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Apr 82015

5 Reasons I Love my High Deductible Health Plan

By |April 8th, 2015|Blog, Personal Finance Tips|2 Comments

It would be difficult to be unaware of the debate surrounding health insurance today.

As the Affordable Care Act jumps into the already-muddied waters surrounding health care and its rising costs, topics for debate and discussion are legion. One of these is the high deductible health plan, or HDHP. Simply put, HDHPs offer lower monthly premiums in return for significantly higher deductibles, or the amount of money you have to pay out of pocket before insurance kicks in to cover all or part of your health care costs. When my family was offered the choice between a traditional plan and a HDHP with an Health Savings Account, or HSA, we chose the high deductible plan and never once looked back.

Here are 5 reasons I love my high deductible health plan:

The math works.

I have a rule of thumb when it comes to finances and financial products. Always look at real numbers. Articles and posts about the pros and cons of any category of insurance are helpful in understanding how policies work and any potential pitfalls, but virtually meaningless when it comes to making an actual choice. In our case, the available options offered similar coverage once the deductible was met, so I took coverage out of the equation. Then I added the yearly premium, the deductible (I assumed we’d have to pay it), and the remaining amount until the out-of-pocket maximum for each of the choices we were offered. I was surprised to find that the high deductible option actually saved us a bit of money. (My husband’s employer puts $900 into our HSA at the beginning of the year, which puts the HDHP in the top spot by about $250.)

Preventive care is covered at 100%.

As with all plans under the Affordable Care Act, HDHPs cover preventive care at 100%, so it’s not like I’m pulling out my debit card every time someone in my family sees the doctor. All of our check ups, well visits, and vaccines are covered, the same way they would be with the more expensive plan.

There's a lot of talk about high deductible health plans with HSAs.  Here's why I love mine.

We hit the deductible and the world didn’t end.

Actually we’ve hit it more than once. This is important, because it is the piece that makes the HDHP work for my family. When we made our health care election, I started off by directing the difference between the traditional plan premium and the HDHP premium into our Health Savings Account (HSA) each month. (Because contributions to an HSA are pre-tax, putting the difference in premium into our HSA has exactly the same impact on our income as paying the larger premium for the traditional plan.) The result was that the amount we saved each year was nearly equal to our deductible. (This is why it is so important to work with actual numbers from actual plans – it’s the only way to find that out.) In the years we’ve had significant health expenses, we were able to meet the deductible with no problem, and the money we paid out of pocket once insurance kicked in at 80% was already available in our HSA from previous years.

I have the potential to keep significantly more of my money for retirement.

The thing to remember about premium dollars is that once they are paid, they are gone. No getting them back if your healthcare costs are lower than the amount you are paying each month. But deductible dollars are another matter.

I put deductible dollars into my HSA each month, but I only pay them out for care my family needs, which means that if we don’t need them, I get to keep them. Meeting the deductible is by no means a regular occurrence for my family, so we would be just fine continuing to contribute the premium difference to our HSA. (Even if we did meet our deductible each year, the math still argues for keeping the same plan.) However, since we don’t meet the deductible each year, our HSA has grown, tax-free. In fact, we now contribute the maximum allowed by the IRS, even though it exceeds our deductible, because that money can be invested and earn a return, or used for health care expenses at any time. It should be abundantly clear to anyone who spends time on the internet that extra money to put toward health care in retirement is never going to be a bad thing.

I make better choices with my healthcare dollars.

Obviously, I am enamored of the economic benefits of our high deductible health plan. There is, however, an argument to be made for a larger benefit. Going down this road has taught me to be aware of where my healthcare dollars are going, and to make careful choices about how and when my family receives care. And responsible choices by individuals have broader implications for the state (and cost) of healthcare in our society.

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Apr 72015

Do We Need Wealth Management Experts?

