'm pretty sure this is an incorrect or incomplete statement.

When you withdraw the money for medical reasons there is no tax to pay regardless of your age.

If you withdraw the money for non-medical reasons as defined by the IRS, then you pay a penalty + income tax on the withdrawal before age 65, and ordinary income tax on the withdrawal after age 65.

Given the complexities of taxes and tax advantage accounts, just about every statement is incomplete without a lengthy explanation. What I say is correct though, if you withdrawal HSA funds after age 65, you will be taxed at regular income tax rates (like a Traditional IRA). It is a given that medical expenses are not taxed, but since this forum revolves around early retirement, I'm assuming this account will be used for other things besides purely medical reimbursements. I'm simply stating that not withdrawing the money for current medical expenses leaves the earnings unavailable under normal circumstances until age 65, and you can enable the use of that money sooner (and its earnings) by withdrawing now and investing in a different account.

In my own circumstances, by following the strategy I reduce the ultimate taxes on the HSA withdrawn funds' earnings from 18.07% to 3.07%. This also leaves open the use of these earnings without the need of qualified medical expenses to withdraw them as well as the tax free withdrawn HSA funds principle.
Why would you assume that?  No one has stated you should do that.  Most have stated keeping your receipts so it counts as a medical withdrawal and you pay no taxes on it.

Because the whole purpose of paying medical expenses out of pocket and saving receipts is to use the money for something else besides medical expenses...i.e. early retirement. What most say about receipts is correct, all I'm adding is that withdrawing now and investing in US stocks can reduce taxes on the earnings for use in early retirement. The OP asked whether he should keep it in the HSA or take out and invest post-tax. I'm giving him a scenario (my own) where this makes sense.
Except you said that they would still count as medical expenses because you saved your receipts. 

Jack

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Re: Investing HSA
« Reply #12 on: October 26, 2015, 11:56:29 AM »
I'm assuming this account will be used for other things besides purely medical reimbursements.
Why would you assume that?  No one has stated you should do that.  Most have stated keeping your receipts so it counts as a medical withdrawal and you pay no taxes on it.

Because an investment of $6650 per year, returning an assumed 7%, is worth about $100K after 10 years. If you start maxing your HSA at age 25 and retire at 35, you're probably going to have a hard time finding $100K worth of medical expenses to get reimbursed for. If you retire later and let it compound more, it gets even "worse" (for some definition of "worse" where having too much money is somehow a problem...).
Not really, when you take into account that the "average" person is recommended to have $250,000 for medical expenses for retirement after 65.  I fully expect to use my entire HSA for medical.

Okay, fine. Let's assume you'll spend $250,000 after age 65 on medical expenses. The only trouble is, that $100,000 that was in the account when you retired at age 35 has now grown to about $750,000 even though you haven't contributed any more to it. What are you going to do with the other half-million?

(Actually, I'm cheating a little on the math: I assumed the HSA contributions for a married couple, but the deductions for a single person. It would be better to assume you and your spouse would spend $250,000 each, leaving you with "only" a quarter-million excess.)

Gin1984

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Re: Investing HSA
« Reply #13 on: October 26, 2015, 12:07:02 PM »
I'm assuming this account will be used for other things besides purely medical reimbursements.
Why would you assume that?  No one has stated you should do that.  Most have stated keeping your receipts so it counts as a medical withdrawal and you pay no taxes on it.

Because an investment of $6650 per year, returning an assumed 7%, is worth about $100K after 10 years. If you start maxing your HSA at age 25 and retire at 35, you're probably going to have a hard time finding $100K worth of medical expenses to get reimbursed for. If you retire later and let it compound more, it gets even "worse" (for some definition of "worse" where having too much money is somehow a problem...).
Not really, when you take into account that the "average" person is recommended to have $250,000 for medical expenses for retirement after 65.  I fully expect to use my entire HSA for medical.

Okay, fine. Let's assume you'll spend $250,000 after age 65 on medical expenses. The only trouble is, that $100,000 that was in the account when you retired at age 35 has now grown to about $750,000 even though you haven't contributed any more to it. What are you going to do with the other half-million?

(Actually, I'm cheating a little on the math: I assumed the HSA contributions for a married couple, but the deductions for a single person. It would be better to assume you and your spouse would spend $250,000 each, leaving you with "only" a quarter-million excess.)
Well, a few options.  First, assume that the loop hole for withdrawing medical expenses is not limited and I pull out "medical" expenses tax free as needed.  Second, the $250,000 is for someone retiring now, not in 30 years.  Assuming basic inflation I would assume a need of $500,000.  And yes that is for one person so double that and you have 1 million, over the $750,000 you projected.  And third, say you do have extra, is that a problem?  It does not have RMD unlike a traditional IRA but otherwise it does operate as one.  It is one more bucket of money. 
So, assuming you are able to max out all your retirement vehicles, and have left over to put in a taxable account but only if you withdraw the HSA as you have medical expenses, I would recommend leaving it in the HSA to attend to your later medical issues tax free and a bit of fudge room with your "medical spending" money. 
ETA:  Also you are ignoring the need for medical expenses from 35-65 which can be a chunk of change.

