Saturday, March 25, 2017

Why I'm switching to an HSA account

Do you know what's the biggest expense that you will incur in your lifetime?

Nope. It's not your home.

I remember my hands were shaking when I handed my agent a $43,000 cashier's check as down payment for our house, 13 years ago. But like I said, it's not the house. Not even close.

Our modest house being built in 2004, isn't she pretty?

Your house may very well be your single biggest purchase, but it's not the biggest expense that you will INCUR IN YOUR LIFETIME.

Guess again...

Nope. It's not cable (geez.. Are you really spending that much on entertainment?).


Here's a clue:





You guessed it right this time. It's TAXES!

Of course, this largely depends upon your tax rate. With a progressive tax system, the higher your income, the higher taxes are imposed. Here's a link to 2017 tax brackets courtesy of Bankrate.

Assuming you're in the 25% tax bracket, like my wife and I filing jointly do, you might be looking at paying a million-dollar tax bill over the course of your lifetime. And this doesn't include sales and property taxes.

Now, how about the second biggest expense ???

Stop bringing up the house again.

Try again...



Nope. It's not your car, unless you're driving a really fancy one like this Lamborghini.

Student loans? Nope, unless you're a broke doctor or a lawyer.


Here's another clue:






You are absolutely correct. It's HEALTHCARE!

According to a 2010 Prudential study, a typical 65yo married couple free of chronic disease, can expect to spend $197,000 on remaining lifetime health care costs-- excluding nursing home care and there is 5% probability that these costs will exceed $311,000.

Note that these numbers don't include expenses that you have already incurred on healthcare before age 65!

So it's TAXES and HEALTHCARE-- two of the biggest expenditures that we will incur in our lifetime.

Wouldn't it be great to be able to save money on both?


Health Savings Account (HSA) to the rescue

A health savings account is a tax-advantaged plan that is available to people with a high-deductible health insurance. The idea is that when people use their own savings for healthcare, they are likely to shop around for the best deal, which helps control health care costs.

Although HSAs have been around for more than 13 years, it was only a couple of years ago when it was actually offered by my company's healthcare plan. Even then, I didn't pay much attention to it because I'm already maxing out my ROTH IRA in addition to my company-sponsored retirement plan.

This year, I decided to switch. This is because my employer appears to be in the process of getting-rid of the 401(K) company match. I figured that since I am likely to spend a ton of money on healthcare when I get old anyway, why not max-out my HSA contributions first?

By maximizing the tax savings, I will, in effect, free up more resources for other expenditures like home renovations, vacations, and other fun stuff in retirement.

Note that this plan is not for everyone. It is particularly beneficial for people who are savers and are in excellent health condition like me.



Together, all the way. (image courtesy of Cigna)



Awesome Tax Advantages

With an HSA, you can contribute pre-tax money, just like a 401(K) or Canadian RRSP up to a pre-defined contribution limit. In 2017, the annual HSA contribution limit for individuals is $3,400 and $6,750 for families.

You can then use the money saved in your HSA self-directed investment account to buy individual stocks, mutual funds or ETFs (much to your heart's content) and your earnings will be TAX-FREE as long as you use them for qualified expenses.

There is also no Required Minimum Distribution-- You are not forced to take money out of them, which can potentially bump you up to a higher tax bracket.

In other words, an HSA account combines the TAX-DEFERRED feature of a 401(K) or RRSP, and the TAX-FREE and No RMD aspects of a ROTH-IRA, provided that you use them for qualified medical expenses, which you will surely incur anyway!

Eligible medical expenses may include things like contact lenses, dental treatments, insurance premiums, long-term care, and laboratory fees.

I don't believe that Obamacare is that broken to be repealed. But it's a shame that President Trump wasn't able to negotiate a deal with democrats last week to pass the American Health Care Act into fruition. The proposed bill would have expanded the HSA by increasing the contribution limits and lowering the percentage of the tax on distributions that are not used for qualified expenses.

