Interested in the the investing trifecta? Then take a look at HSAs and their new contribution limits for 2019!

Why is a Health Savings Account (HSA) the equivalent of hitting the investing trifecta? Well, because it gives you three (3) tax breaks. It’s normally hard to even get one (1) tax break!

So, what are the three (3) tax breaks. First, you can deduct your HSA contributions from your current year’s income. Second, your earnings grow tax free inside of a HSA. And finally, your withdrawals are also tax free if used for qualifying medical expenses. Those three benefits are not too bad in and of themselves. But HSAs have one more trick up their sleeves. HSAs don’t require the “use it or lose it” provision of Flexible Spending Accounts (FSAs), i.e., your account can continue to grow through the years.

However, with the good must come the bad, it seems. They are a few flies in the ointment with HSAs. For example, HSA accounts are only available for those who purchase high-deductible health plans (HDHPs), HSA investing accounts are often subject to high fees, and the contribution limits are rather small.

Nevertheless, every little bit helps when saving for retirement. Especially considering that most health care cost estimates for a couple retiring in 2018 come in around at $250,000+ for lifetime medical expenses. So here are the new contribution amounts for 2019:

2019 Maximum contribution limits

Single - $3,500 (up $50 from 2018)

Family - $7,000 (up $100 from 2018)

For more information about 2019 HSA limits, please click on the title above.

How should you change your portfolio to reflect a low-return environment?

Hopefully, not at all. If you are invested in low-cost, highly diversified funds matching your risk tolerance with your asset allocation, then stay put.

Why? Because you already have greatly reduced or almost eliminated the largest headwind to anyone’s portfolio: costs. Most studies show that by reducing costs, an investor achieves their single greatest boost to investment returns. Not by being a great stock picker, but by reducing one’s costs. That is the single most effective lever (i.e., the reduction of investment costs) to manipulate when trying to increase one’s retirement account balance over an investing lifetime.

Secondly, matching your risk tolerance to your asset allocation is key so that you don’t get the urge to sell in down markets. If you are a “nervous Nelly” about high equity exposure or you are nearing retirement, then investing 80% or 90% of your portfolio in stocks is not the way to go (excluding 20 somethings from this hypothetical - who can afford to have high stock exposure). Your asset allocation should reflect your investment risk tolerance, as well as, your investing time horizon. For example, for those nearing retirement you can peak under the hood of most major life-cycle funds and see that their stock exposure probably varies between about 40% to about 60%. Adjust within this equity exposure depending on your risk tolerance.

Last, if you are utilizing funds that are non-correlated (another way of saying “diversified”), then studies show that your portfolio will weather stock market gyrations better than non-correlated portfolios. What does a non-correlated portfolio contain? Simply put, one with appropriate levels of stocks, bonds, and some alternative assets (e.g., real estate investment trusts, oil, metals, hedge funds, futures, etc.). The purpose of non-correlation is to have some assets zig (go up) when others zag (go down).

If you are not doing the above, then you have some work to do. With Vanguard forecasting market returns of 4% to 6% over the next decade, you need to market proof your portfolio to squeeze every last bit out of it. For more information, click on the title above.

You can save more for retirement in 2019!

After not rising for many years, retirement savers can rejoice as they can save a few extra dollars in 2019. The increase is not an astronomical increase, but an increase, nonetheless. Here’s the breakdown:

IRA’s - contribution limit for an individual is now $6,000 in 2019 (plus a $1K catch-up contribution for those 50 and older); deductible phaseouts are up $1K for singles/head of households and up $2K for married couples

401k/403b/457/Federal TSP - contribution limit for an individual is now $19,000 in 2019 (plus a $6K catch-up contribution for those 50 and older)

SEP IRA’s/Solo 401k’s - contribution limit for an individual is now $56,000 in 2019

For more information about additional defined contribution and defined benefit plan contribution limit changes please click on the title above.

How much should you save for "Junior's" college expenses? Is a quarter-million enough?

