Maximizing Your HSA

by Grant Sims, CFP

Whether you are young, old, starting a family, or retiring, you are likely being impacted by rising health care costs. According to one study, medical costs are expected to increase by 6.5% through 2017, much higher than the pace of general economic inflation. In addition, the average deductible for people with employer-provided health coverage has more than tripled over the past decade, from $303 in 2006 to $1,077 in 2015 (benetworthy.com).

One of the increasing trends to plan for rising costs of health care is the number of people choosing to be on a High Deductible Healthcare Plan (HDHP) where they have the ability to save in a Health Savings Account (HSA). You can sign up for an HSA through your employer’s health plan or on your own. They can be funded through direct deposits from your paycheck or self-directed contributions to your account.  Here are the powerful short and long term tax advantages that have made HDHP’s and HSA’s so attractive.  

Not only are all your contributions tax-deductible for the year that you make them, but they are also tax-free when withdrawn for qualified medical expenses. In case a light bulb didn’t just go off inside your head, let me repeat that. As long as you use the money on qualified medical expenses, not only are your contributions tax-deductible, but your money grows tax-free and withdrawals are tax-free. 

There is likely not another tax opportunity like this! Like all tax deals, the IRS puts a limit on how much you are allowed to benefit. For 2017, the contribution limits are $3,400 for individuals and $6,750 for a family, with an additional $1,000 catch-up provision for those age 55+ (Learnvest.com).

Most people use a debit card linked to their HSA to pay for out-of-pocket medical expenses throughout the year. If you don’t use the entire account, your funds will accumulate year after year, and you may have the option to invest a portion in mutual funds, depending on your HSA provider. A good rule of thumb is to keep a year’s worth of healthcare expenses in cash—if you are actively funding the account--and invest the rest for growth. This provides the opportunity to pay for all your medical expenses with completely tax free dollars. 

In certain situations, you might benefit from paying all medical expenses out-of-pocket, allowing the entire HSA to remain invested for long-term growth.  Consider that if you invested $6,750 each year and it compounded tax-free with 7% returns. After 10 years you would have access to $93,000 of tax-free money. After 15 years, you would have $170,000!

This will put you in a position to cover future and/or retirement health care expenses with tax-free dollars, particularly during a time of life when those expenses may be elevated. The list of qualified health expenses is vast, ranging from doctor visits, co-pays and prescription drugs, to vision care, orthopedic shoes, hearing aids, long-term care insurance premiums (limited) and Medicare parts A, B, C and D. 

With this potential, an HSA doesn’t have to be just a healthcare account, it can also serve as a supplemental retirement account--one you never knew you had. As a financial planner, it excites me to help clients identify opportunities like this to plan for their financial future. 
Do you have access to an HSA? Are you maxing it out? How else could you be better planning for your financial future? 

https://www.benetworthy.com/best-retirement-account-didnt-know/
https://www.learnvest.com/2014/12/is-an-hsa-right-for-me/

Disclosures:
•    This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
•    These materials contain references to hypothetical case studies.  These are presented for the purpose of demonstrating a concept or idea, and not intended to be interpreted as representing any specific person.  Such representations are not intended to substitute for individual investment advice, even if the case study appears to have similar characteristics.  
•    A443
 

Lessons from an "old" man

by David Munn, CFP

A newlywed couple was walking down a dusty country road outside a little town they were visiting. While admiring the beautiful scenery, they came across a small, run-down trailer.  Sitting on the porch in a rocking chair was an old man being fed by a middle-age nurse.

The couple marveled at the old man and quietly wondered about the life he had lived.  With their curiosity being too much to ignore--and with no demands on their time--they approached the porch and greeted the man and his nurse.  Upon hearing the visitors, he sat up and motioned for them to join him on the porch.  

As they shook his hand, they realized he was blind.  His skin seemed to barely hang on his bones and his voice was raspy and shaky.  

“Sir,” the young man started, “we can see that you have lived a long and full life.  What wisdom can you offer a young couple that is just starting out in life together?”

“Ah,” the old man replied.  “You are wise to seek my advice, as I have much to offer.  But seeing that my time is short, I will tell you the one thing you must remember to truly get the most out of life.”

