February 22, 2017
Do you have a health savings account? The odds are high that you have no real idea of how it works.
An Alegeus Technologies study found more than 70 percent of consumers who have health savings accounts can't pass a basic proficiency quiz on how these accounts work.
Respondents often believed they'd lose money in their accounts if they didn't spend it each year. Others thought they could only use the accounts to pay for co-payments when they visit a doctor. Both assumptions are incorrect.
"Health savings accounts are one of the best-kept secrets for consumers," says Steve Auerbach, health insurance expert and Alegeus CEO. "There is a lot of potential for people to get better value out of these accounts."
Want to get the maximum benefit out of your health savings account, also known as HSA?
Here are five benefits of a health savings account:
1. It's like a 401(k) plan
You contribute to a health savings account much like you would a 401(k) retirement savings plan. Your employer removes a certain amount of dollars from each of your paychecks and funnels them into your account. In 2017, you can contribute a maximum of $3,400 for the year if you are the holder of an individual health savings account. If you are contributing to an account that is serving your entire family, you can contribute a maximum of $6,750 this year.
Health savings accounts come with a catch-up provision, too: You can contribute $1,000 over the annual limit each year if you are 55 or older.
If your employer doesn't offer this type of account for health care expenses, you can still contribute to one. You'll just have to shop private insurers to find a plan.
2. You'll pay less in premiums (via required high-deductible health insurance)
You can only contribute to an HSA if you have what is known as a high-deductible health-insurance policy. In 2017, this meant that your annual deductible had to be $1,300 for single account holders and $2,600 for account holders who wanted to cover a spouse or entire family.
In such plans, you are responsible for paying the annual deductible before your health insurance kicks in and starts covering the rest of your medical costs. For example, if you have a family, you'd need to spend $2,600 in health care costs during this year before your insurance would kick in to help cover your health care expenses for the rest of the year. You would use the dollars saved in your account to cover your deductible.
Advantage of lower premiums
That doesn't sound good, but there is a big advantage to high-deductible health-insurance policies: They come with lower premiums. During those years when you have lower medical bills, you might pay less than you would with a higher-premium traditional health insurance policy.
Chad Parks, CEO and founder of Ubiquity Retirement + Savings, says consumers shouldn't let the high deductibles scare them away from the combination of a health savings account and high-deductible plan. He has his own account, and says that he spends less than he would with a higher-premium health insurance policy.
"With a traditional plan, I knew for sure that I would spend $1,200 a month in premiums," Parks says. "That is gone every month, and will cover me if I have a medical problem. But only if I use medical services will I get a benefit. With the HSA and high-deductible plan, I would pay a lot less in premiums every year. It turned out I'd pay less with the HSA option. That made signing up for one a no-brainer."
3. The money in a health savings account rolls over
Many consumers worry that if they don't spend all the money in their health savings accounts every year, those dollars will disappear. This is one of the biggest misconceptions that consumers have about these accounts.
"This is not a use-it or lose-it proposition," says Rebecca Palm, chief strategy officer and cofounder of CoPatient. "Other accounts like flexible spending accounts do operate that way. If you don't use your money, you lose it every year. People get nervous that this will happen with an HSA. They shouldn't. That money does roll over."
If you end the year with $700 left in your HSA, that money rolls over and remains in your account.
4. This money can grow and earn interest
The money in your account can grow in other ways, too. First, you'll earn interest on the dollars in your account, which, depending on how large your accounts grow, could result in a nice chunk of change each year.
But many health savings plans also offer consumers the opportunity to invest the funds in their accounts into a number of investment vehicles. This works pretty much the same way that 401(k) plans work: You'll have the option to invest your health savings plan dollars into a number of mutual funds. This gives people with high-deductible insurance plans another way to invest in the stock market.
Of course, there is risk in this. Just like with your 401(k) plan, if your mutual funds perform poorly, you could see the value of your health savings dip.
5. There are triple the tax savings involved
Health savings plans come with some impressive tax benefits. In fact, financial pros say these accounts have a triple-tax advantage. The money you put into a health savings account is not taxed. So, if you deposit $6,000 into an account in a year, that money is no longer considered taxable income, which could save you some decent tax dollars April 18.