An interesting article covering the nuances of saving for college, mostly focusing on college inflation rates and anticipated rates of return for your college savings accounts. The long-story-short is that general rules of thumb still apply, even in this fluid branch of investing/saving. The article highlights studies that seem to suggest private versus public university rates of inflation can (and do) vary over time and that common historical rates of stock market returns will be lower over the next decades. Nevertheless, the following general maxims are good starting points for your college savings needs:

• Assume college costs will increase by 6% a year (e.g., roughly CPI inflation rate + 3%)

• Assume your rates of return will average 5% (e.g., due to possible subdued future market returns and scaling of your college savings account to reduce equity exposure)

Both of these rules err on the side of being conservative, but it helps to emphasize that one cannot seemingly save too much for their children’s college costs. The article aptly notes that a $20,000 public university in 2018 will cost more than $57,000 in eighteen (18) years at a 6% rate of inflation. That’s close to a quarter-million after four (4) years of undergraduate study. That’s why at Intelligent Investing, Inc., we teach investing early and often. Click on the title above to learn more about saving for college!

Fifteen (15) Life Financial Rules!

Financial literacy and investing can be boiled down into some pretty simple general rules. These maxims are not to be followed blindly but implemented with an eye towards the fluidity of one’s financial situation. Nevertheless, these “North Star” type guiding principles are not a bad place to start.

With the above in mind, let’s cover a few of these general rules:

• Avoid debt (especially high-interest debt; notably, credit card debt)

• Have an emergency fund (at least 6-12 months worth set aside for life’s unexpected occurrences)

• Have a budget (stick with it and pay yourself first)

• Use tax-advantaged accounts (it is hard to beat tax-deferred growth)

• Invest regularly, appropriately (think age/risk appropriate asset allocation), and keep your investing costs low (watch expense ratios and utilize index funds)

• Protect your credit score (it will save you money in interest costs throughout your life)

• Seek out a fee-only financial advisor if you need help

If you would like to read more about Life’s 15 Financial Rules, click on the title above for more information.

Tax planning in retirement? Here are some ideas . . .

They say you should never let the tax tail wag the dog, but why pay more in taxes than you need to. Enter, taking some time to plan your income streams during retirement; wherein, a little planning regarding your income sources can save you a lot in taxes.

Some new retirees may not be aware that their social security benefits can be subject to increasing levels of taxation and that they may need to file quarterly tax payments. Moreover, some folks may not be aware that if their income rises too high during retirement that up to 85% or their social security benefit can be subject to taxation. Maybe then a little tax planning is in order.

With that thought in mind, generally, investors would prefer to have three sources to draw from during retirement: taxable accounts (e.g., brokerage accounts), tax-deferred accounts (e.g., traditional IRAs and 401k accounts), and tax-free accounts (e.g., a Roth IRA). By utilizing these three different accounts at different times, one can best control their tax liability,

For example, some folks may enter retirement in a low tax bracket, so generally withdrawing from tax-deferred accounts and taxable accounts will minimize their tax liability when their income is lowest (while also reducing future RMD tax liability). Since a married couple can report up to $77K in 2018 income while still remaining in the 12% tax bracket, it can be advantageous to use this income bracket for taxable and tax-deferred account income. For other folks who may enter retirement with high income levels (e.g., due to pension income and/or rental income streams) and anticipate that they will drop over time, they may wish to consider using their tax-free accounts if they still require additional income (thereby, avoiding taxation at their highest marginal rate).

Remember though, that everyone’s tax situation is different and that you should check with a qualified tax professional to see if these tax strategies would work for you. The key is though, a little advance planning about your anticipated income streams can reduce the amount of taxes that you pay.

For more information, please click on the link above!

Stock Market Volatility Making You Nervous? What to do by age group . . .

With the stock market losing ground more often than not lately, what should you do? If you find yourself a little nervous by this occurrence here are some ideas:

For investors in their 60’s and beyond

• Make sure your asset allocation (bond/stock mix) is suitable for your risk tolerance and age (utilize maxims like invest your age in bonds (a conservative approach) or invest 100 minus your age in stocks);

• Revisit (or create) your financial plan to make sure you are on retirement track;

• Be flexible and adjust your budget/withdrawal rate to reflect weaker market returns; and

• Ensure you keep a cash reserve/“bucket” of two to three years worth of living expenses on the side for down markets.

For investors in their 40’s and 50’s

• This group also needs to make sure their asset allocation (bond/stock mix) is suitable for their risk tolerance and age (utilize maxims like invest your age in bonds (a conservative approach) or invest 100 minus your age in stocks or mimic allocations found in appropriate target date funds); and

• Check the quality of your bonds, remembering that high quality, shorter duration bonds exhibit negative correlations with stocks and thereby provide a better ballast to ones portfolio during turbulent stock market times.

