An HSA is a tax-sheltered account for individuals to save for medical expenses that aren’t covered by high deductible insurance plans. You can use an HSA account to meet your current health plan deductible and other out of pocket expenses. And you can contribute to an HSA regardless of your income.

What are the requirements for opening an HSA in 2026?

For 2026, the key requirements for Health Savings Accounts (HSAs) include a minimum high-deductible health plan (HDHP) with a deductible of at least $1,700 for self-only or $3,400 for family coverage, and an out-of-pocket maximum of no more than $8,500 for self-only or $17,000 for family plans. The maximum annual contribution limits are $4,400 for self-only coverage and $8,750 for family coverage, with an additional $1,000 “catch-up” contribution allowed for those aged 55 and over.

Benefits

HSAs have one very attractive and unique benefit – they are triple tax sheltered. They are funded with pre-tax dollars that are deducted from your gross income or excluded from income if contributed by your employer.

All contributions grow on a tax-free basis, and withdrawals are tax-free if the money goes for qualified medical expenditures (detailed below).

Healthcare cost projections later in life

An August 2018 survey done on behalf of the nonprofit Employee Benefit Research Institute found that:

In 2019, a 65-year-old man with $79,000 in savings and a 65-year-old woman with $104,000 in savings have a 50 percent chance of having enough to cover Medicare and supplemental-plan premiums and median prescription drug expenses in retirement.

At age 65, a couple with median prescription drug expenses needs $183,000 in savings for a 50% chance of having enough to cover healthcare expenses in retirement. Note these odds are equivalent to flipping a coin.

If that doesn’t concern you, it should, unless you believe you will have that covered by other retirement assets. Also keep in mind that increases in medical expenses have exceeded the general inflation rate in the past.

How HSAs work

Pre-tax annual contributions in 2026 can be made for individuals up to $4,400, contributions of $8,750 can be made by people with family insurance coverage, and an additional catch-up contribution can be made of $1,000 for individuals 55 years of age and older.

HSAs can be rolled over to spouses without taxation.

You can withdraw money any time without penalty for qualified medical expenses for you, your spouse, and any dependents. These are qualified medical expenses: co-payments, co-insurance, health insurance deductibles, dental and vision care, prescription drugs, Medicare Part B and Part D prescription-drug premiums, wheelchairs and walkers, hearing aids, X-rays, ambulance services, long-term care services, nursing home expenses, and nursing services at home.

If you withdraw money for non-medical reasons there is a 20% penalty in addition to the withdrawal being taxed as ordinary income, but once you are age 65 or older, distributions for non-medical expenses such as paying Medicare medical insurance premiums, employer-provided health insurance, COBRA, or long term care insurance are not subject to the 20% penalty.

There is no time limit on when the funds can be used. And there is no “use it or lose it” provision; once the funds are contributed they remain in your account until they are withdrawn. They do not have Required Minimum Distribution requirements.

What to look for in HSAs

If you begin looking into options for HSAs, pay special attention to maintenance fees and investment options; they can vary widely and are critical in the choice of plans as they can significantly affect account balances over time. Banks, credit unions, and some large investment firms offer HSAs; if you want to treat your HSA as a sort of triple tax advantaged IRA that’s reserved for health care expenses, then you should probably start your research with the large investment firms.

If you have an HSA with your current employer and expect to change employers, ask if your HSA balance can be transferred. If so, make sure it is a trustee to trustee transfer to avoid any tax issues.

Be aware that the rules change from year to year. If you open one, you should track changes from year to year. The Internal Revenue Service (IRS) provides official guidance each year, e.g. the publication Publication 969 (“Health Savings Accounts and Other Tax‑Favored Health Plans”).

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For example, I thought perhaps reading books on aging or watching YouTube videos of people in their 80s and 90s might help. They didn’t. Most are well intentioned, but not that useful for what to do after you get out of bed every morning.

So, here’s an approach I suggest is worth trying every day:

Separate health challenges into ones I can do something about, and those which I can do nothing about. Ask whether there is anything I need to do today to improve or maintain my health. Everything that follows depends on this.

Ask if there is anything I can do today for someone else, without being asked or expecting anything in return. Think small and note where it leads.

Ask if there is something productive I can do today that at the end of the day would give me satisfaction. Think small and note where it leads.

Spend a few minutes thinking about what “leisure time” might mean to me today. I try not to confuse “entertainment” with “learning”. I distinguish between them this way: if something has the potential to change my life and the way I lead it, then I call that “learning”. Watching a YouTube video purporting to show Bruce Lee battling an 800-pound woman is “entertainment”, at least for some.