The earnings, interest and investment returns your dollars generate while in a health savings account are also tax-free.
Finally, if you withdraw money from your account for qualified medical expenses, you aren't charged taxes, either. And qualified medical expenses include more than you might think. Yes, it includes co-payments and prescription drugs. But you can also withdraw money from your account tax-free to cover dental visits, vision screenings and even over-the-counter medications.
Financial penalties using health savings accounts
If you withdraw money from your health savings plan for non-medical expenses, you will have to pay taxes. You'll also face a penalty of 20 percent if you do this before you reach the age of 65. Once you've hit 65, you'll still have to pay taxes when you withdraw funds from your account for non-medical reasons, but you won't be hit with an additional penalty.
John Inhouse, market executive with the Atlanta office of Merrill Lynch, says he expects more consumers to sign up for health savings accounts as they learn more about the tax and other benefits of these accounts.
"Right now, I think it's just a simple lack of understanding that is keeping more people from signing up for HSAs," Inhouse says. "Employers need to do a better job of educating their employees about these plans. They have to show them that these plans are a great way to put money aside."
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February 10, 2017
You want to boost the money you are stashing away for your retirement years. But now you face tough choices: Should you invest in a traditional individual retirement account (IRA)? How about a Roth IRA?
There are so many types of investment vehicles, choosing the right one for your retirement savings can seem overwhelming. But here's a tip from financial advisors: Don't focus so much on the savings accounts and investment options available to you. Instead, focus on setting goals for your own retirement. Then determine how much money you'll need to meet those goals.
This kind of retirement planning is the most important step in securing happy golden years, these financial pros say.
"What investment vehicle you save in is much less important than determining if your current level of saving and spending are going to allow you to achieve the goals you've set out," says Neal Slafsky, managing director at United Capital in Fort Lauderdale, Florida. "I can't talk about the savings vehicles until I first understand the direction that my clients want to go. There's no point in getting in the car and having no destination in mind."
The point here? Before you start worrying about the differences between Roth and traditional IRAs, you need to determine what kind of retirement you want and how much money you'll need to get it.
Review current spending and saving habits
Everyone wants a happy retirement. And many believe that simply choosing the right mix of annuities, IRAs, stock market picks and life insurance investments will get them there.
But the real trick in saving for retirement is to start planning out those after-work years as early as possible.
Alex Navarro, senior vice president and private financial advisor at SunTrust Investment Services in Miami, says that he first advises his clients to look at their current spending and saving behaviors. Are the actions they are taking today getting them closer to their retirement goals? Or are they putting those goals in jeopardy?
If it's the latter, Navarro works with his clients to determine what changes they can make in how they spend and save.
"To plan for retirement, you need to look at your behavior today," Navarro says. "Then you need to take the appropriate actions that will put you into a situation where you are able to save for retirement."
Take every opportunity to maximize contributions to 401(k) plans
Mary Ellen Garrett, senior vice president of wealth management with the Atlanta office of Merrill Lynch, says some people are not maximizing the contributions they are making every two weeks to their company's 401(k) program. This is another example of current behaviors that do not push retirement savers toward their targets.
To get closer to your retirement goal, you'll need to boost the amount of money you are automatically depositing into your 401(k) account, Garrett suggests.
"The first thing people should look at is what is already available to them," Garrett says. "If they are working for a company that provides a retirement plan, they should take full advantage of that first before they invest in any other retirement savings vehicles. If your company offers a 401(k), it will typically offer some type of matching plan. If you are not taking advantage of that, you are walking away from a great savings tool."
Use a retirement savings calculator
So, how much money do you need to save to have a happy retirement? Not surprisingly, the answer to this depends largely on the type of retirement you want to live.
The 2016 Retirement Confidence Survey by the Employee Benefits Research Institute found workers cite a wide range of figures when saying how much money they'll need in retirement. About 24 percent of workers, for example, told the institute that they think they'll need at least $1 million after calculating how much for retirement to save. Almost two-thirds of employees said they'd need to have less than $1 million saved by retirement.