Here's how I plan to use it

A little known feature is that you're allowed to pull out and reimburse yourself for past eligible expenses AT ANY TIME--- as long as you keep the receipts.

For example, instead of withdrawing money from the HSA account to cover things like routine dental treatments or medical check-ups, I can pay for these out-of-pocket. In this way, the money invested in the account can continue to grow and compound-- tax-free.

Later down the road, say in 20 years, I can reimburse myself for these expenses and use the money for paying non-eligible expenses that would have been taxable otherwise. That $1,000 that you didn't take out, 20 years ago, would have grown to maybe $10,000, depending on how it is invested.

By doing this, you'll have more money to spend for major expenses such as long-term care or heaven forbid, open-heart surgery.


May you stay healthy.





Monday, March 6, 2017

Aw, Snap! (I should not have bought the stock)

Buy what you know, and stick to companies with good long-term
prospects and quality management-- are 3 well-known rules that the famous investor, Warren Buffett, follow when buying stocks.

None of these rules I followed when I bought 200 shares of SNAP when it went public last week.

The purchase was done on impulse. Risky move indeed, but it is risk that I can afford to take.


I bought what I barely knew

I sort of knew what SNAP is. It is the parent company of Snapchat-- famous for its disappearing messages. Across the country, millions of teenagers and millennials have been using the app to share intimate and sometimes indecent selfies. It's the killer app that could have saved Anthony Weiner's career-- if only he knew about it.

I'm no active Snapchat user, but I do try to login to my account (I go by the username of M Solve) every now and then. The only reason why I have yet to send a message is because I don't know anyone there. Most of my friends are either on Facebook or Instagram.

Being an older Generation X'er, I simply don't belong to the age group (I still do get a lot of compliments that I look very young for my age though).

What's interesting for me is that the company's 26 year old co-founder and the CTO, Bobby Murphy, is part Filipino. He's now worth a cool $5.6 billion dollars. His mother grew up in the Philippines before emigrating to the USA. This is probably what intrigued my interest to watch the stock.

Valuation, what valuation?

Everybody knows that buying stocks is the same as buying a piece of a business. When you're buying the coffee shop across the street, the first thing that you ask is "What's the bottom line?". Let's say the store's net profit is $10,000 per year, after all the employee salaries and other expenses are paid. If the owner is selling the business at $100,000, the Price-Earnings (or the P/E ratio) is 10.

The P/E ratio is probably the most important metric that professionals use (and misuse) when buying or selling stocks. In general, a low P/E can indicate that the company may currently be undervalued. Either that or the company is doing very well relative to its past trends.

In the case of Snap, there is no P/E ratio...

Companies that are losing money do not have a P/E ratio.

In fact, the company has incurred a net lost of $514.6 million in 2016 and $306.6 million in 2015, according to its SEC filing in February.

An alternative would be to use the Price-Sales metric by using revenues instead of earnings. But even then, valuation in Snap's case is not relevant, according to the "Mad Money" host, Jim Cramer. You simply cannot value the stock when only 200 million out of the 1.2 billion shares are publicly traded.

What's pushing the price is the stock's "hotness" factor.

Why then did I buy the stock?



It's pure speculation, I do not plan to hold the stock for a long time.


I seldom buy individual stocks, it's risky. The ones that I'm currently holding, I've held for a very long time. I'm fortunate that I've profited from them, through dividends and asset appreciation.

Snap will be the exception to the rule. For growth stocks like Snap, expect potential dividend money to be reinvested back to the business. Capital appreciation is what I'm hoping to get.

You see, there's nothing wrong with doing a little speculation ;)

I bought the stock with money that I can afford to lose.


$5,000 is money that I can afford to lose. That's the most that I could lose, but the probability that I'd lose all that in a year or two is close to nil.

I figured that if the stock loses 2/3 of its value then that will be comparable to me spending $3,348 to travel to Manila to attend my high school reunion. And since I didn't actually go, any loss that I might incur due to this trade will still be within my budget.

Let's wait and see.