Engage in a little self-directed empathy. It’s OK to give myself a break such as skipping an exercise I had planned to do or eating something I had vowed not to eat. I find it ironic that when working on becoming less judgmental of others I neglect to apply that goal to myself.

Remind myself that tomorrow is another day, regardless of what happened today.

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1) $1,000,000 deposited in your bank today, or

2) $5,000 deposited every month in your bank for the rest of your life, guaranteed.

Your choice reveals a great deal about your attitudes towards money in general, and your ability and willingness to take risks. This has relevant implications for saving, spending, and investing. Take a few minutes and reflect on that.

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I got past that objection by realizing that I, for one, would have wanted to read such a document from a deceased family member. So here is mine. It covers all three Phases of my life. If the idea appeals to you, why not write one of your own?

Life Lessons and Legacies – David Kelsey, age 79, September 2026

Life and its meaning. Because I was always interested in philosophy, I spent hours in my younger years obsessing over “the meaning of life”. Then I read a book that made a profound impression on me: Viktor Frankl’s Man’s Search for Meaning. He was a survivor of a Nazi concentration camp where he witnessed fellow inmates, including several family members, die in the most horrible circumstances.

He wrote that the Nazis could take everything from him except for one priceless thing, and that was his ability to choose what attitude he would take about what was happening to him and to those around him.

If, under those terrible conditions he could hang on to that, then I reasoned I could too. I think of his attitude as something profoundly human that can be threatened, but never destroyed. I’ve tried always to remember that when bad things happen.

Death and its meaning. Some people fear death because they think of it as nonexistence. Regardless of whether you believe in an afterlife, I suggest there are better ways to think about this.

Take a few minutes and think of all the things you leave behind for others: experiences, memories, stories, letters, and pictures, to name only a few.  Try writing what is sometimes called a “reverse obituary” –  write out what you would wish to read in your obituary, then ask whether or not you’re living up to this. You will probably focus more on ethical virtues than resume accomplishments.

Consider that we are gone, but our past existence, in some form or other, lives on. Morrie Schwartz, in the final months of his life, is quoted in Mitch Albom’s book Tuesdays with Morrie: “Death ends a life, not a relationship“.

Documents like ethical wills and reverse obituariescan be of real value in this process.

Religion and its meaning. I’ve never belonged to an organized religion and I’m unlikely ever to join one. That does not mean I reject the idea that we’re part of something “larger”. Nor does it mean I believe that children should not be exposed to religious concepts.

I support any religion that encourages independent thinking in the search for truth along with promoting values such as honesty, integrity, fairness, accountability, trustworthiness, and equal treatment for all.

I have serious issues with people who are convinced their beliefs are the only possible “right” beliefs, especially fundamentalists on one end and atheists on the other. Fundamentalists ought to examine their beliefs in light of whether they promote good will to all. And atheists ought to read about current theories popular in quantum physics and then ask themselves whether these theories are any more or less believable than the idea of the possibility there exists something “greater” than ourselves.

Family. The importance of family and the need for love and support within families cannot be overstated. While this may sound trite to some, it’s not, especially for those who don’t have it. Look around for examples and you’ll find truth everywhere in this statement. My understanding of this has deepened with age.

To children – your parents should not be used as an excuse for your own shortcomings. Take the best from them and discard the rest.

To parents – To “honor your parents” is an admirable goal. Unfortunately, we do not always live up to that goal.We should do better while we still have the opportunity.

Until I moved away, married, had children, divorced, remarried, and had grandchildren and great grandchildren did I ever consider the effects moving away had on my parents. If I had, I would have devoted more time and effort to keep in touch with them. Of the few regrets in my life, this one is at the top of my list; it’s a regret that cannot be remedied. 

Passion and beauty. Find something, or someone, in your life to feel passionate about. And always be on the lookout for artistic beauty. Passion will provide you with an inner energy to empower you in the difficult times we all endure in our lives. One of my passions is classical music, both performing it and listening to it.

Beauty will remind you that such a thing exists – you have only to look for and recognize it – especially in times when ugliness and chaos seem to be all around us.

Work. How do you view what you do on a regular basis: a job, a career, or perhaps a calling? How does your answer to this question affect your life, both short term and long term? These do not have to be mutually exclusive  as you may be able to turn one into the other (for example, a job into a career). Sometimes it helps to take a step back and ask yourself where you are, where you’re headed, and where you want to end up.