“Always eat, drink, and smoke what you desire. I haven’t eaten a fruit or vegetable since I was little boy.  I gave up water for alcohol years ago; and I’ve smoked 3 packs of cigarettes a day since I was 16. I’ve never been sick or gone to the hospital.  It is only now--in my old age--that my body is failing me.”

“Now if you’ll excuse me, it is time for my nurse to carry me to my bed.”

The young couple thanked him and stepped off the porch, still processing what they had just heard.  Just as the door was about to close behind the man and his nurse, the young wife ran back and called out, “Sir, if you don’t mind my asking, how old are you?”

The nurse stopped and turned around so the man could face the woman.  “Why, I don’t mind you asking at all.  I’m proud to say that last week I turned thirty-five years old.”  With that, the door shut and the two disappeared into the trailer.    

As absurd as this story may appear, I would contend that I regularly observe financial behavior that is equally foolish.  Here are some generic examples:

• Mistake: We should follow their advice (from a friend, neighbor, or family member)--or do what they did--because they appear to be wealthy.

  Truth: More often than you might guess, if someone appears to be wealthy, they’re not. They may have high income that supports their lavish spending, but they have little savings and still live paycheck to paycheck.  Or they may even be going into debt to support their lifestyle. Regardless, you should never justify your financial decisions by someone else’s decision.

• Mistake: We should follow his advice--even though it’s contrary to conventional wisdom--because he seems to know what he’s talking about and he’s doing it with his money.

  Truth: If something has been proven over time, perhaps it has some legitimacy, though it could still be a “one hit wonder”.  But making a financial decision based on the persuasive argument of an unproven maverick is a recipe for disaster.  

• Mistake: That approach may have worked for the last 100 years, but this time is different.

  Truth: Disregarding time-tested principles to follow your own, revolutionary conclusions is likely dangerous and foolish.  Proceed with caution and make every effort to limit the collateral damage to those around you.

There are five principles that transcend time, culture, class, and religion, and will help ensure you are moving in the right financial direction:

1. Spend less than you earn (common sense that’s not so common)

2. Avoid the use of debt, with limited exceptions (i.e. an affordable mortgage)

3. Build margin (save something with every single paycheck; no exceptions)

4. Set long-term goals (it will change your financial behavior for the better)

5. Give generously (counter-intuitive, but it’s absolutely true)

Certainly there are other wise practices that, when applied properly, can accelerate and/or protect your financial progress, such as diversification, an appropriate investment allocation, and having the right amount of life insurance, but their application will vary from person to person.  

These five transcendant principles are as true and relevant today as they were 100 years ago, and they can be understood and followed by a child. If someone tells you to deviate from one of these, remember the story of the “old” man. Things are not always as they appear.

1323DMJ

2017 First Quarter Market Commentary

Waiting for Proof

BY DARREN MUNN, CFA

What a difference a year makes!  While 2016 started with a large drop in the equity markets, 2017 started with a continuation of the market gains experienced after the election with very little interruption.  Yet, we still have not seen any progress on the tax reform or health care reform, which many (including me) believe are the primary drivers in moving the market higher over the last several months.  The healthy skepticism we expressed last quarter remains and time is likely running short for results to happen before the market loses patience. 

Based on the data we have seen so far, it doesn’t appear the economy has accelerated like many expected.  The Federal Reserve raised rates another .25% in March and expects two more increases this year, but we continue to expect moderate & sluggish economic growth, which will make that third increase very difficult.  The market seems to be agreeing with us now as the 10-yr bond yield has dropped quite a bit since the rate increase in March. 

To top it off, there have been significant headlines in Europe, China, North Korea, and now Syria – none of which have seemed to faze the market.  Corporate profits are expected to be significantly higher for Q1 2017 than a year ago, which seems to be the focus of the markets (rightfully so).  Oil has been relatively stable and energy companies are starting to show some profits, which is a significant turnaround from last year.

