All posts tagged Lean Investing

Tax-Free Investing. The True Secret Behind Health Savings Accounts.

By Brad Beckstrom

Why would I waste a perfectly good Thursday morning writing about health insurance and health savings accounts? Well, politics has made paying for healthcare a national obsession.

There’s been a lot in the news recently about the spiraling costs of healthcare and Republican promises to cut the costs of health insurance for individuals and families. While no formal plan has been presented, one key component mentioned by both Republicans and Democrats is the Health Savings Account or HSA. The fact is, tax-advantaged HSAs have been around for years. In many ways they are also one of the best ways to save for retirement. I’ll explain why.

What is an HSA?

An HSA used in conjunction with a high deductible health insurance policy allows users to save and spend money tax-free to use for medical expenses. Contributions to an HSA can be made pre-tax directly from your paycheck or you can make contributions on your own that are 100% tax-deductible, up to $3300 for individuals and $6550 for families and, if you’re over 55, you can contribute $7550 per year. For example, a family in the 25% marginal tax bracket could save you over $1600 a year in taxes.

How does it work?

Once you have money in your account, you can then use it to pay for all types of medical expenses, including things like new glasses, prescription drugs, medical and dental visits, and any medical expenses not covered by your high deductible health plan. To be eligible, you need to have a health plan that qualifies as a high deductible plan. (Example a minimum deductible of $1300 for singles or $2600 for families). A high deductible plan means you will pay more out of pocket before meeting your deductible. The advantage is that the premiums on these plans are lower. Due to the high cost of health care, many employers are now offering only high deductible plans, or versions of it, as an option.  For entrepreneurs, these plans are also available through healthcare.gov and labeled as HSA or through most health insurance brokers at comparable rates. Read more…

A Short Guide to Lean Investing.

taking-the-simple-path-to-wealth

By Brad Beckstrom

Have things gotten too complex?

Today we have more savings and investment options than ever before. Online tools and investment options that give us access to over 10,000 mutual funds and exchange traded funds, with another 40,000+ publicly traded stocks worldwide. Most of these investments are accessible without setting foot in a brokerage firm or bank. Online banking, trading, and mutual fund supermarkets give us access to sophisticated investment tools available only to professionals just a decade ago.

Yet, despite so many options, the US personal savings rate is hovering between 5% and 6% and has been in steady decline since the 50s. The retirement savings picture is even worse, one in three American adults has zero saved for retirement and 62% have less than $1000 saved. Many Americans like to blame the government for this predicament but in fact many countries with significantly higher taxes have savings rates that are 2 to 3 times ours.  On top of our tax advantages, we have a wide selection of pre-tax and post-tax savings options many other countries don’t have, including 401(k)s, IRAs, SEPs, Roth IRAs, Health Savings Accounts, 529 college savings plans, and about 10 more with various combinations of numbers and acronyms in the name. All of them are underutilized by any standard of measurement.

Part of the problem is complexity. We’ve made it easier to go out and get a loan for a new SUV or a 5,000 square foot house than to start saving or put that money away for retirement.  We’ve been incentivizing people to take out student loan debt instead of starting college savings accounts.

To solve the complexity problem we need to make it easier to save and invest. We need to create a simpler path to wealth through regular and efficient investing. I like to call this Lean Investing. Read more…

Lean Investing. Doing Less to Earn More.

the long climb

by Brad Beckstrom

With most things in life, simpler is better. I’ve learned this is especially true in investing.  It started out simple enough, it was the 80s and I was working at my first job out of college. I had a few dollars to invest so I purchased a mutual fund. It was the hottest fund at the time, The Fidelity Magellan fund managed by the infamous Peter Lynch.  It was a few days before Black Monday one of the largest single day drops in US stock market history. I was off to a fabulous start.

But I stuck with it. I added a small amount to the fund each month. Over time, I purchased other funds, international funds, bond funds, small-cap funds, mid-cap funds, over-the-counter funds. At some point I consolidated all these funds into a Fidelity Brokerage account.