Careers. I’ve had three: corporate America, music, and investment management. The first had its financial benefits, but they came at a cost I had neither anticipated in the beginning nor fully realized until later. The second was a major focus in Phase 2 of my life. The third is active, challenging, and rewarding.

Goals. Lifetime goals can be summarized  into four categories: work and achievement, relationships and intimacy, spirituality (including religion), and what Robert Emmons called generativity – leaving a legacy and thereby contributing something to society. We owe it to ourselves and to the important people in our lives to consider how we rank these in terms of importance in our own lives, not once, but continously throughout our lives. Being aware of how these rankings change over our lifetimes is the first step in adjusting them as desired.

Goals can have a dark side – be aware that setting goals for yourself can be both very useful and potentially very destructive. Some goals are OK when set as “pass/fail” – setting aside 5% of your salary and putting it into savings or towards retirement. These goals are measurable. If you occasionally fall short of meeting them you can simply ask yourself why that happened, and either try to meet them next time or change the goals as being too high and unrealistic or too low and not ambitious enough.

Bucket lists – I’m not a fan. For me, they turn into “I did this” or “I saw this”, eventually becoming boring to both doer and listener. Bucket lists can also be effective distractions, keeping you from thinking about alternatives to the time, energy, and money spent on them. 

Other goals such as strengthening the relationships in your life should never be “pass/fail”. These goals should be set in ways that will allow you to step back and think about what you have learned, and are learning, along the way.

Accomplishments. I’ve always valued my own accomplishments and those of family members. But it’s easy to focus on personal accomplishments throughout your life and forget that to do so you may be assigning lower priorities elsewhere that may be, or should be, of equal or even greater importance.

For most of us, accomplishments accompany us to the grave while what we pass on to others lives on.

Competence. Striving to achieve a level of competence is fine as long as you don’t go past the point where you no longer get any fullfilment from striving for it. The idea that you have to be competent at everything you do will, at some point, bring you a lot of unhappines. And regardless of the media nonsense you likely have been bombarded with, you can’t give 110% to anything.

Success. Success is transitory – one success leads to imagining what the next one might be. And if you tend to view everything you do in terms of success and failure, you’re creating an exhausting competition with two competitors combined into one individual – you. One of you is always going to lose.

Failure. Don’t be afraid to fail or make mistakes; embrace failure and learn from it. You will learn a whole lot more from your failures than you will from your successes. When I was young, I wanted to be a concert pianist. I was good, but not good enough to make a sustainable career with it. Coming to terms with that was a great stress reliever.

This applies to children as well. Children learn from failures and they learn from dealing with adversity. Encourage them, love them, and keep them safe, but let them learn, cope, and grow. And be skeptical of whatever the current crowd of “experts” is spouting when it comes to raising children.

Quitting. Annie Duke’s book Quit, The Power of Knowing When To Walk Away, (2022) is instructive.

“When we quit, we fear two things: that we’ve failed and that we’ve wasted our time, effort, or money.” These two fears have the potential to limit your future at best, and destroy it at worst.

How many times have you ever observed a person, a business, an institution, or a government “double down” when pursuing an obviously losing course of action?

Consider your personal understanding of the word “quitting”. Walking off a soccer field in disgust because your team is losing is quitting; reimaging “quitting” as stopping doing one thing so that you can start doing another is a very different way of thinking about it.

Predictions. Many of us presume we have a a fairly good idea of what our lives will be like 10 years in the future. Some spend many hours planning and building their “dream house” thinking they will live out their lives in it. Not likely. Studies have shown repeatedly and conclusively that we are not good about making such predictions. If you’re skeptical, ask yourself if ten or twenty years ago you could have accurately predicted where you are right now.

So, does this mean planning in general is of limited value?

Absolutely not. What it means is that you will change over the years, and when important decisions are being made in the present, one should always consider what it would take to undo them later.

Decision follies. In the extreme, there are two types of people when it comes to making decisions: maximizers, and satisficers. Maximizers spend much time and many hours of effort carefully defining and evaluating all the possibilities before making a decision. Satisficers begin by evaluating the choices but stop looking as soon they come upon one that is “good enough”. Curiously, based on psychological studies, maximizers are later less satisifed with the decisions they made.

Neither of these is inherently bad. Not knowing which you tend to be could be a problem. Have you ever known someone who will spend hours shopping online for a particular item trying to save one dollar who think nothing of choosing the first car they like the look of on the new car dealers lot?

Humor. “Cheer up – things could be worse. So I cheered up, and sure enough, things got worse.” This kind of wry humor has always appealed to me. I value this brand of humor as a way to help one navigate through trying times.

