The Health IRA

Health savings accounts (HSAs) are tax-deductible savings plans that allow you to put aside savings for future health care expenses. HSAs were introduced in 2004 as part of the Medicare Prescription Drug, Improvement, and Modernization Act, which was signed into law by President George W. Bush. Since their creation, advancements in technology and popularity have allowed investors to not only access their HSAs more efficiently but also grow their accounts considerably.

While HSAs are primarily known as a tax-advantage plan for paying medical expenses, they can also help you save for retirement. Although it has become common practice that we income earners should contribute to our respective company-sponsored retirement plans or similar workplace defined contribution plans and other IRAs as the best way to save or invest our way towards retirement, recent developments in HSAs have created new strategies to help work towards financial independence and retirement expenses.

Before getting into potential strategies for Health Savings Accounts, let’s first look at who is eligible to open a Health Savings Account:

  • Must be 18 years of age or older
  • Must be covered under a qualified high-deductible health plan (HDHP). For 2020, the IRS defines an HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.
  • May not be covered under any health plan that is not a qualified HDHP
  • May not be claimed as a dependent on another individual’s tax return
  • Cannot be over the age of 65

Now, if you meet the criteria listed above, you are eligible to set up a Health Savings Account. Here is where the fun begins. HSA holders in 2020 can choose to contribute up to $3,500 for an individual and $7,000 for a family (HSA holders 55 and older get to save an extra $1,000). HSAs are considered ‘triple tax-free’ assets. 1) All contributions to your HSA account are tax-deductible. 2) All funds in your account grow tax-free. 3) Withdrawals to pay for qualified medical expenses are tax-free. Unlike a 401(k) or IRA, an HSA does not require the account-holder to begin withdrawing funds at a certain age. However, funds taken out for non-qualified expenses are both taxed and incur a 20% penalty if made before age 65. After age 65, non-qualified withdrawals are still taxed but have no penalty.

As the popularity of these accounts has increased over the years, we have seen more and more HSA providers include investment options as an added benefit to their services, which gives investors all the more reason to take advantage of the benefits of HSAs. What we suggest as a long-term strategy to turn your HSA from a healthcare plan to a retirement strategy is:

  1. To max out your contribution every year.
  2. Don’t spend it! This may sound counterintuitive, but we’re looking at an HSA primarily as an investment tool and tax-exempt future bucket of money. Let it grow!
  3. Keep all of your medical receipts. That $900 invoice for physical therapy in 2019 can be used anytime in the future; for example, you can pull that $900 out in 2059 tax-free!
  4. The key to maximizing your unspent contributions, of course, is to invest them wisely. Don’t leave your HSA account in cash!
  5. It may be wise to set up a separate savings account for unplanned future medical expenses so that you aren’t scrambling to find funds to pay for these expenses out of pocket.

In golf, we are all familiar with the main clubs in our bag. Our woods, irons, and (eventually) the putter. However, every once in a while we need a little extra help getting our ball to the green. That’s where the rescue club comes into play. If your woods and irons are your 401(k) and IRAs, then the HSA is kind of like your rescue club to give you that extra push towards the green. The HSA can be a great addition to your long-term planning.

Do you still have questions about HSAs and how they fit into your overall plan? Please do not hesitate to reach out to your dedicated DWM team members to learn about new developments in this area, and how an HSA may fit into your overall planning.

https://dwmgmt.com/

Robo-advisors: The Latest “Inexpensive” Product

RoboadvisorWhen Brett was little, he worked, saved his money, and bought a three wheel ATV. He needed a helmet to keep his head safe while he was riding merrily through the neighborhood. We investigated and settled on a Bell Helmet since it was the best. Their slogan said it all: “If you have a $10 head… buy a $10 helmet.” In my opinion, the same applies to your financial future. If your financial future isn’t worth much to you, use a robo-advisor. It’s like the $10 helmet: it’s cheap, better than nothing, yet provides little value.

Robo-advisors are making the news. They are a low-cost, computerized asset-allocation software application. Folks like Betterment, Wealthfront, Vanguard, and now Schwab have been getting into the game. Users are asked to provide a number of inputs such as:

  • How much are you investing?
  • What is your risk tolerance?
  • What is your goal?
  • How long do you have to invest?

