Random financial tips


“I’m feeling rather ungrateful”


I’ve come across a few interesting / relevant ideas lately.  There isn’t exactly a thematic coherence between these financial tips / this financial advice, but it’s worth sharing.

Random financial tips

  • HSA (Health Savings Account) can be used as a super-charged retirement account.  Here’s how it works.  Contributions

“an ounce of prevention is worth a pound of cure”aren’t taxed. Contributions can be invested in the stock market and will grow tax-free.  Contributions can later be withdrawn and used for medical expenses, tax-free.  Alternatively, after the age of 65, contributions can be withdrawn and used for anything, but non-medical expenses will be taxed as income, similar to IRA or 401k.  There is a a $3,350 contribution limit for individuals in 2015 and a $6,650 limit for families.  So, at worst, the HSA mimics an IRA or 401k, at best, it is a completely tax-free investment vehicle for future medical expenses.  Bottom line: if one can afford it, invest and don’t touch HSA contributions until much later in life; pay for medical expenses with taxable money to give investments time to grow. (See: Mad Fientist (1)(2) and Betterment)

  • There is no clear-cut answer for Roth vs. Non-Roth retirement accounts. The general rule of thumb for deciding between a Roth IRA or a traditional IRA is: if you expect to be in a higher tax bracket when you retire, use Roth to pay lower taxes now, if not, use a traditional IRA/401k to defer taxes until later when you’ll be in a lower tax-bracket.  Personal Finance PhD. Wade Pfau shows that it is a little more complicated than that.  His recommendation is a blend of Roth and traditional retirement accounts, so maybe use a traditional 401k but also use Roth IRA’s for tax diversification.
  • Everything you know about glide paths (asset allocation by age) is wrong.

Okay, that’s a little dramatic, but Pfau also has some interesting research showing that instead of reducing the percentage of stocks in your portfolio as you age, it is better to follow a U-shaped lifetime glide path, meaning one should have the highest percentage of their portfolio allocated to stocks early in their career and then later in retirement.  It is right at the start of retirement that one should have the lowest percentage of stocks in their portfolio.  Why?  As I alluded to in the location arbitrage article, the time immediately before and immediately after retirement is when a nest egg is most vulnerable.  So the thought is to protect the value of your nest egg during that time with a higher allocation of bonds and then slowly shift that allocation to riskier stocks after a few successful years of retirement.  This U-shaped allocation glide path strategy apparently lends itself to some of the highest portfolio success rates.

  • Being thankful is likely to help improve your finances.  Recent research shows that a healthy sense of gratitude significantly improves patience and self-control, two key virtues for achieving personal finance goals.  So be thankful for what you’ve got this holiday season. Case in point: check out MMM’s latest where he frames their $40,000 equivalent lifestyle as a lifestyle of luxury rather than deprivation… not that I doubt the joy of such a lifestyle, just that his financial success probably wouldn’t be possible without such an enlightened attitude of gratitude.  The flip side of this is that in a society where there are pretty substantial amounts of inequality and where we tend to compare ourselves to each other on social media sites and in other ways, our patience and self-control are likely to be especially unreliable. Rise above.
  • Housing isn’t the best investment and shouldn’t constitute the largest portion of your portfolio. I’ve mentioned many times that housing returns have barely outpaced inflation historically, yet housing remains the primary savings vehicle for most people in the U.S.  This is unproductive for building wealth.  I can’t find the article now, but I remember seeing a comparison, on Betterment I believe, where one person paid off their mortgage early rather than invest and the other person paid the minimum on the mortgage and invested the difference.  The results showed an enormous difference in the values of their portfolios after a number of years (maybe $300-$500k after 20 years).  This isn’t surprising given the low returns and lack of diversification with housing, and it is particularly important for current and soon-to-be homeowners in the Midwest and other areas of the country, where the housing market is expected to do the worst going forward (coastal is a different story). According to The Milloinaire Next Door, a good rule of thumb is to buy a house that is no more than 3 times your annual income, so a $50k income couple should target a home for $150,000 or less.  And then, pay the minimum payment and invest any extra money. *It should be said the the pay mortgage early vs. invest debate is still very alive and well, and there are a variety of factors to consider and opinions on the subject; different people will have unique preferences and situations.

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