The Broke Professional - grow your money and yourself

The Best Retirement Account for Young People

Dude.  Check out this new HSA I got.

Dude. Check out this new HSA I got.

When I graduated optometry school and was finally making real honest to goodness money, I didn’t really know what to do with it.  I knew I should save some for a rainy day, so I did that while paying off my student loans.  I wasn’t even doing that efficiently until I learned the Avalanche method.  I decided to start reading up on investing and money management in general, and eventually got my 401k funded, maxed out a Roth IRA and even started a 529 plan for my son.  Let me just pat myself on the back real fast.

But the account that I think has the most bang for the buck, especially for young people just out of school, is the Health Savings Account, or HSA.  I have written before about how great the HSA is, but over time I’ve come to realize that it’s not just a great account for most people, but it is an amazing, and dare I say “must have” account for young people especially.  That’s because it can serve as an emergency fund for short term healthcare expenses and also act as a retirement account.

A Versatile Account

HSA’s aren’t usually advertised as retirement accounts.  They are shown to be a benefit that comes with signing up for a High Deductible Health Plan (HDHP).  These plans usually have high deductibles and low monthly premiums, so you end up paying for your care out of pocket, but you pay less every month for the plan.  The HSA is there to set aside some money ($6,660 is the limit for families for 2015) pre-tax that will help you pay for those out of pocket costs.  This can serve as a kind of personal healthcare emergency fund, which you can use to augment your regular emergency fund sitting in your savings account.

While this is a great benefit in itself, it starts getting more interesting for the following 2 reasons:

  • Many HSA providers give you the option to choose investments.  These range from ultra conservative money market funds to aggressive stock funds.
  • Any type of non healthcare related expense that you use an HSA distribution for before the age of 65 will be taxed and you will have to pay a penalty.  But after 65, any type distribution can be taken penalty free.

Having investment choices and penalty free distributions after 65 makes this account almost exactly like a Traditional IRA.  But why is this a good thing for young people?  It’s because, for the most part, young people are healthy and don’t spend much on healthcare.  If you’re someone who is in relatively good health and doesn’t spend much on healthcare throughout the year, then the HSA is a fantastic choice.  You can leave the money in the account to grow from a young age, and when you get to be 65, you can start withdrawing the money for any type of retirement expense.  Along the way, you can always tap the money for any large healthcare expenses that come up.

Final Thoughts

For people like this, my advice is as follows:  Open an HSA as soon as you are able.  Contribute the maximum amount every year since this will help you save money on taxes.  If your provider has investment options, simply choose an aggressive fund with low fees and let it ride, changing to less aggressive funds as 65 gets closer.  Any small healthcare expenses can be paid out of your own pocket (with a credit card that earns rewards of course).  You may have to tap the account for any large expenses, but ithat’s okay since that what the account is for anyway!

This is a fairly simple strategy that can provide great diversification among your accounts.  If you are a young person with few healthcare costs, you will be doing your future self a great favor by signing up for an HSA and using it the right way.


Journey to Life Insurance Part 1: Why Do I Need It?

How it feels to have life insurance

Insurance companies make a whole lot of money.  That’s because literally every adult in the country has to deal with them.  Everyone with a car needs auto insurance.  Everyone with a mortgage needs home insurance.  It’s safe to say that most Americans will have one of these two at some point in life.  There are many other common types of insurance out there, like renters insurance and disability insurance.  And also some not so common ones, like ghost insurance.

What is the value of insurance?

To be perfectly honest, for the longest time I had no idea what the purpose of insurance was.  I just thought it’s something you’re mandated to pay every month to have a car.  I didn’t realize what value that money is bringing the customer.  But after reading about insurance from various sources, it is actually surprisingly simple:  Insurance is simply a transfer of risk from one entity to another.  For a price of course.

Driving a car, for example, is a risky activity.  Most drivers don’t regularly get into accidents, but they do happen at some point.  And they can be expensive.  Fixing a damaged car can be pricey.  Paying medical bills for injuries sustained in a car accident is expensive.  Most people don’t have enough money in the bank to cover an accident where their car is totaled and they have to spend a significant time in the hospital.  An incident like this would typically wipe out most people’s savings accounts and leave their lives in ruin.

This is where insurance companies come into the mix.  They offer to take on that risk in exchange for a certain amount of money.  The process of determining how much money to charge the customer is called underwriting, and it takes into account many things including age of the driver, driving history, type of car etc.  All these factors play a role in determining who is accident prone or not, and the insurance company will charge accordingly.  So essentially, insurance companies provide peace of mind and financial security in exchange for a set amount of money, which can vary between companies so it’s a good idea for the consumer to shop around.

Is life insurance worth it?

Car insurance is pretty easy to understand, but what about life insurance?  It still comes down to the same concept of transferring risk.  If someone’s death will potentially leave others in financial distress, the life insurance company will take on that risk.  Talking about death is by definition a morbid topic, but it needs to be done in a subjective manner when dealing with life insurance.  When someone dies, it is a very emotionally distressing time for family and friends.  And if that person who died had dependents, then it can become a financially distressing time as well.  If someone with life insurance dies, the insurance company will provide a previously agreed upon amount of money to the family.  This can be an enormous help during an especially trying time.

Life insurance gets a bad rap because it’s usually associated with sleazy salesmen and commercials marketed towards seniors.  But it shouldn’t be that way.  Anyone with dependents should seriously consider getting life insurance, and none of that whole life policy nonsense.  In my opinion, insurance products that include investments should not be considered.  They are usually laden with fees and take away money from where it should be going into: insuring your life.  There are plenty of ways to invest on the cheap such as your company 401(k) or Vanguard mutual funds.  Many of these insurance/investment products are difficult to understand as well, and that’s always a red flag when it comes to financial products.  So stick with a set insurance amount for a set term.  Simple and easy.

With me having a wife and 2 year old son, I figured it was time for me to get serious about this life insurance thing.  I’m actually probably overdue, because if something did happen to me, my wife and son would be in a tough spot since we rely on solely on my income at the moment.  So I decided to buck up and get the ball rolling by getting a quote.

Step 1: Get a quote

Where does one buy life insurance?  Pretty much all major insurance companies offer life insurance, and there are some companies that specialize in life insurance.  I heard a lot of good things about a website called Quotacy, so I gave it a shot.  And I’m glad I did, because it made the first step to getting life insurance so easy and smooth.  You can get a very good quote estimate in a couple of minutes without giving up any personal information.

How does the website work?  And how did it determine what rate I should be charged?  What companies were a good match for me?  I know this is a killer cliffhanger, but tune into Part 2 of this post to find out!


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