Then proprietary algorithms process the inputs and provide a “tailored” investment plan. The provider implements that plan using their recommended funds.

Here’s what people who use robo-advisors are generally not getting:

  • Appropriate diversification. Use of all three asset classes: equities, fixed income, and liquid alternatives is generally not available with the robo-advisors. Studies have shown that adding non-correlated assets, aka alternatives, to a portfolio can improve return and reduce volatility.
  • Wide fund selection. Robo-advisors not only get their asset management fee from customers, they typically also receive all or part of the operating expenses of the funds for the funds they recommend. Lack of independence in fund selection is a key point here since the robo-advisor’s overall income is impacted by the funds they recommend. Hence, while the asset allocation percentages may be appropriate, the specific investment choices may not be, which can lead to underperformance.
  • Monitoring. Investment management is a process. “Set it and forget it” doesn’t work, particularly in the current investment environment.Regular monitoring and periodic rebalancing is required in order to continue to adapt and improve portfolios.
  • Commitment to protecting your money. Let’s face it, the robo-advisors were developed and exist to collect assets and make money for their company. If there is a big market swing, like we had in 2008, don’t expect the robo-advisor to cushion the downfall. A firm like DWM is focused on your money, not ours.We’re here to help protect first and then grow your assets. Our clients are familiar with what we did in 2008 to contain their losses by reducing equity exposure and the use of alternatives.
  • Guidance. Some robo-advisors do include some assistance with financial decisions in their service. Most of the advice will be generated automatically by the firm’s computers and delivered online. Compare that with a firm like DWM. Brett and I have over 60 years’ experience helping clients. In addition, as you know, we’re CFP® practitioners, CFA charterholders, and I am also a CPA. You want a sounding board that is experienced, competent, thoughtful, and sensitive to your particular personal situation, not a robot simply doing calculations and spitting out answers.
  • Fiduciary care. Robo-advisors don’t sign an oath, as Brett and I have, to always put the client’s interest first. We are also Accredited Investment Fiduciary (AIF®) certificants. Robo-advisors are the latest “fad” for collecting assets and have no legal responsibility to put their client’s interests first. Their principal goal is to make as much money for their company as they can.
  • Proactive advice. Don’t expect that from your robo-advisor. DWM clients know that we believe “Wealth Management is a Process, not a Product.”We have processes in place to review and monitor on a regular basis and review with our clients such important topics as financial independence, education funding, income taxes, estate planning, insurance and other matters. We have saved families hundreds, thousands, and millions of dollars by providing proactive suggestions for them in many different ways. In addition, we have collaborated with their other advisers to implement changes to help secure and protect them.

Ultimately, it’s all about what price you put on your financial future. If you want a seemingly inexpensive product (a computerized calculation of an asset allocation) and you believe that will provide you and your family future financial success, then a robo-advisor may be for you. If, on the other hand, your family’s financial future is of key importance to you and you wish to have financial “peace of mind” with an independent, competent, experienced, proactive financial advocate that employs processes in both investment and financial planning areas devoted to helping you and your family and is committed to protecting and growing your net worth and legacy, then I suggest you do your due diligence and opt for the best, not the cheapest.

So Many Numbers: Which Ones Are Important?

stock-photo-old-typeset-166120136Our world is full of numbers. They’re everywhere. Our calendars just moved from 2014 to 2015. We get bombarded continually with numbers representing time, temperature, and, yes, stock market reports. NPR’s Eric Westervelt last week called numbers “the scaffolding that our economy, our technology and huge parts of our life are built on.”

For this blog, I thought it would be interesting to look at the origin of our numbers and then highlight five key numbers that are of real importance to your financial future.