Timodeus

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Re: Investing HSA
« Reply #14 on: October 26, 2015, 12:11:09 PM »
This is a good strategy but any earnings off that money will be taxed as regular income once you draw upon it at age 65+.

I'm pretty sure this is an incorrect or incomplete statement.

When you withdraw the money for medical reasons there is no tax to pay regardless of your age.

If you withdraw the money for non-medical reasons as defined by the IRS, then you pay a penalty + income tax on the withdrawal before age 65, and ordinary income tax on the withdrawal after age 65.

Given the complexities of taxes and tax advantage accounts, just about every statement is incomplete without a lengthy explanation. What I say is correct though, if you withdrawal HSA funds after age 65, you will be taxed at regular income tax rates (like a Traditional IRA). It is a given that medical expenses are not taxed, but since this forum revolves around early retirement, I'm assuming this account will be used for other things besides purely medical reimbursements. I'm simply stating that not withdrawing the money for current medical expenses leaves the earnings unavailable under normal circumstances until age 65, and you can enable the use of that money sooner (and its earnings) by withdrawing now and investing in a different account.

In my own circumstances, by following the strategy I reduce the ultimate taxes on the HSA withdrawn funds' earnings from 18.07% to 3.07%. This also leaves open the use of these earnings without the need of qualified medical expenses to withdraw them as well as the tax free withdrawn HSA funds principle.
Why would you assume that?  No one has stated you should do that.  Most have stated keeping your receipts so it counts as a medical withdrawal and you pay no taxes on it.

Because the whole purpose of paying medical expenses out of pocket and saving receipts is to use the money for something else besides medical expenses...i.e. early retirement. What most say about receipts is correct, all I'm adding is that withdrawing now and investing in US stocks can reduce taxes on the earnings for use in early retirement. The OP asked whether he should keep it in the HSA or take out and invest post-tax. I'm giving him a scenario (my own) where this makes sense.
Except you said that they would still count as medical expenses because you saved your receipts.

I'm a bit lost as to what exactly you're pointing out. Of course receipts should be kept for medical expenses as you need them to proof to the IRS that the money you withdrew (now or later) was for the right reason.

Gin1984

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Re: Investing HSA
« Reply #15 on: October 26, 2015, 12:22:43 PM »
This is a good strategy but any earnings off that money will be taxed as regular income once you draw upon it at age 65+.

I'm pretty sure this is an incorrect or incomplete statement.

When you withdraw the money for medical reasons there is no tax to pay regardless of your age.

If you withdraw the money for non-medical reasons as defined by the IRS, then you pay a penalty + income tax on the withdrawal before age 65, and ordinary income tax on the withdrawal after age 65.

Given the complexities of taxes and tax advantage accounts, just about every statement is incomplete without a lengthy explanation. What I say is correct though, if you withdrawal HSA funds after age 65, you will be taxed at regular income tax rates (like a Traditional IRA). It is a given that medical expenses are not taxed, but since this forum revolves around early retirement, I'm assuming this account will be used for other things besides purely medical reimbursements. I'm simply stating that not withdrawing the money for current medical expenses leaves the earnings unavailable under normal circumstances until age 65, and you can enable the use of that money sooner (and its earnings) by withdrawing now and investing in a different account.

In my own circumstances, by following the strategy I reduce the ultimate taxes on the HSA withdrawn funds' earnings from 18.07% to 3.07%. This also leaves open the use of these earnings without the need of qualified medical expenses to withdraw them as well as the tax free withdrawn HSA funds principle.
Why would you assume that?  No one has stated you should do that.  Most have stated keeping your receipts so it counts as a medical withdrawal and you pay no taxes on it.

Because the whole purpose of paying medical expenses out of pocket and saving receipts is to use the money for something else besides medical expenses...i.e. early retirement. What most say about receipts is correct, all I'm adding is that withdrawing now and investing in US stocks can reduce taxes on the earnings for use in early retirement. The OP asked whether he should keep it in the HSA or take out and invest post-tax. I'm giving him a scenario (my own) where this makes sense.
Except you said that they would still count as medical expenses because you saved your receipts.

I'm a bit lost as to what exactly you're pointing out. Of course receipts should be kept for medical expenses as you need them to proof to the IRS that the money you withdrew (now or later) was for the right reason.
Because if you already have say $1000 of medical expenses you spent in say 2015 (and you are 30) and ten years from now you retire (40 years of age) and in 2030 (45 years of age) you need $1000 and pull it out, there is no tax on it because you have saved your receipt and it is counted as a "medical expense".  All the while the $1000 is earning non-taxed income (similar to a Roth IRA) for you as long as you pull it out properly.
Now assume you pulled it out in 2015 and invest it in a taxable account.  And every year you pay taxes on the dividends, unlike if you had pulled the money in 2030.  You end up with less money because of that.  Yes, you don't have direct access to the earnings unless another medical cost comes (like that is unlikely in 30 years?) but the amount is higher. 
And assuming that these people are those who plan to FIRE, they probably have money in 401ks to roll into their Roths for normal money.

