Apprise’s Five Favorite Reads for the Week of January 16, 2022

A Hand Putting Money Into Retirement Box To Save For Retirement
Articles discussing HSAs, effects of the car shortage, Pre-tax vs Roth 401k's, generosity, and estate plans.
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The start of the new year has been a bit challenging. We’ve had to deal with another pandemic-related scare. The rise of the Omicron variant has resulted in a sharp uptick in new covid cases. It’s starting to feel inevitable that we will all come down with covid at some point. Those of us who are vaccinated (and boosted) can take solace in knowing that getting your vaccination helps minimize covid’s effects in the vast majority of cases.

The weather has turned much colder in the new year as well. Not surprisingly, many of the predicted storms have failed to meet expectations. Today is the latest example of that. We did not receive the forecasted snowfall. Looking out my office window, I see sunshine and no snow on the ground. But looks can be a little deceiving. Temperatures are dropping as the day goes on.

Financial markets, like the weather, are difficult to predict. Strong gains in each of the last three years helped the S&P 500 Index surge about 80% higher. The picture looks a little different so far in January. As of Thursday’s close, the S&P has fallen about 6% this month. While the declines were more modest, the S&P fell in January in both 2020 and 2021. We can’t say with any level of certainty what will happen this year.

In general, the market delivers annual gains about two-thirds of the time. At the same time, we haven’t had a market correction – a decline of at least 10% – since the pandemic-related bear market in 2020’s first quarter. I can’t say when, but at some point, the market will decline. Its direction won’t always point to the sky.

Many tech investors have seen their holdings drop more than the S&P. The technology-heavy Nasdaq is in correction territory. It’s fallen more than 12% from the all-time high it reached on November 22nd. Concerns about inflation and higher interest rates have helped drive this decline. Higher rates can serve as a drag on the economy, limiting growth. A weaker economy could hurt higher growth stocks. I plan to talk more about inflation and interest rates next week.

In the meantime, I don’t see any reason to change a long-term view that says the market will move higher over time. After all, if we don’t expect market growth, we shouldn’t be investing in the first place.

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This week’s articles include a reminder about the importance of Health Savings Accounts (HSAs). Remember that you must participate in a high deductible healthcare plan to contribute to a HSA.

Here are the links to this week’s articles as well as a brief description of each:

1. The Ultimate Retirement Savings Account? Surprise, It’s an HSA! 

Regular readers of this blog shouldn’t express the surprise implied by this article’s title. I’ve blogged about the triple-tax benefit Health Savings Accounts (HSAs) provide. I also like to share other articles extolling the virtues of HSAs as their tax benefits are often overlooked. HSAs offer a tax-advantaged way to save and invest money that you use to pay for future healthcare expenses. If you have a high-deductible health insurance plan, you should contribute to an HSA. You should save – or even better invest – the money in your HSA. HSAs provide triple-tax benefits. You don’t pay tax on the money you contribute to your HSA. You don’t owe taxes on any growth of the funds invested in your HSA. As long as you use your HSA funds to pay for qualified medical expenses, you won’t have a tax liability when you withdraw money from your HSA either.

2. Car Shortage Could Change Buying Behavior Forever.

Disruptions to the supply chain have limited the availability of semiconductors. This shortage has impacted the car market. Prices for both new and used cars have increased. As a result, fewer cars are available for purchase, too. I see this every time I drive by nearby car dealerships with empty lots. Most of the time, we could go to a dealer and find the car we want. Not anymore. Because of the pandemic, we can complete car purchases online without needing to set foot in a showroom. Will automakers switch to a build-to-order model? Could we reach a point where we order the exact car we want directly from the factory?

3. Pre-Tax vs. Roth 401(k): There’s More to Consider than You Think.

When saving for retirement, should you make pre-tax contributions through your 401(k) or after-tax Roth contributions? What’s the difference between the two? It comes down to when you pay the tax. With a 401(k), you pay tax when you withdraw the money. That means you pay tax on the growth. With a Roth, you pay tax when you contribute the money. You get tax-deferred growth. How do you decide which is best for you? You want to think about tax rates first. Do you think your tax rate will be higher now or in retirement? That’s not always easy to figure out. A financial plan can help you get an idea of what your future required minimum distributions might be. What other factors come into play? Withdrawing money from a 401(k) increases your taxable income. That can mean more of your Social Security taxes are subject to income taxes. It could also lead to higher Medicare premiums. In the end, you want to have diversification of account types for tax purposes. That can provide much greater flexibility when withdrawing money in retirement. It can also make your withdrawals more tax efficient.

4. How Generosity Changes Your Brain.

Can money buy happiness? According to this article, it can. How? According to research, it helps if you spend money on others. Giving to others produces numerous psychological and physiological benefits. This can include people as well as causes that matter to you. The article also discusses the benefits of volunteering on your health.

5. When it Comes to a Will or Estate Plan, Don’t Just Set It and Forget It. You Need to Keep Them Updated.

When I work with clients on financial plans, I remind them that financial plans are akin to “living documents.” They need to be updated and reviewed periodically. The same applies to your will, your estate plan, and your advanced directives. You should revisit each of these periodically. Events such as marriage, divorce, the birth or adoption of a child, require it. Other events such as an inheritance or moving to another state that has different laws matter as well. Outside of your will, one of the most important considerations is making sure you name beneficiaries for your retirement accounts. Your beneficiary can generally receive the money in the account regardless of what your will says. That’s why you must make sure your beneficiaries are up to date. Assets that pass to your beneficiary also don’t go through probate. That can help lower costs as well.

Our practice continues to benefit from referrals from our clients and friends. Thank you for your trust and confidence.

We hope you find the above posts valuable. Please complete our contact form if you would like to talk to us about financial topics, including your investments, creating a financial plan, saving for college, or saving for retirement. We will be in touch. You can also schedule a call or a virtual meeting via Zoom.

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