For younger investors

• Stay the course and add to your equity positions in these down markets; and

• Only invest in stocks money that you will not need for the next 5-10 years, money that is needed for shorter time horizons should be in short to intermediate term/duration bonds or cash accounts.

For more information about this topic, click on the link above!

With stock valuations in a late economic cycle, non-correlated bonds are your best bet!

A really interesting article pointing out which bonds tend to serve their purpose most dutifully, while others fall short (as all bonds are not created equal). For sometimes, investors seem to lose sight of the fact that bonds really should provide a ballast to one’s portfolio during turbulent stock market times.

In that light, one should ensure that a least a portion of their bond portfolio preferably exhibits a negative correlation with stock movements. Notably, quite a few bond sectors don’t. For example, high-yield bonds and corporate bonds tend to display a higher correlation with stocks than U.S. Treasuries. Although yields are low on Treasuries, one of their other major functions within a portfolio (besides investment return) is to reduce losses in stock market downturns. As witnessed by their negative correlation with stocks, bonds “zig” when stocks “zag,” thereby providing buoyancy to one’s sinking stock ship.

The linked article also succinctly points out that a purpose of some of your bond portfolio’s function/objective/diversification is best met by bonds of high credit quality with short duration. This point is further supported by the fact that most “new’" bond money is going into ultrashort duration funds, while corporate and high-yield inflows have been drying up in 2018.

Click on the link above to read more about bonds and their correlation with stocks!

Unfortunately, Roth recharacterizations are gone . . .

Why does this matter? Well, you can still convert traditional IRA assets into a Roth IRA (that’s good news); however, if your conversion proves unfavorable, you can no longer undue that conversion post October 15, 2018. Prior to the tax reform package of 2017, if your Roth conversion proved financially unfavorable, you could recharacterize (read as undue) your conversion to avoid the adverse consequences of your actions.

What has this tax law change cost us? Here are some examples:

• Since converted assets must be included in your taxable income, tax planning your conversion has become more difficult because end of year unexpected income or deductions can alter/change what once appeared to be a tax savvy move earlier in the year;

• Also, if your converted assets suddenly lose value after your conversion, you still owe taxes on the converted value, not the new lower value (in essence, you will owe taxes on money that you no longer possess); and

• Finally, if your tax conversion levied more taxes than you could afford, you may even have to liquidate some tax-deferred assets to cover your new tax bill causing you to incur even more taxes and, possibly, penalties.

If your considering converting some or all of your traditional IRA assets to a Roth IRA, you need to be more careful now than ever! Consult with your tax professional and your financial advisor to help ensure your not wishing for a “recharacterization.”

Market sell-offs leaving you worried? Maybe they should not . . .

If market down-turns are leaving you worried, then consider the following:

• If you are invested appropriately for your age and risk tolerance, then market down-turns should not be of large concern;

• If you are still in the accumulation phase of saving for retirement (10 or more years out from retirement), then market down-turns should not be of large concern; and/or

• If you like buying things on sale, then sufficient market down-turns can provide a buying opportunity.

So, the next time a market down-turn seems to leave you with a little angst, make sure you are invested appropriately for your age and risk tolerance and maybe you won’t have to reach for the antacids. A little planning can go a long way.

For more information about how to handle market sell-offs, click on the link above!

Got the RMD (Required Minimum Distribution) blues? Rebalance!

Some older investors love to hate their RMDs. Why, you may ask?

Well, some may not need the money, while others are not sure what to do with the proceeds of their distribution (e.g., how to reinvest or how to minimize the tax consequences of their distribution).

Enter: rebalancing.

Not necessarily a solution to the above mentioned RMD problems, but possibly a silver lining to the cloud of unwanted distributions. For you see, although rebalancing may be something we all find nerve racking (and counter-intuitive because we are selling our winners to buy more of our losers), it, nevertheless, improves a portfolio’s returns while also reducing a portfolio’s risk. So, the next time you are dreading your RMD, use it as an annual reminder to rebalance your retirement accounts. Something you needed to do anyways!

**Remember, you don’t need to wait for an RMD opportunity to rebalance your portfolio. All investors can rebalance inside of their tax-deferred accounts without incurring tax consequences whenever they want!

Is $1 million enough to retire with?