The study also highlights the differences in confidence for retirement depending on whether workers performed a calculation of how much to save for retirement. Of those who said they were very confident about their ability to have a comfortable retirement, 30 percent crunched the numbers for retirement while 13 percent who had a similar confidence level did not.
Using a retirement savings calculator to estimate their needs after leaving the workforce could better prepare workers for their golden years.
How much to save for retirement investments
What's the right number? One rule of thumb is that you should have a retirement portfolio. Use whatever combination of savings, stocks, annuities, pensions, Social Security payments and other income streams you can muster. Ensure this will allow you to generate 80 percent of your current income every year. If you make $100,000 a year, then, you'll need a retirement portfolio that generates $80,000 in income every year.
Match post-work goals and lifestyle to retirement savings targets
But these retirement savings targets are just an estimate. Depending on your retirement goals, you might not need that much money in your retirement years. It all comes down to what you want to do after you leave the working world.
If you want to travel extensively, you'll need to save plenty of money. If you just want to play golf and spend time with your grandchildren, you can get by with a smaller amount of savings.
The key is to be realistic about what kind of retirement you can have based on your current income stream and the amount of money you've already saved. You might not be able to afford those yearly cruises that fuel your retirement dreams.
Navarro points out some negative outcomes as a result of retirees living outside of their means.
"I'm not a magician. I'm a financial planner," Navarro says. "I have had situations where people have continued living the lifestyles of the rich and famous without worrying about how much money they had left. Then the money ran out and they had to live the lifestyle of Purina cat chow. They were not mature enough to take the proper action at the right time. It's like watching a train wreck. My job is to advise them. Some people choose not to listen."
The above scenario highlights the need to not only have retirement savings goals, but also spending targets that are in line with their savings accounts in addition to their desired lifestyle.
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January 31, 2017
You lost your job and could no longer afford your monthly mortgage payments. You stopped making them and lost your home to foreclosure. Maybe you've made so many financial missteps that you filed for either Chapter 13 or Chapter 7 bankruptcy protection to get a fresh start.
These are big financial disasters. Each will send your credit score plummeting by 100 points or more. And don't expect to qualify for credit cards, a mortgage loan or auto financing anytime soon.
3 Biggest Credit Busters
There is hope, though. It is possible to recover from each of these three financial disasters. It just takes time and good financial habits to boost your credit score and become an attractive borrower once again.
"A lot of times people say that they can't do anything for seven or 10 years after a foreclosure or bankruptcy," says Chris Copley, who has worked as a regional manager for TD Bank. "That's not necessarily true. If you take the steps to rebuild your credit, you might be able to get a credit card or even a mortgage loan before that seven- or 10-year period is up. Don't fall into that trap of thinking that there's nothing you can do."
Foreclosure and short sale
If you began falling behind on your mortgage payments, you may have sold your home through a short sale, a type of home sale in which your lender allows you to sell your residence for less than what you owe on your mortgage loan. Having such a sale on your credit report marks you as a high credit risk, and a far less attractive borrower to lenders.
Losing a home to foreclosure or selling a home through a short sale is a serious blow to your credit, and will send most consumers' scores falling by more than 100 points. Even worse, both a foreclosure and short sale remain on your credit report for seven years.
Chapter 13 bankruptcy
Bankruptcy filings stay on your credit report for a long time, too. If you file for Chapter 13 bankruptcy protection, in which a judge creates a payment schedule that allows you to pay back at least a portion of your debts, your bankruptcy filing will stay on your credit report for seven years before falling off.
Chapter 7 bankruptcy
If you file for Chapter 7 bankruptcy protection instead, this filing will remain on your credit report for 10 years. Under this form of bankruptcy you'll have to sell most of your assets to pay back what you can. The debt that you still can't afford to pay back is erased.
How to Rebuild Your Credit Score After Financial Disasters
But this doesn't mean that you won't be able to qualify for a loan or credit card for a full seven years. The more years that pile up between you and your foreclosure, the less impact a foreclosure has on your three-digit credit score. In year six, your foreclosure will remain on your credit report, but it won't exert the same downward pull on your score.