Mr. Westervelt was interviewing Amir Aczel who has written a new book “Finding Zero: A Mathematician’s Odyssey to Uncover the Origins of Numbers.” Mr. Aczel believes the invention or discovery of numbers “is the greatest intellectual invention of the human mind.” We use Hindu-Arabic numerals. Before that, there were many other systems including the Mayans, the Babylonians, and, yes, the Romans. The big problem with the Roman number system is that it had no zero. The numbers didn’t cycle and hence multiplication or division was almost impossible. Five (V) times ten (X) is 50 or L in the Roman system. Each value was unique in the Roman system whereas in our system, numbers can cycle. Two with a zero after it is 20. And, zero is very important. Without it, numbers couldn’t cycle. It’s the reason that 9 numbers plus a zero allow us to write any number we want. Pretty amazing.

stock-photo-old-typeset-166120136Our world is full of numbers. They’re everywhere. Our calendars just moved from 2014 to 2015. We get bombarded continually with numbers representing time, temperature, and, yes, stock market reports. NPR’s Eric Westervelt last week called numbers “the scaffolding that our economy, our technology and huge parts of our life are built on.”

For this blog, I thought it would be interesting to look at the origin of our numbers and then highlight five key numbers that are of real importance to your financial future.

Mr. Westervelt was interviewing Amir Aczel who has written a new book “Finding Zero: A Mathematician’s Odyssey to Uncover the Origins of Numbers.” Mr. Aczel believes the invention or discovery of numbers “is the greatest intellectual invention of the human mind.” We use Hindu-Arabic numerals. Before that, there were many other systems including the Mayans, the Babylonians, and, yes, the Romans. The big problem with the Roman number system is that it had no zero. The numbers didn’t cycle and hence multiplication or division was almost impossible. Five (V) times ten (X) is 50 or L in the Roman system. Each value was unique in the Roman system whereas in our system, numbers can cycle. Two with a zero after it is 20. And, zero is very important. Without it, numbers couldn’t cycle. It’s the reason that 9 numbers plus a zero allow us to write any number we want. Pretty amazing.

Now, knowing a little more about our number system and with numbers seemingly everywhere, where do we focus our attention? Here are five key numbers that have a big impact on your ability to meet your financial goals:

Percentage of your paycheck that goes to savings/investments. This may be the most important decision in your life. By saving early, you can have a portion of earnings grow in a compound fashion for decades. Furthermore, by “paying yourself” off the top, you limit the amount available for everyday living expenses during your working years. This discipline helps you in two major ways to obtaining early financial independence- first, by creating the fund for “retirement” and second, by reducing the expenses you will likely have during “retirement.” BTW- there is no magic percentage. Everyone’s circumstances are different. Consider an amount of 10-20% of your gross pay.

Your Annual Living Expenses. Monitor your expenses for last year and group them in three categories- needs, wants and wishes. Review the data from a long-term perspective. Spending a considerable amount now on wants and wishes will obviously reduce the amount available in future years. It’s all about choices and accountability. For the most part, you alone can determine and control your level of expenses.

The Asset Allocation of Your Portfolio. This is one of your most important investment decisions. Based upon your risk profile you need to determine how best to split up your investment funds between stocks, bonds and alternatives (which can include real estate). Studies show that 90% of your investment returns are the result of your asset allocation.

The Net Returns on Your Portfolio. Research shows that fees really matter. A $1,000,000 portfolio that earns 5% net per year will grow to $4.3 million in 30 years. The same portfolio that earns 4% net per year will grow to $3.2MM. The difference is $1.1 million- a 26% reduction. Over long periods, loads, commissions, high operating expenses and management fees can be a significant drag on wealth creation. Low cost passive investments are best for stocks and bonds. Make sure you understand and monitor all fees charged to your portfolio. Make sure you are getting real value for all the fees. And certainly, know what your net returns have been, are expected to be and how they compare to the appropriate benchmarks.

Your Effective (average) and Marginal Tax Rate. Tax costs on earnings, investment returns and other income can be huge, particularly as a result of the increases caused by the Affordable Care Act. You and your advisors should know your tax rates and use them as a key factor in decision making and investment strategy. Furthermore, proactive planning designed to minimize taxes is a must for you and your advisors.

Over the last 45 years, I have worked with clients of all ages, income levels and circumstances. A common thread among those who have achieved or are achieving their financial goals is that they all knew of and monitored these five key numbers regularly, making adjustments as appropriate. And, of course, they use objective, proactive, value driven advisors like DWM to help them as well.

Why not make it a New Year’s Resolution to know and monitor these five key numbers for your financial future? It could change your life.