The S&P 500 and Dow Jones Industrial Average experienced strong returns in the first quarter and bonds experienced some small gains, as 10-year yields moved down slightly for the quarter.  But underlying these numbers, the overall market was actually experiencing some turmoil as select parts of the market are actually down for the year.  We could probably dust off a commentary from several quarters ago as the positive returns on the S&P 500 are being driven by a small number of very large companies, creating a false perception that everything is rosy.

We are not fooled, nor are we worried.  But we are cautious and expect to have some better buying opportunities in the near future, allowing us to deploy some of the dry powder we have accumulated in many of our strategies.

Positives

·       Employment continued to be steady with the unemployment rate at 4.5% in March. (U.S. DOL)

·       Low oil & gas prices continue to save money for consumers, but the savings have been shrinking.

·       We believe energy markets have stabilized and are near equilibrium.  We expect oil to stay in the $40-$60 range in 2017.

·       Housing has continued moderate--but choppy--growth.  Low interest rates have helped keep prices affordable.  (Barron’s)

·       Economic growth continued in the fourth quarter, but dropped to just 2.1% as we expected.

Challenges & Risks

·       Economic growth will likely trend in the 2% range in our opinion.

·                                Interest rates – the Federal Reserve raised interest rates again in March and expects 3-4 increases this year.  We believe this is more than the economy can handle and believe it should only raise twice.

·       Government regulation is a potential huge drag.  Health care costs are continuing to rise significantly & government interference in several areas (finance, education, energy) continue to limit economic growth.  Will this improve in 2017? 

·       China, Europe, North Korea – we expect these three to capture significant headlines in the coming year. 

·       Oh, let’s add Russia to this list!

While we have certainly enjoyed the positive run in the market these last two quarters, we know the market will experience some volatility at some point.  Trying to time that is futile.  Instead, we have sold some positions due to high valuations and are sitting on some more conservative holdings to take advantage when the market creates buying opportunities. 

We consider ourselves very blessed to serve you and hope your 2017 is off to a great start!

Sources:  1)      Bloomberg  2)      Barron’s

Disclosures:

Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.  This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein. A401

Planning for Retirement: Creating YOU Version 3.0

by Josh Mudse, CFP

I recently met with a client who asked me to help him plan for an early retirement. We worked through the financial details of retiring at age 59, determining the appropriate investment portfolio and planning distributions from various accounts to maximize tax efficiency. After we worked out all the numbers and we both felt good that he could retire whenever he wanted, I got an email that said he was having cold feet. His reluctance was not a result of questioning the math or the distribution plan. In a self-reflective moment, he realized he had no idea what he would do once he was retired.

Leaving the traditional career world today means that you will likely live another full adult lifetime, 10 or 15 years longer than the retirement years lived by your parents. As people approach the arbitrary end line, determining what comes next is a real and common problem. At major life transition points like retirement, it is normal to run through some version of grief. Making the decision to retire often involves mourning our former life. We wrap so much of our identities into our work that it can be traumatic when we walk away, equivalent to the loss of a loved one.

The realities faced by someone retiring today change our role as financial planners. Instead of talking about asset allocation and buttoning-up the details of an estate plan, financial planners now help clients determine what makes their lives significant.  Significance means something different for every one of us. We often hear our clients define it as spending time with family, giving generously, pursuing a passion, or serving others.  The client above described this process as creating a new version of himself, version 3.0.

According to life and leadership coach, John Cunningham, the first step in making progress is to stop thinking in traditional terms about retirement, start thinking about the next phase of your life as a re-entry, one that you can control. He recommends having a quiet period after you leave your career. Find a way to go out in the proverbial (or actual) woods to decompress, reflect on your past, and focus on identifying what will provide inspiration and purpose for this next phase of life. 

This idea of taking a break to get refocused and re-energized was reinforced to me twice during a recent trip to California. During a conference that I was attending, one of the keynote addresses was made by Richard Swenson, M.D., author of Margin: Restoring Emotional, Physical, Financial, and Time Reserves to Overloaded Lives. Margin is the space between our load and our limits, and is directly related to our reserves and resilience. Dr. Swenson explained that his research shows that humans can maximize personal productivity by interchanging periods of working slightly above their natural limit with periods that allow for time to heal, to reflect, to recharge our batteries and focus on the things that matter most. After pressing to succeed in your career, creating margin before your re-entry will help make that next phase more productive.