Make on-time bill payments
After a foreclosure or similar credit-busting incident, avoid being late on bills, eliminate as much of your credit card debt as possible and keep the balances low on your credit cards. If you practice these sound habits, your score will slowly -- but steadily -- rise after a foreclosure.
"Pay all your bills on time. That is the most important thing you can do," says Patrick Simasko of Simasko Law Offices in Mt. Clemens, Michigan. "Don't throw in the towel. Don't think the hole is too deep to dig out of. You can dig out of it. You just have to be fiscally responsible from that point on."
Wait until you can apply for another mortgage loan
Even if you rebuild your credit score and grow your savings account for a down payment, though, you will have to be patient if you want to qualify for a mortgage.
Applying for a mortgage after foreclosure
You'll have to wait at least seven years after a foreclosure before applying for a conventional loan backed by Fannie Mae and Freddie Mac. But you can qualify for a mortgage backed by the U.S. Federal Housing Administration, better known as an FHA loan, as soon as one year after a foreclosure if you can prove that you fell behind on your mortgage payments because of an economic event outside of your control, such as a job loss. If you can't prove this, you can still apply for an FHA-insured mortgage just three years after a foreclosure.
Getting a mortgage after bankruptcy
If you want to apply for a mortgage loan after bankruptcy, you'll also need to wait. If you want to apply for a conventional mortgage backed by Fannie Mae or Freddie Mac, you'll need to wait at least four years if you filed for Chapter 7 bankruptcy and two if you filed under Chapter 13. For an FHA loan, you'll need to wait two years after Chapter 7 bankruptcy. You can qualify for an FHA loan after you have made at least 12 months of on-time Chapter 13 payments.
Lower credit card debt
If you want to apply for a new credit card or auto loan, you won't have to wait as long as for a home mortgage. You'll simply have to build up your credit score over time by never making another late payment and reducing your credit card debt. Depending upon how low your score fell, you might have to practice these good financial habits for a year or more before you start to see any improvement in your score.
Just as with foreclosure, the negative impact of bankruptcy filings lessens over time. Again, you'll need to pay your bills on time and keep your credit card debt low to see your credit score slowly rise as the years pile up after your filing.
Show you can handle new credit responsibly
You want to reduce your current credit card debt to a manageable level, but what if you want to apply for a credit card? This is probably a good idea, if you can handle this new credit. Once you get a credit card, you can begin making charges each month. Pay off your full balance each month on time. If you do this for a long enough period of time, your credit score will steadily rise.
Look into a secured credit card
Don't expect to qualify for a premium credit card with a low interest rate when a bankruptcy filing is still on your credit report. Instead, Simasko recommends that you apply for a secured credit card. To do this, you'll need to make a cash deposit in an account tied to the card. Your credit limit is set based on the amount of your money in that account. This provides protection for the financial institution giving you a card. If you don't make your payments, the bank behind your card can simply take the money out of your security account.
Banks do, though, report payments on secured credit cards to the three national credit bureaus of Experian, TransUnion and Equifax. Make these payments on time each month and you'll improve your credit score.
Diversify credit types and prove you're a low risk
Another way to raise your financial standing is to diversify the types of credit you have on your credit report, such as an auto loan. You can still qualify for an auto loan as long as you show that you can afford the monthly payments. Prove your ability to pay with copies of your most recent paycheck stubs, bank-account statements and W-2 forms. But do expect to pay higher interest rates. Charging these higher rates provides some protection to lenders who are taking on more risk by loaning you money.
"You are going to have to wait for a while after one of these financial issues to apply for new credit or debt," Copley says. "But just because you filed for bankruptcy doesn't mean that you can never become a fiscally responsible consumer. You can. You just have to make it a habit to pay your bills on time. Do that long enough, and banks and lenders will work with you again."
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January 23, 2017
In a youth-oriented culture, it is easy to feel a little over the hill by the time you turn 50. When it comes to building wealth though, your 50s are the prime of your life - a period when you have a chance to emerge from debt, enjoy your peak earning years and start to see your investments make a serious contribution to your net worth.
To take advantage of this crucial phase of your financial life, it is important to understand some key factors that can help you make the most of your 50s.