By |April 7th, 2015|General Personal Finance|Comments Off on Do We Need Wealth Management Experts?

wealth management expertsWith today’s fast-paced environment and a lot of things to take care of at the same time in our daily lives, not to mention our financial matters, we need all the help and advice we can get.

If you are trying to balance finances, your life at home, your job or a business and other extra stuff you need to do, you can simply lose track of the things that you need to prioritize first.

If you are investing for your future it’s important that you stay educated and aware of the markets. Don’t have time for that? This is where wealth management experts come in.

What is Wealth Management?

Wealth management is an investment-advisory which tackles financial planning, investment portfolio management and other types of financial services.

Individuals who have high net worth, small business owners and even families who needs the assistance of wealth management experts, can have them. The best wealth management strategies work effectively is if you have accumulated some amount of wealth.

Historically, the entry bar for having an expert was high but recently more investors are managing their own expenses therefore the entry bar has gone down and became more accessible. The net worth needed to qualify for wealth management services vary from each institution so it’s best to ask them what their requirements are first.

Some firms however, offer this service to a certain minimum amount in investments but it’s customizable to meet the specific needs of the client.

Think of wealth management as a professional, all-in-one service, for financial/investment advice, tax/accounting services and estate/legal planning and! This is definitely an added bonus, instead of seeking services from different sources amounting to higher expenses in the long run.

Can You Do this Yourself?

Absolutely. Not every person is in the position or even needs to hire an expert.

If you’re still working on building your net worth it’s a good idea to learn as much as you can now and then get help when your situation changes and you have more complex decisions to make.

There are free resources all around you that can help you learn how to manage your money, begin investing, save for your future, and optimize your taxes and more. So while you might not need expert help right now it’s good to know that you have that option in the future if you decide to go that route.

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Apr 62015

Dollar Cost Averaging to Reduce Risk?

By |April 6th, 2015|Blog, Personal Finance Tips|Comments Off on Dollar Cost Averaging to Reduce Risk?

Determining the best time to invest can be a nerve wracking business. Ideally, we’d all invest at the market’s low point, and watch our returns climb as we sat back and congratulated ourselves on our stellar timing and market acumen. Alas, we are stuck with real life, where markets are unpredictable and determining the very best time to buy nearly impossible.

One purported solution to this dilemma is dollar cost averaging. Rather than putting all of our money into the market at one time, we hold on to it, doling it out a little bit at a time, feeling secure that we are lowering our average share price with each investment.

Lower average purchase price

Dollar cost averaging is a strategy based on mathematical averages. Say, for example, you have $10,000 to invest. Rather than investing it all at once, you decide to invest $100 a month for a little over 8 years. That $100 will buy more shares in the months when prices are low, and fewer when they are high. The theory is that this helps to smooth the volatility of your investment by lowering your average price per share.

To an extent, the logic is indisputable. If you buy more shares when the price is low, and fewer when the price is high, your average price per share will be closer to the low side than the high side. That’s how averages work. The mistake is in assuming that reducing the volatility of the purchase price will have a similar effect on the performance of the investment.

Dollar cost averaging to reduce risk

Lower Returns

The presumed advantages of dollar cost averaging have been soundly debunked, unfortunately. In 1992, larger brains than mine compared dollar cost averaging to two other investment strategies – buy and hold and optimal rebalancing. While dollar cost averaging involves doling out your investment a little bit at time, both buy and hold and optimal rebalancing involve a single, lump sum investment.

Dollar cost averaging as a strategy came in dead last. Essentially, the reduction in average price from dollar cost averaging was more than offset by the loss of investment gain. More simply, the lower average share price doesn’t make up for the return lost by the money that is waiting to be invested. (The owners of those larger brains I mentioned are John Knight and Lewis Mandell, and they published their findings in the Financial Services Review (Vol.2, Issue 1) in a paper entitled “Nobody Gains from Dollar Cost Averaging: Analytical, Numerical and Empirical Results.”)