The brokerage account was very appealing to me. I could make stock purchases online and rollover retirement accounts into one place. I could shop in a mutual fund supermarket (Fidelity was one of the first brokerages to offer access to competitive mutual funds via a fund supermarket.) This made it easier to add even more variety to my portfolio funds with names like Pacific Tiger, The Clipper Fund, California Muni.  I would look for funds highly rated by Morningstar. What could go wrong with a four-star rated fund? I was pretty much an investing genius. It was 1999.

The bubble bursting in 2000 was a wake up call. I would continue to stick with investing, but I would need an even more diversified portfolio, loading up on more bond funds and international funds, as well as individual value stocks. I would follow a bulletproof portfolio philosophy and be highly diversified, adding real estate investment trusts, emerging markets and global bond funds. Online trading made tracking and adding all of these investments much easier.

At one point, I owned over 30 different stocks and funds spread out across retirement and investment accounts. They were all with one broker, but it was a mess, hard to balance and even harder to fix. Not long before the global financial crisis in 2008, I also realized that many of these funds moved in the exact same direction, especially during a downturn.

Through all my efforts, I had basically created a giant global index fund with one key point of difference — I was wasting thousands of dollars in annual mutual fund fees. As with everything else in my life, I needed to simplify.

Around this time, I discovered The Stock Series by James Collins. I can sum up James’s investing philosophy with three bullet points:

  • You can’t beat the market long-term.

  • Buy no more than three low-cost index funds to cover the entire market

  • Low cost means funds with expense ratios of under 0.10%.

I can promise you once you read his stock series, you will be sold on this approach.  If you need more convincing, visit personalcapital.com and try out their free 401K fee analyzer. You will find. as I did, that some of the mutual funds in your account have fees that are 10,15 or 30 times what James Collins is recommending.

How do high fees impact investments? Here is a sample for a 30-year-old active investor with a variety of widely traded mutual funds with fees ranging from 1.35% to 2.75%.  Here’s the shocker, this investor will lose 44% of his earnings to fees from now to his retirement age at 65.

Image: Personal Capital 401K Analyzer Example

401k Fee Analyzer

The funds listed in this example are actual funds and their fees are fairly typical. In my own research, I found that many of the funds I owned were charging fees ranging from 0.67% to 1.75%. Again, 10 or 20+ times the fees Vanguard charges for one of the funds that James recommends. Vanguard total Stock market Index fund VTSAX. Expense Ratio 0.05%. For those who don’t have access to Vanguard Funds you can research  similar total stock market index funds. I was able to find  Fidelity Spartan Total Market Index Fund  with an expense ratio of 0.06%. FSTVX

If you want to do a quick check of your funds fees, you can also use Google Finance. Just type in the symbol of any mutual fund you own and scroll down to key statistics you will see both expense ratios and management fees.

If you’re a 30-year-old investor, you can thank me later after you’ve saved hundreds of thousands on fees over the course of your investing life.  I found one of the added benefits to be less worry about picking a dog stock or a dog fund, and more free time through simplification.

So here’s my quick recommendation for simplifying your investing life.

  1. Read the The Stock Series by James Collins. You can just start with the first five posts and get most of what I’ve discussed here.

  2. Get a handle on what you’re paying in fees. You can use the free automated tool at personalcapital.com or go the manual route using Google finance to look up individual funds.

  3. Make a quick spreadsheet of all of your funds called portfolio makeover include funds from your company 401(k) or 401(k) rollover accounts. You can also include fund investments in non-401(k) accounts

  4. Make a plan to move money out of the funds in 401K accounts with the highest fees first.

  5. Set a goal to consolidate all of the funds into two or three total stock or bond low-cost index funds representing the total stock market with expense ratios of than 0.25%

  6. Buy and hold, avoid trying to time the market.

Not sold on this approach. I’ll drop in one simple chart from John Bogle.

index funds versus mutual funds

I’d love to hear your experience in simplifying your investments. A quick disclaimer — Any concepts presented on this blog are simply opinions and should not be considered as professional investment advice.  As with most other things in life, you are solely responsible for your own choices, make them thoughtfully.

The Frug