Personal finance checklist at age 50
As you look over your financial situation once you turn 50, here are some things you should attend to:
1. Shift more heavily from borrowing to saving
Early in your career, accumulated savings are likely to be modest and it seems you are taking out one loan after another: student loans, car loans, home mortgages, etc. By the time you reach age 50 though, you should have greatly reduced your debt burden. In its place, you should see a growing portfolio of retirement assets. This is the type of trend that can feed on itself: the more you retire your debt, the more of your monthly budget can go to savings rather than loan payments.
2. Estimate your Social Security benefits
The U.S. Social Security Administration will provide you with a free projection of your retirement benefits based on your career earnings so far. While this will remain subject to change based on your subsequent earnings, by age 50 you should have enough of a track record to get a sense of what contribution Social Security will make to your retirement income. This projection can also help you start to think seriously about the pros and cons of retiring early or working longer to achieve the maximum annual benefit.
3. Reassess your retirement goals
In addition to Social Security, look at your other retirement savings and see how much income they project to provide. Knowing where you stand will help you make more concrete plans about the future, including when to retire and what kind of lifestyle to expect.
4. Use catch-up retirement saving opportunities
Looking at your projected Social Security benefits and your savings accounts relative to your goals may tell you that you have some catching up to do. Fortunately, the government gives you some catch-up opportunities in the form off additional tax-deferred retirement contributions to 401(k) or individual retirement account (IRA) plans that you can make once you turn 50. Use this as an incentive to start making extra contributions.
5. Keep your asset allocation aggressive
People often feel their investments should get more conservative as they get older, but age 50 is too soon to throttle back to a less growth-oriented asset allocation. At that age, you are probably still more than a decade away from retirement, and still have an investment time horizon of some 30 or so years stretched out ahead of you. Plus, if you are contributing heavily to your retirement plans, this positive cash flow will help smooth out some of the volatility from growth investments.
6. Update your will
If you first made a will when you started your family, you might find things are radically different by the time you turn 50. Your kids may be on the verge of adulthood and your net worth may be substantially greater, so it is a good time to take a fresh look at what provisions you've made for your survivors.
7. Don't be shy about discounts
Turning 50 makes you eligible for AARP membership. Don't let that make you feel old - just look at the discounts available, and think of it as an advantage you've earned.
8. Take advantage of senior checking accounts
Some banks offer checking accounts for older customers that have no monthly fees. Eligibility is often set at age 50, and with free checking getting harder to find these days, signing up for one of these accounts can be another advantage of getting older.
9. Survey your career opportunities
Since these can be your peak earnings years, you should assess whether your current employer is the best place to capitalize on those years, or whether you could do better somewhere else. To think more defensively, you should also take an honest look at whether your job skills need freshening up so your employer does not view you as out of date.
With proper attention to your finances, this could be your greatest decade for wealth building. After all, it is too late for procrastination and too early for slowing down. This is prime time.
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December 16, 2016
How many times have you resolved to lose 15 pounds or go to the gym more often? Maybe it's time to make resolutions that you can keep for a better 2017.
The start of a new year is a great time to begin an emergency fund, create a household budget or pay off debt.
Several financial planners share their tips on what resolutions and steps consumers can take today that will result in a healthy financial year in 2017.
Here are 15 steps to prepare your finances for next year:
1. Start/build an emergency fund
Wilson Moy, director of financial planning and senior trust officer at AAFMAA Wealth Management & Trust, says that the best move consumers can take is to resolve to build an emergency fund next year.
As its name suggests, an emergency fund is an account -- typically a savings account -- that consumers can tap to pay for life's unexpected events, such as a broken water heater or a blown transmission on the family car.
2. Aim to save 6 to 12 months of expenses
Moy says traditionally, financial experts have recommended that consumers keep three to six months of living expenses in their emergency funds. But that might not be enough today, Moy says.
Instead, Moy recommends building an emergency account that holds six to 12 months of living expenses.
"Things change so fast today," Moy says. "If you're the single wage-earner for your household, what would happen if you lost your job? Three to six months might not be sufficient. Without that emergency fund, you might be forced to make big changes, such as selling your home, if you do lose your income for any period of time."