A comforting myth

It’s no great mystery why we find dollar cost averaging so appealing. As a concept, it plays nicely into our reservations about investing. None of us wants to risk putting the entirety of our investable capital into the market on the most expensive day of the year. Since stock prices are unpredictable, there is great allure in a strategy that takes the guesswork out of determining the very best time to buy, and minimizes the risk that we will have paid a premium for something we could have gotten more cheaply had we timed things differently. However, the evidence suggests that the risks of buying high are far lower than those of holding back and not putting all of our investable capital to work at one time.

Regular investing is important

No one – not Knight and Mandell, and certainly not me – is saying that regular investing is a poor strategy. It’s important to note that, from a definition standpoint, dollar cost averaging involves an amount of money you already have – like the $10,000 in our example above. On the other hand, Knight and Mandell note that regular investments from periodic income would be considered lump sum investments, since you are investing all of your available capital at one time.

The moral of the story is this – if you’ve earmarked it for investing, invest it, and let share prices fall (or not) where they may.

 

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Apr 32015

3 Investments That Can Reduce Your Tax Bill

By |April 3rd, 2015|Blog, Personal Finance Tips|Comments Off on 3 Investments That Can Reduce Your Tax Bill

Investments with tax benefits are an attractive option for diversifying your portfolio. The IRS offers tax breaks for savings goals such as retirement and education, but you can reduce your taxes further by looking beyond these options. The following products either offer tax-free earnings, or are more tax-efficient than many people realiz

1. Municipal Bonds

Municipal bonds are those issued by a state or local government, and they can be very attractive to those looking to cut their tax bill. Many municipal bonds pay interest that is exempt from federal taxes, and often from state and local taxes. Municipal bonds fund projects for the community, like schools or highways, so they are also a way to invest in improving the place where you live.

It’s important to remember that it is only interest on municipal bonds that is exempt from federal tax. Any discount at purchase or profit on the sale of a bond may be taxable. Also, investing in municipal bonds for their tax exemption requires some due diligence. Bonds issued to fund projects that don’t primarily benefit the community pay interest that is taxable, and certain other municipal bonds are subject to the Alternative Minimum Tax.

2. Life Insurance

Life insurance as an investment usually brings our some pretty strong opinions, many of them negative. However, I am a believer that there are no inherently evil products – only unsuitable ones. And what is unsuitable for one investor might be a perfect fit for another. Life insurance comes in two broad categories – term and permanent. Permanent life insurance includes a cash value account, which can be invested to earn a return. Those earnings are exempt from federal tax. What makes permanent life insurance a potential investment for the living is that the policyholder can borrow this money, tax free, for pretty much any purpose.

Taxes have a significant impact on long term investments.  Know your options for minimizing your tax liability.

It bears repeating that this is a contentious subject. Permanent life insurance premiums generally run over ten times those of term, and of course a good chunk of that goes to fees and cost of insurance. But for those who are looking for tax-advantaged investing options and have maxed out their retirement contributions, life insurance is worth a look.

3. ETFs

ETFs are a bit different than the other two items on this list in that they do not enjoy any special tax treatment from the federal government. However, I think they belong in a discussion about reducing tax liability because they are remarkably more tax efficient than their alter ego, the mutual fund. ETFs buy and sell securities less frequently than mutual funds, which means they realize fewer gains and thus pay far less in capital gains tax.

There are two reasons for ETFs’ lower trading activity. First, ETFs are generally index funds, which means that they buy and sell securities less frequently than an actively managed mutual fund. ETFs buy and sell mostly to rebalance the portfolio or to reflect any changes in the underlying index.

Secondly, the structure of an ETF is fundamentally different than that of a mutual fund. When an investor redeems mutual fund shares, the fund must sell securities to raise the cash to pay the investor. ETFs trade on the secondary market, where buying and selling has no effect on the securities in the fund. Even if an institutional investor purchases enough shares to redeem them from the fund, the investor receives the underlying securities rather than cash, so no taxable transaction takes place.

