Tracie Dawson

Utilizing a health savings account can be a smart way to pay for current or future healthcare expenses, or even another way to save for retirement. If you own a high-deductible health insurance plan, you may have the option of opening a health savings account (HSA). Health savings accounts are tax deferred, so your earnings’ growth will be tax-free. Your contributions are sheltered from income taxes and so your withdrawals for qualified health care expenses are also tax-free. HSA benefits not only provide a way to lower overall costs for medical expenses, but also provide a non-traditional tax-free retirement savings opportunity. Managing an HSA is easy as long as you adhere to the contribution and withdrawal guidelines.

If you are covered by a high deductible health plan and are not receiving Medicare, you are eligible to contribute to a health savings account. HSA contributions can be made by you and/or by your employer. Employer contributions reduce your taxable income; personal contributions are tax deductible. There are limits on the amount you can contribute to your HSA each year: in 2015, the maximum contribution with individual health coverage is $3,350 (with $6,650 allowed if you have family coverage). Individuals who are 55 or older may contribute an additional $1,000 as a “catch-up” contribution. Contributions that are not used for medical expenses can be invested and accessed in the future for health care expenses—making health savings accounts a great way to save for emergencies.

Withdrawals from health savings accounts are exempt from income taxes as long as the withdrawals are used to pay qualified medical expenses. Qualified expenses include medical deductible and co-payments, prescription drugs, dental visits, orthodontics, glasses, long-term care insurance premiums, and the cost of COBRA coverage. You can also re­imburse yourself for your Medicare Part B and Part D expenses. (Note that if you are under age 65, there is a 10% penalty on the amount withdrawn for non-qualified expenses.)

If you pay for qualified medical expenses with non-HSA funds while you are covered under an HSA plan, you can reimburse yourself at any time. (You have to keep records of all qualified expenses in order to document your current and potential future withdrawals.) Once you reach 65, your withdrawals are no longer subject to penalty. You can withdraw funds from your HSA and only pay income tax on nonqualified withdrawals—making an HSA an effective way to save for retirement.
You own and control the money in your health savings account. The accounts are portable and remain with you even if you change medical plans, change employers, or retire. As an HSA account holder, you can designate beneficiaries for your account so that upon your death, any money left in your account becomes the property of your beneficiary. If your spouse inherits your HSA, it remains an HSA and retains its tax-deferred status. If someone other than your spouse inherits, then the account is no longer an HSA and the fair market value of the account becomes taxable for your beneficiary.

Health savings accounts provide a smart, flexible way to save. The funds can be used as needed for medical expenses or the account balance can be allowed to grow tax-free and/or used as a retirement fund. As more people are signing up for high deductible health insurance policies, more individuals will be able to benefit from the many advantages of health savings accounts.

You still have until April 15, 2015, to make HSA contributions for the 2014 tax year. For more information on health savings accounts go to www.irs.gov.

Susan A. McCants

Let’s start with a simple question: “A bat and ball cost $1.10 together. The bat costs $1 more than the ball. How much does the ball cost?”

The vast majority of people respond quickly and confidently, insisting the ball costs 10 cents. This answer is both incredibly obvious and utterly wrong. Interestingly enough, education does not seem to help since more than 50% of students at Harvard, Princeton and Massachusetts Institute of Technology routinely give the incorrect answer as well. (Please find the correct answer at the end of the article.)

When people face an uncertain situation, they do not carefully evaluate the information or look up relevant statistics. Instead, their decision depends on mental shortcuts called “heuristics” and flawed biases, which often lead them to make foolish decisions. The shortcuts are not a faster way of doing the math; they are a way of skipping the math altogether.

How do you go about making smart financial decisions when our brains are wired to take shortcuts? We are unable to change the biology and chemical makeup of our brains; however, we are able to recognize and educate ourselves on their potential weaknesses and agree to create safeguards to protect from future faulty intuitive thinking.

People are also plagued by biases that cause them to be overconfident, overoptimistic, susceptible to framing, and desiring to stay with the status quo, regardless of the costs. Do you or someone you know suffer from any of these biases?

Overconfidence:

Investor overconfidence has two main implications. The first is that investors take bad bets because they fail to realize that they are at an informational disadvantage. The second is that they trade more frequently than is prudent, which leads to excessive trading volume.