3. Create or adjust your household budget
Drafting a budget for your household doesn't sound like fun. But Craig Robson, senior vice president of wealth management at the Atlanta office of Merrill Lynch, says doing so is a key step in having a healthier financial year in 2017.
4. Update your monthly income in the budget
Creating a household budget isn't overly complicated. Start by listing your monthly income. Account for any increases in salary or bonuses your employer mentioned for next year.
5. Adjust fixed monthly expenses
Then list your fixed monthly expenses, items such as your monthly mortgage payment, car payment and estimated utility bill. Note if there are any modifications in these costs, like a new addition to the family or the additional expenses of a longer commute.
6. Set aside money for other household costs
Finally, determine how much money is left over. This is money that you can earmark for entertainment, weekly groceries and eating out.
7. Put money toward financial goals
Use the remaining money to achieve your financial goals, such as saving for college or building an emergency fund.
Once you know how much money is coming into and out of your household each month, you can take steps to either reduce your expenses or boost your monthly income to meet your specific financial goals, Robson says.
"Studies show that those who create budgets are more likely to achieve their financial goals," Robson says.
8. Target high interest debt
Kevin McCarthy, financial advisor division manager with SunTrust Investment Services, says before making any big financial moves, consumers should resolve to pay off any debts that come with high interest rates.
This usually means credit card debt, which can come with interest rates of 20 percent or higher, making it the most expensive debt you can carry.
9. Limit dependence on credit cards
Kathleen Hastings, portfolio manager with FBB Capital Partners in Bethesda, Maryland, says the biggest mistake people make is running up their debt. The best resolution you can make, then? To use your credit cards wisely.
Consider only making purchases with your cards that you can pay off in full when your bill comes due. Using your credit cards in this way is smart: You don't have to carry loads of cash with you and you can improve your credit score by paying off your debts on time each month.
"Resolve to stay out of this kind of debt," Hastings says. "If debt gets out of control, it's really tough to eliminate. It compounds. It snowballs. The next thing you know, you are $30,000 or $40,000 in debt."
10. Look into transferring debt to a low interest card
The high interest of certain credit cards make them hard to pay off debt. Some consumers may want to look at the option to transfer their balance to a low or 0 interest credit card. Though the promotional interest rate will not last, they can use this opportunity to pay down the debt. Before moving your balance, compare different cards and be aware of transfer fees.
11. Pay off credit card debt
Financial pros recommend several ways to pay off your credit card debt. Start by paying extra each month on the card that has the lowest balance. Once you pay that off, you can then take the extra cash and begin paying off the card with the next-lowest balance.
Or begin paying off the card with the highest interest rate first, no matter how small or large its balance is. Once you pay off that card, take on your credit card that has the next-highest interest rate.
12. Prepare to max out retirement savings contributions
Kevin Houser, manager partner with Allentown, Pennsylvania's Houser & Plessl Wealth Management Group and one of the authors of "The Book on Retirement," says resolving to maximize the contributions to your retirement plans -- whether 401(k) plans or individual retirement accounts -- is a step that everyone should make.
Most people know this. But they instead let emotion, such as worrying that they'll miss those extra dollars being funneled from their paycheck to their 401(k) plan, over numerical facts dictate their decisions.
13. Raise retirement plan contributions
Instead of devoting, for example 12 percent of each paycheck to their 401(k) plan, they instead contribute only 8 percent. That ends up costing them big dollars come retirement time.
"So often, emotions drive our retirement decisions," Houser says. "The black-and-white of the numbers is easy. People know they should contribute as much as possible to their retirement plans. The underlying shade of grey that comes in when emotions get involved is what clouds our judgment."
To calculate how much to increase contributions to meet your goal, use a retirement savings calculator.
14. Review your insurance
If you haven't had a chance to look over your insurance, from health to life insurance, make sure to go over costs, deductibles and other expenses for next year. For example, you may want to increase your amount of life insurance if your income is now higher.
15. Consider housing options
Are you renting when you should be buying a home or find yourself in a place that is too small? Assess your current living situation, research new housing options and calculate whether you have the finances to make a move. If not, grow a savings account to relocate or see about refinancing to lower mortgage rates.
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