Taking advantage of opportunities to lower tax obligations is especially important for long-term investors, since the effects can be compounded over many years. Looking beyond the basics and gaining a true understanding of where tax liability is incurred in an investment can make you a more efficient – not to mention wealthier – investor.

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Apr 12015

Understanding IRAs for Retirement Savings

By |April 1st, 2015|Blog, Personal Finance Tips|1 Comment

IRAs, or Individual Retirement Arrangements, are important retirement savings vehicles. IRAs offer the potential for tax-advantaged saving, which is especially important for anyone without access to an employer-sponsored retirement plan.

In order to make IRAs easier to grasp, think of a book with a cover. The underlying investment is the book, while the IRA is the cover. The cover tells whoever looks at it what you would like them to know about the book inside, but it doesn’t change the book itself. In the case of investing, the cover is usually related to taxes. The type of “cover” you put on your investment tells the IRS how to treat it for tax purposes.

In an IRA, the “book” can be almost anything – the IRS excludes only collectibles and life insurance. Common choices are mutual funds, ETFs, stocks, or bonds. However, trustees are not required to offer every option, and your options will be limited to those offered by the institution you choose to invest with.

Traditional IRA

Anyone with income can invest in a Traditional IRA. Contributions to a Traditional IRA are tax-deductible, up to the limit set by the IRS. (For 2015, those limits are $5,500; $6,500 if you’re over age 50).

Qualified distributions from a Traditional IRA, are taxed as ordinary income, but money taken out before age 59 ½ will be subject to an additional 10% penalty on the full amount of the distribution. Traditional IRAs are also subject to RMDs, or Required Minimum Distributions, beginning at age 70 ½.

Depending on your income, your deduction limit may be lower if you or your spouse is covered by an employer retirement plan. For example, in 2015, a single person who is covered by an employer plan is eligible for a reduced deduction when income reaches $60,000, and no deduction at all once income reaches $70,000.

Most people know that IRAs are a great way to save for retirement.  Do you know what type is best for you?

Roth IRA

The other type of IRA most people are familiar with is the Roth. Unlike Traditional IRAs, you may be not be able to contribute to a Roth IRA if your income is too high. You are eligible to contribute to a Roth IRA in 2015 if you are a single person making less than $131,000, or a married couple filing jointly making less than $193,000. (As you get close to the income limits, the deduction allowed begins to go down, so check the IRS website to determine your own eligibility.)

Contributions to a Roth IRA are made with after-tax dollars, and qualified distributions are tax-free. Additionally, contributions can generally be withdrawn without penalty at any time, which makes a Roth IRA more flexible than other retirement savings options. Earnings withdrawn before age 59 ½ are generally subject to income tax and a 10% penalty.

Unlike Traditional IRAs, Roth IRAs are not subject to distribution requirements during the lifetime of the account owner.

Additional Notes on Contributions and Distributions

There are a few other things to consider when looking at IRAs.

  • The limit of $5,500 ($6,500 for age 50+) for IRAs applies to both Traditional and Roth IRAs, so if you contribute to both in the same year, your total IRA contribution cannot exceed the limit.
  • IRA contributions made before April 15th may be allocated to the previous tax year. This can be especially important for those with variable income, if income is higher than anticipated in the first part of a given year.
  • If you exceed your contribution limit in either type of IRA, the excess amount will be subject to a 6% tax, so be sure to keep track.
  • There are circumstances where a qualified withdrawal may be taken before age 59 ½. These include, but are not limited to, certain medical expenses and the purchase of a first home.

Making the right choice

We’ve gone over some of the basics of Traditional and Roth IRAs, but making the choice can be a bit more complicated. As with all financial decisions, it’s best to deal with actual numbers. Use your current income, tax bracket, and assumed investment returns to perform a simple calculation. If that’s not your cup of tea, anticipate another post from me on this subject, where we’ll dive in to specific examples to help you determine the best course of action.