Overoptimistic:

People judge their chances of a experiencing a good outcome such as obtaining financial security, having healthy children, or having a successful marriage higher than average. But when they contemplate the probability that something bad will take place such as losing a job, divorce, losing money on a house, they estimate their odds to be lower than those of other people.

Frame dependence:

A person answers a question differently based on the way in which it is asked or “framed.” Which prognosis sounds better: A) You are given an 80% chance of a successful surgery, or B) You are given a 20% change of death. An individual who is given the option between two surgeries and told that surgery 1 has an 80% chance of success while surgery 2 has 20% chance of complications or death might select surgery 1 because of the positive way the sentence was framed.

Status quo:

People are biased to keep things the way they are, even if they did not originally choose the position. People are biased to avoid risks generated by change, even when the risks are less than from making no change because changing outcomes requires pursuing action and change.

The importance of healthy decision making in regards to personal finance cannot be overstated. A strong financial adviser may act as a change agent in your life to assist you with strong emotions and impulse control. Of course, this is much easier said than done. Educating yourself about financial biases will not sure you from taking mental shortcuts or making irrational decisions; however, creating an awareness of your potential weaknesses may create dialogue with your spouse or trusted adviser leading to the implementation of a systematic and disciplined approach to making smart financial decisions.

The financial planning process creates sustainable change when clients work with a trusted adviser in a relationship that goes beyond the numbers. If you are willing to take the time to explore how and why you make certain financial decisions, you may be better equipped to “stay the course” on the financial plan you create with your adviser.

Here is the answer to our question.

We are told that the bat cost $1.00 more than the ball. For illustration, review the potential prices of the ball ($ball) and what that would mean for the price of the bat ($bat) and the total cost ($Total)?

From the above, “10c” is clearly the wrong answer, though most people would answer .10 for the cost of the ball. It makes the total cost $1.20, not $1.10. Indeed, any cost higher than 5c for the ball must be wrong, as the total cost will be more than $1.10. Ball prices less than 5c mean that the total is less than $1.10. A price of 5c for the ball and $1.05 is the only scenario in which the bat costs exactly $1 more than the ball, and the total is $1.10.

---

This article originally appeared February 5, 2015 online at MidlandsBiz.com.

Bailey O. Davis

With so many baby boomers reaching retirement age, how to maximize one’s social security benefits has become a hot topic these days. Although it was originally not meant to be, our next guest says that Social Security is, indeed, a critical component of retirement planning.
Mike Switzer interviews Susan McCants, CFP with Abacus Planning Group in Columbia.

Listen to Susan’s interview on SC Business Review:

Further resources from SC Business Review »

Susan A. McCants

Health Savings Accounts (HSAs) have been around before the new healthcare reform law and they’re still available now. And with so much emphasis now on high-deductible health insurance plans, our next guest says that the HSA could be a valuable benefit.
Mike Switzer interviews Susan McCants, a CFP with Abacus Planning Group in Columbia.

Listen to Susan’s interview on SC Business Review:

Further resources from SC Business Review »

Susan A. McCants

Many times, two or more people will consider buying property together. And we’re not necessarily talking about couples. Our next guest says that buying real estate with someone else can have its perks, if it is done with care.
Mike Switzer interviews Abby Mason, a CFP with Abacus Planning Group in Columbia.

Listen to Abby’s interview on SC Business Review:

Further resources from SC Business Review »

J. Abigail Mason

As the April 15th tax deadline approaches, many people are considering lowering their tax bill or increasing their refund by making a contribution to a retirement account. Our next guest says that maybe you should instead think about making that contribution to a retirement account that does not give you a current tax deduction, that is into a Roth IRA or Roth 401(k).
Mike Switzer interviews Corinne Sheridan, a CFP® with Abacus Planning Group in Columbia, SC.

Listen to Corinne’s interview on SC Business Review:

Further resources from SC Business Review »

Corinne S. Hanna

Most stock brokers and financial advisors will tell you that their clients expect them to have a crystal ball when it comes predicting stock prices and financial markets. If only such a prognistication device was available! However, the 2013 Nobel Prize in Economics was given to three researchers who have made progress in that area.
Mike Switzer interviews Cheryl R. Holland, a CFP® with Abacus Planning Group in Columbia, SC.