Timodeus

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Re: Investing HSA
« Reply #16 on: October 26, 2015, 12:34:20 PM »
Because if you already have say $1000 of medical expenses you spent in say 2015 (and you are 30) and ten years from now you retire (40 years of age) and in 2030 (45 years of age) you need $1000 and pull it out, there is no tax on it because you have saved your receipt and it is counted as a "medical expense".  All the while the $1000 is earning non-taxed income (similar to a Roth IRA) for you as long as you pull it out properly.
Now assume you pulled it out in 2015 and invest it in a taxable account.  And every year you pay taxes on the dividends, unlike if you had pulled the money in 2030.  You end up with less money because of that.  Yes, you don't have direct access to the earnings unless another medical cost comes (like that is unlikely in 30 years?) but the amount is higher. 
And assuming that these people are those who plan to FIRE, they probably have money in 401ks to roll into their Roths for normal money.

I see your point, but in the right circumstances the taxes are minimal to none on the earnings, while providing you with easy access of use for early retirement. Also, the taxes on the after tax amounts are generally lower than a post 65 withdrawal for non-medical expenses which are treated as regular income.

I understand where you're coming from, that you expect to use most if not all of your HSA for medical expenses during your lifetime. I don't. So it makes sense for me to maximize tax savings while preserving ease of access for early retirement. 

Gin1984

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Re: Investing HSA
« Reply #17 on: October 26, 2015, 12:45:01 PM »
Because if you already have say $1000 of medical expenses you spent in say 2015 (and you are 30) and ten years from now you retire (40 years of age) and in 2030 (45 years of age) you need $1000 and pull it out, there is no tax on it because you have saved your receipt and it is counted as a "medical expense".  All the while the $1000 is earning non-taxed income (similar to a Roth IRA) for you as long as you pull it out properly.
Now assume you pulled it out in 2015 and invest it in a taxable account.  And every year you pay taxes on the dividends, unlike if you had pulled the money in 2030.  You end up with less money because of that.  Yes, you don't have direct access to the earnings unless another medical cost comes (like that is unlikely in 30 years?) but the amount is higher. 
And assuming that these people are those who plan to FIRE, they probably have money in 401ks to roll into their Roths for normal money.

I see your point, but in the right circumstances the taxes are minimal to none on the earnings, while providing you with easy access of use for early retirement. Also, the taxes on the after tax amounts are generally lower than a post 65 withdrawal for non-medical expenses which are treated as regular income.

I understand where you're coming from, that you expect to use most if not all of your HSA for medical expenses during your lifetime. I don't. So it makes sense for me to maximize tax savings while preserving ease of access for early retirement.
I'm confused at that (given national averages) but glad you have had a healthy life so far.  Good luck on keeping such a trend  (I do mean this sincerely, since we can't see facial expressions/hear tone).  :)

Timodeus

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Re: Investing HSA
« Reply #18 on: October 26, 2015, 12:53:34 PM »
Because if you already have say $1000 of medical expenses you spent in say 2015 (and you are 30) and ten years from now you retire (40 years of age) and in 2030 (45 years of age) you need $1000 and pull it out, there is no tax on it because you have saved your receipt and it is counted as a "medical expense".  All the while the $1000 is earning non-taxed income (similar to a Roth IRA) for you as long as you pull it out properly.
Now assume you pulled it out in 2015 and invest it in a taxable account.  And every year you pay taxes on the dividends, unlike if you had pulled the money in 2030.  You end up with less money because of that.  Yes, you don't have direct access to the earnings unless another medical cost comes (like that is unlikely in 30 years?) but the amount is higher. 
And assuming that these people are those who plan to FIRE, they probably have money in 401ks to roll into their Roths for normal money.

I see your point, but in the right circumstances the taxes are minimal to none on the earnings, while providing you with easy access of use for early retirement. Also, the taxes on the after tax amounts are generally lower than a post 65 withdrawal for non-medical expenses which are treated as regular income.

I understand where you're coming from, that you expect to use most if not all of your HSA for medical expenses during your lifetime. I don't. So it makes sense for me to maximize tax savings while preserving ease of access for early retirement.
I'm confused at that (given national averages) but glad you have had a healthy life so far.  Good luck on keeping such a trend  (I do mean this sincerely, since we can't see facial expressions/hear tone).  :)

I learned a long time ago to heavily discount national averages when it comes to expenses from college, housing, food, and ultimately retirement.

The good news for both of us is that if either of us are wrong, we still saved and most likely have a good chunk of money to whether any events (or lack thereof) that life throws at us. Cheers