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Mar 302015

Take care of today so you can dream about tomorrow

By |March 30th, 2015|Blog, Life, Personal Finance Tips|Comments Off on Take care of today so you can dream about tomorrow

It’s easy to feel inadequate when it comes to your retirement savings, especially since there is no lack of motivation to make you feel that way. Bloggers like me get to sound smart when we scare you with what is essentially basic math; investment companies get to come to your rescue with savings vehicles; and there is, of course, the inconvenient truth that many of us are lacking in actual savings.

This is not the normal sort of thing you’ll hear from me on this site, but I think it bears mentioning. Investing is a great thing, as long as you have the rest of your financial house in order.

The Set Up

It goes something like this: Responsible Rex graduates college with about $2 in student debt and begins saving 50% of his $80,000 starting salary, while Flighty Fran waits until she turns 50 to start saving 5% of her $30,000 salary. Responsible Rex retires with billions at 55, while Fran retires at 92 and moves into Rex’s basement (which he is renting out for extra retirement income so he can afford a nicer yacht.)

Some of us want to be Rex and others are afraid of being Fran, but either way, we swallow the story hook, line, and sinker and scramble to increase our retirement savings contribution and make it our number one priority. In the process, we may neglect the more foundational areas of personal finance.

Obvious Fact: Saving is Important

I write about investments, so (as you might imagine) I’m a huge fan of Retirement Saving. I would let Retirement Saving autograph my shirt at a concert, an honor previously reserved only for Bruce Springsteen (who has not yet taken me up on it, but I am persistent.) But the blazing neon sign of Retirement Saving can blind us to less visible figures like Budget and Emergency Fund, or even Retirement Saving’s archenemy, Consumer Debt.

I am not a fan of being scared into doing anything, no matter how inherently sensible it seems. It isn’t necessarily smart to rush headlong into Investment Land if you haven’t spent enough time in the Kingdom of Basic Needs. Don’t be so worried about tomorrow that you fail to take care of today.

The Pyramid of Financial Needs

Retirement saving is a big topic these days, and for good reason.  But it's important to make sure you have the basics covered first.

Arguably, the most common visual for the hierarchy of financial needs is a pyramid (because pyramids are structurally hierarchical. It makes sense.) The base of the pyramid is cash management.

Quite simply, cash is first because it will determine your success at every other level of the pyramid. It’s impressive to be saving 30% of your income for retirement. It is less so if you’re racking up debt at the same pace. For some of us, keeping this level in order comes naturally, but most of us have to work at it. If you are in the former category, try to keep the smugness to a minimum. It’s annoying. If you are in the latter, accept it and move on. There are worse things in life.

Most immediately, successful cash management means that you have the funds to protect yourself from risk. When most of us think of risk, we immediately think of insurance. And there is definitely insurance at this level – life, health, disability, property, and casualty insurance are some major categories, with additional liability for some of us if circumstances warrant. Another piece I put at this level is your emergency fund. (Others may argue that the emergency fund belongs with cash. I’m fine with that as long as you have one.)

Once you’ve put a harness on your spending and protected yourself from the unexpected, you are ready to begin saving for your future.

Unless…

Now that I’ve laid out this neat, logical plan, I’m going to mess it up with a few exceptions to the general order of things. First is 401(k). Responsible Rex may be annoying, but he’s not entirely misguided. If your employer offers a 401(k), go ahead and sign up. If your employer matches your contributions, then contribute at least to the match. Why? Because it’s FREE MONEY.

Another area where you might consider jumping levels is life insurance, if you have dependents who will not be able to fend for themselves in the event of your demise.  None of us is guaranteed tomorrow, so regardless of where you are on your climb, make life insurance a priority.

Today vs. Tomorrow

To quote a character from my daughter’s current favorite movie (and the inspiration for this particular post), Seymour S. Sassafrass, “It’s important to dream about tomorrow, but you have to take care of today. It’s a classic today/tomorrow problem.”

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