Listen to Cheryl’s interview on SC Business Review:

Further resources from SC Business Review »

Cheryl R. Holland

Here we are near the end of January already. Which means you’ve had almost a whole month to start putting into place your new year’s resolutions. A common resolution for many is to have a financially successful year. In case that is one of yours, our next guest says there are 10 simple steps that anyone can take to make 2014 a financially successful year.
Mike Switzer interviews Alex Chastain, a CFP® with Abacus Planning Group in Columbia, SC.

Listen to Alex’s interview on SC Business Review:

Further resources from SC Business Review »

X. Alexandra Chastain

A target date mutual fund (TDF) is a single investment composed of other investments, usually other mutual funds, to form a single diversified investment. The goal of this type of mutual fund is to reduce the amount of risk as the investor nears retirement. One of the defining characteristics of TDFs is that the asset mix within the fund changes and becomes more conservative over time. As the current year nears, (and surpasses) the stated year on the TDF, the investments in the fund will change to become more focused on income and stability. For example, currently 2040 TDFs have approximately 85% of the investments in stocks (more risky) and 15% in fixed income or bonds (less risky). Conversely, a TDF with a date of 2015 would have 50% in stocks and 50% in bonds. Most 529 college savings plans use a similar type of investment strategy in their age-based investment choices.

The Pension Protection Act of 2006 allows for the use of TDFs as the default option for 401(k) retirement plans for participants who do not wish to choose their own investments. As a result, TDFs have become very popular in recent years even though they have been around since the early 1990s. Recent studies have shown that assets in TDFs have increased five-fold since 2005. In fact, Vanguard has indicated that 25% of current retirement plan participants and over 60% of new participants are invested in a target date fund as the sole investment of their plan.

The advantages and disadvantages of target date funds

Picking investment allocations can be daunting. TDFs allow the investor to take a “set it and forget it” approach making the simplicity of these funds their biggest advantage. TDFs are a great choice for investors who do not want to spend time researching their own investments and do not understand how to construct a properly diversified portfolio. The level of diversification within a TDF may also be an advantage because a retirement plan participant may gain access to asset classes that are not otherwise available.

Unfortunately, one size does not necessarily fit all investors. For instance, investors who have assets outside of their retirement plans may want to pick specific investments rather than pick randomly from a diversified bucket to complete their portfolio allocations. TDFs have recently also garnered criticism for taking more risks than necessary in the years nearing retirement dates, made worse by the 2008 market. The average decline for 2010 TDFs was 37% from the 2007 market peak to the bottom of the market in 2009 was difficult hard for someone who is only a year or two from retirement.

Another disadvantage is the potential for conflicts of interest to arise for the fund companies and managers. Companies receive more revenue from funds that are invested in stocks versus bonds, and some investors will look solely at historical returns on investment to decide which fund is best for them in any given retirement year. This is an incentive for managers to take extra or unnecessary risks close to the indicated retirement date that could be detrimental to the investor with little to no consequences for the fund companies and managers.

What to look for in a target date fund

Several factors should be considered when thinking of investing in a TDF. As always, the first consideration should be expenses and whether you would like a fund that uses active management or a passive indexing strategy.

While all target funds have the same underlying objectives to reduce portfolio risk as the investor gets closer to retirement, not all TDFs are created equal. The allocations for the same retirement year may vary across mutual fund providers—and sometimes by a very meaningful amount. For example, The Alliancebernstein fund with a target date of 2040 has 95% of funds allocated to equities, whereas another company had the least allocation of 38%. The average allocation was 87% across all fund companies. The lesson to be learned is to refrain from choosing a fund company that has an allocation on an extreme. Additionally, not all investors have the same tolerance for risk. Therefore, it is important for an investor to choose a fund with allocations that will achieve their financial goals and let them sleep at night.

Finally, TDFs are not a guarantee of retirement success. Retirement plan sponsors are obligated to educate their participants concerning investment-associated risks. A recent study by Alliancebernstein suggested that 50% of surveyed workers “mistakenly believed that using [TDFs] will guarantee that their retirement income needs will be met,” a misconception that can easily be rectified with proper client education.

Overall, TDFs are popular and advantageous investment choices for participants desiring a simple investment strategy. With proper education about TDFs, many investors can have some peace of mind about their retirement funds.

---

This article originally appeared in the December, 2013 issue of Columbia Sun News.

Download this article: Target date mutual funds
(429 Kb)

Stephen “Scotty” J. Scott