Simply put, probably not. Why is that? $1 million is a lot of money and pretty hard to accrue. It should be enough to retire on.

Well, the answer in part depends on your budget and when you plan on retiring. For example, if you are retiring today and your budget shortfall outside of your social security and pension income mandates an amount between $30K and $40K a year from your $1M portfolio, then you are probably OK with a $1M nest egg.

However, if you were to retire say 20 or 25 years from now, the Rule of 72 tells us that our $1M nest egg would need to be around $2 million (because at a 3% inflation rate, the purchasing power of our money is cut in half every 24 years). And, additionally, our retirement years will hopefully last another 20 to 25 years, thereby, further requiring even more money if we are to live 50 years from today (nearly 4x’s the $1M needed today).

Moreover, with healthcare costs rising faster than the rate of inflation, healthcare should be a serious concern of every retiree. Fidelity estimates that a couple retiring today would need to budget about $280,000 for lifetime healthcare costs. One can easily see that in 20 to 25 years from now the Rule of 72 again tells us that healthcare costs could be well over a half million dollars.

Is all lost? No. It is never too late to start preparing for one’s retirement. Even saving a modest $6,500 per year at a 7% rate of return for the next 25 years can yield nearly $440,000 per the linked article’s calculation. It may not be a million, but its better than a goose egg! Click on the link above for more information.

For a quick post about how much you need to save by age group to reach $1M, click here.

These metrics can help you decide how tax-efficient your fund is?

Generally, index funds and total-market index funds are tax-efficient due to their inherent low turnover. Moreover, some ETFs can also be tax efficient because they can exchange securities in kind (which avoids tax liability) instead of selling. But, what other metrics can be tracked to help us determine a funds tax efficiency? Here are some interesting ones you should be following:

• after tax returns vs. “tax efficiency;”

• the tax cost ratio (a measure of a funds annual return reduced by taxes paid on distributions); and/or

• the potential capital gains exposure of a fund (a metric that measures all the gains yet to be distributed by the fund)

By paying attention to not only a funds turnover ratio, but also the funds after tax returns, the tax cost ratio, and its potential capital gains exposure, you will help better ensure its true tax-efficiency. Clink on the link above to learn more!

With interest rates rising, how do I invest my money?

Just a couple of weeks ago I was writing about the 10 year Treasury Note breaking 3% and holding. As of today (October 9, 2018), the 10 year is now holding around 3.2%. In a rising rate environment, how does one invest? Some pundits posit that a rising rate environment is bad for stocks (as rising rates can slow the economy and reduce corporate profits); however, not all rising rate environments are the same. Notably, stocks have moved higher in 12 of the 15 periods since 1950 when the 10 year Treasury was rising (i.e., the market has moved higher 80% of the time). This makes some sense because the Fed usually raises rates as the economy is doing better. If the economy is doing better, then corporate profits are usually up and stock prices are up. So, again, where do I invest?

Answer:

Traditionally, the following stock sectors have performed better during rising rate environments:

• Industrials;

• Tech (please note its already high P/E valuation);

• Consumer Discretionary; and

• Energy

And, here are some stock sectors you may wish to avoid:

• Real Estate; and

• Utilities

Regarding bonds, rising rates hurt current bond holders; however, by keeping your bond portfolio duration short or utilizing shorter term bonds (2 years or less), one can reinvest their matured bond money into new, higher-yielding bonds when their money comes due.

For more information, click on the link above!

Medicare Open Enrollment October 15th to December 7th - Do you need to make a change?

If you think you need to make a change begin by reviewing your Annual Notice of Change (ANOC), which lists changes to your plans premiums and co-pays. Your ANOC will also provide a comparison of your 2018 benefits versus your 2019 benefits. Options available to Medicare recipients during this open enrollment period include: choosing a new plan, adjusting your drug coverage, or switching to an Advantage Plan. With regard to Medicare Advantage Plans, check to make sure your local hospital is still accepting your Medicare Advantage Plan, as well as, your pharmacy and doctors are still part of the Plan’s preferred network. Also, make sure your prescriptions are still covered under your plan’s coverage. When comparing Medicare versus Medicare Advantage Plans, don’t only judge the plans by their premiums, look to make sure deductibles and co-pays are appropriate, as well as, your network coverage and medications. Click on the link above for more information!