Following the conference, I had the opportunity to spend time with my 90 year old grandmother. She is a marvel, still cooking her own meals, driving herself to the store and doctor appointments. Even though she has an arched back that requires her to shuffle around the house, she still accomplishes everything she wants in a day. She told me that as long as she takes a break in the afternoon, she can keep getting things done through the evening. She confessed that her one hope for all of us is that when life presents hardships, we would take time to learn from them and then keep going. That conversation was an affirmation of the principles promoted by Dr. Swenson and provides wisdom to dealing with the hardships we face at life transition points, including retirement.

It must be said that not all retirement transitions are equal. You may be facing an unexpected retirement as a result of a job loss or a health issue. Whatever the situation you find yourself as you approach the end of YOU 2.0, take some time away from your routines to determine what you value most moving forward. Determining the outcomes that you desire most will help in creating the financial plan that supports your life of significance. 

Disclosures:

• This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
• John Cunningham, M.A. has been coaching and assisting individuals and organizations for over 30 years, including Camelot Portfolios. Learn more about John at encompassresources.net

A364

Let's Change the Conversation

Grant Sims, CFP

As January has come, many clients start the new year by revisiting their financial goals. Just as in your personal life, a little planning is likely better than none and adding details to your financial goals are better than wishful desires.

In the conversations we have with clients we want to shift the focus away from goals, and instead emphasize our clients’ desired outcomes.  It sounds like the same thing--goals and desired outcomes—yet, in our opinion, there is a subtle and significant difference. 

Outcomes typically come from a different place than goals; they are heart-level desires. Most goals can be directly purchased or achieved with money; a desired outcome typically cannot.

Rather than only asking, “What are my goals for the future?”, an additional question might be considered: “If all the things I have identified came true, what then would be true in my life?” In other words, what outcomes would the achievement of these goals bring about in your life; what would they give you the ability to do that you can’t or aren’t doing right now? 

Consider the following illustration. A small business owner was approaching retirement with his wife. They had worked hard to grow the business and save as much as they could. They had a goal of retiring with significant retirement assets and the proceeds from the sale of the business.  Unfortunately his business transition plan with his top manager fell through and the manager left to start his own company, taking half the former clients.

The couple were crushed as they realized even if a new buyer was found, the business would be worth less than half the previous value. They were depending on the full value of their assets and business to achieve their ideal retirement, which included: purchasing a vacation home on the lake, volunteering with some of their favorite non-profit organizations, and traveling through Europe. With the loss of business value, they felt they would either need to postpone retirement by several years, or significantly alter their lifestyle plans.

But when they met with an advisor, a simple question began to change their perspective: “What do you want to do at the house on the lake?” They responded that they would like to spend their summers at the lake visiting with kids and grandkids, fishing and writing.

Then the advisor asked, “Do you need to own the home?” Their answer of “no” revealed that while their goal had been to buy a lake house, their desired outcome was spending time with family and pursuing specific hobbies for a few months a year, which did not require the large amount of assets needed to purchase a property.

Consequently, with the change in their financial circumstance, while their goal was now unachievable, their desired outcome was still viable by renting a home in the summers.

The advisor helped them focus on the outcome and experiences they wanted, rather than having the assets they thought they needed to achieve their goals. Once their true desired outcome was identified, alternative options provided funding for everything they wanted in retirement without having to build the business back up or push off retirement. 

 As I have heard multiple wise advisors say, “money is NEVER the final product or end result, it is simply the tool to achieve what you truly desire.” As we plan for retirement, let’s change the conversation from hopeful goals to designing a plan to keep you on track to achieve your most important desired outcomes. 

Disclosures:

•      This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

•      These materials contain references to hypothetical case studies.  These are presented for the purpose of demonstrating a concept or idea, and not intended to be interpreted as representing any specific person.  Such representations are not intended to substitute for individual investment advice, even if the case study appears to have similar characteristics.  1323DGJ