82% of asset classes post negative inflation-adjusted real returns in 2018

14 of 17 major asset classes have posted negative inflation-adjusted real returns thus far in 2018, as reported by Morgan Stanley and Bloomberg. That’s pretty scary! Pretty much, only U.S. stocks have fared well, while most other asset classes have lost ground. Nevertheless, the mantra of diversification still holds true as one asset class may “zig,” while the other may “zag;” thereby providing a level of risk reduction to your portfolio. Click on the link above and see below to ascertain how your asset classes fared!

Worst Real Returns Since Financial Crisis: A Look at 17 Asset Classes

Winners

S&P 500 Index (SPX)

Russell 2000 Index (RUT)

U.S. high yield corporate debt

Losers

2-Year U.S. Treasury Note

10-Year U.S. Treasury Note

U.S. investment grade corporate debt

Global high yield corporate debt

Inflation-protected bonds

U.S. Aggregate Bond Index

Emerging market U.S. dollar government debt

Emerging market local debt

REITs

MSCI Europe Index

MSCI Japan Index

MSCI China Index

MSCI Emerging Markets Index

Commodities

Sources: Morgan Stanley, Bloomberg; Annualized, unhedged inflation-adjusted real returns in U.S. dollar terms computed YTD as of Sept. 24.

Read more: Investors Face Worst Returns In 10 Years | Investopedia https://www.investopedia.com/news/investors-face-worst-returns-10-years/#ixzz5SsnkRvqG

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How do the Fed's recent interest rate hikes affect those in their 20's, 40's and beyond . . .

The Federal Reserve’s change in the federal funds rate affects everyone, from borrowers to savers. So, let’s take a look at how your age group might be commonly affected:

• “20 somethings” - undergraduate federal direct loans have risen to 5.05% in 2018 versus 4.45% last year; moreover, credit card interest rates have also risen from 15.78% to 17.32% in 2018 (borrowing continues to become more expensive);

• “40 somethings” - mortgage rates have climbed from 3.9% in late 2015 to 4.6% in 2018, any variable rate debts that you owe will have adjusted upwards as well;

• “60 somethings” - online bank savings accounts are now offering rates around 2% while some bond funds are losing value; as to stocks, if corporate profits continue to rise, stock prices should hold and/or continue to rise slightly (noting this is the longest bull market in history).

To see more examples of how your finances are affected by the Fed’s rate changes, click on the link above!

Worried about running out of money in retirement?

Running out of money in retirement is a real fear. What can you do to alleviate this from occurring? Follow these suggestions to improve your chances of avoiding the proverbial “poor house” in retirement:

• Withdraw only 3% to 4% per year from your retirement savings (the latest research suggests withdrawing only 3.13% from your retirement accounts at age 65);

• Have some exposure to stock, so you portfolio can grow during retirement (a general rule of thumb suggests 100 minus your age for your equity allocation); and/or

• Don’t retire too early - the longer one works, the less time your retirement accounts need to support you; plus social security benefits grow by 7% to 8% each year you don’t take social security.

For more tips, click on the link above!

Can I use a 529 College Savings Plan to pay off student loan debt?

Technically, yes. But, not really. Withdrawals from a 529 to pay off student loan debt are not “qualified” withdrawals and, as such, are subject to taxes and a penalty. However, withdrawals to pay for things like tuition, room and board, books, fees, computers and other college-related expenses are “qualified” and are tax-free (and penalty free). 529 plans are a great way to save for college considering their unique tax advantages. Click on the link above to learn more about why you shouldn’t use a 529 to pay off student loans. Spoiler alert, think investing time horizon and the latest bull market run-up . . .

What do I need to earn each year to max out my social security benefit?

Well, since social security is based on your 35 highest inflation adjusted years of earnings, your benefit changes with your income level. Also, since Social Security’s benefits formula changes each year, it is hard to give a specific dollar amount going forward. However, generally speaking though, you will need to earn more than Social Security’s maximum taxable earnings in at least 35 individual years to receive the maximum possible Social Security benefit (which is around $2,788 per month in 2018). Since Social Security’s maximum taxable earnings has risen from $90,000 in 2005 to $128,400 in 2018, you can see how your benefit might vary if your income falls below the threshold in any given year. Also, remember that Social Security only taxes “earned” income; so, if your passive income is what pushes you over the Social Security maximum taxable income level, you will not “max out” your benefit. Click the link above for more details!