Giving advice. No matter how well intentioned, be reluctant to give unsolicited advice. Even if people ask for advice, they usually don’t really want it – they only want you to agree with what they’re already thinking or have already decided. If you think someone really wants your advice, ask them first if you have their permission to give it to them.

You can also try serving as a model in thoughts and actions and let other people come to their own conclusions.

Gratitude. If you wake up in the morning and don’t feel grateful to be alive, and grateful for the people in your life, think about finding ways to make it so, regardless of your age. I cannot overstate my belief in this.

The frequently annoying need to be “right”. This seems to be a disease of: youth, scientists determined to protect, at any cost, their work from challenges, non-scientists who mistakenly believe they understand science, and people who are incapable of holding two conflicting ideas in their heads at the same time. 

As I get older I’m dismayed that other people seem to get more and more narrow-minded and adamant they are “right” in their beliefs. This is sad especially given the amount of both misinformation and disinformation we are bombarded with on a daily basis in the “information age”.

I seem to be certain about less and less the older I get about things that don’t count for very much. Always allow for the possibility that you may be mistaken. You may find that as a result you subsequently become less judgmental when considering your own shortcomings and the shortcomings of others.

Letting go. Once you have determined there is nothing you can do about something over which you have no control or influence, stop fussing over it. 

If, after giving a complex problem a lot of thought and making a decision that subsequently did not turn out well, neither you nor your decision is at fault. Have faith in your decision processes and accept the result. Worrying about things over which you have no control and blaming yourself for poor outcomes reached in good faith is emotionally destructive. 

Achieving balance. In my younger years success and accomplishments were high on my list of priorities. Now that I’m older, the importance of family, serving others, realizing and accepting that relationships matter, and living in the present have become more important. So, on occasion, take a minute or two and ask yourself “What really matters?” And respond accordingly.

Retaining a sense of purpose. Try this: do something for yourself every day, do something for someone else every day without being asked, and try hard not to leave others worse off than the way you found them.

Never relinquish your right to be skeptical. Especially when written sources are presented as “well established fact” or people are presented as “experts”. Learning how to ask the right questions is a formidable skill that will serve you well throughout your life. I have always assigned more credibility to physicians who have told me that either they or the medical industry as a whole simply do not know all the answers than doctors who spout industry guidelines with no further explanation or justification.

Giving back. Whether giving to a charity or doing something with more personal involvement such as mentoring, find ways to give back. We sometimes spend our working lives striving for recognition and financial rewards; it’s gratifying how much can be accomplished by doing things without regard to who gets the credit. 

Legacies. In the literature on aging and ethical wills it’s popular to ask what sort of legacy you would like to leave. I think it’s a poor question as the answer will ultimately be determined by the people you leave behind, not by what you would like the answer to be.

A better question is the one addressed in Frank Capra’s movie It’s a Wonderful Life: Would the world have been a better or worse place had I never been born?

When it’s finally over. Perhaps the best way to end this post is to ask, “What will I miss when I’m gone?”  

Answering that question might lend insight to what you can do right now.

Updates. Last update: September 22, 2026. This post will be updated periodically until there is no more need – or ability – to do so, whichever comes first.

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Assume you have money set aside to cover emergencies, and you have money in a savings account as well. Or perhaps you just received some money through an inheritance. Should you use any of these sources to pay off your mortgage or take that money and invest it?

The simple answer

If, in the past, you have had trouble managing your finances, particularly managing debt, then you are probably better off continuing to make mortgage payments. You can see the progress you’re making with these payments by simply looking at your bank statements.

On the other hand, if you have demonstrated in the past that you can successfully manage your finances and you are willing to spend time in the future managing them, then you should consider using the money for investing. While investing can do a better job of building wealth than paying off debt, this is by no means a certainty.

Relevant factors in your decision

General factors to consider are your age, your home’s current market value and anticipated future appreciation, your marginal income tax rate now and your estimated marginal tax rate in retirement, your current mortgage interest rate and terms, and your estimate and confidence of future returns in alternative investments such as stocks and bonds.

Paying down, or paying off, a mortgage, pros and cons

If your mortgage rate of interest is 4%, then your mortgage is costing you 4%  in interest payments providing you do not itemize your deductions for federal tax purposes. If you itemize, your cost is less than 4%; the actual cost will depend on your marginal tax bracket. Note that as a mortgage balance declines or is eliminated, any tax benefits you get with itemizing deductions also decline and are eventually eliminated.

In your retirement years having lower monthly expenses is always good; having a small or zero mortgage payment could be a valuable benefit especially for people who rely heavily on social security payments or who have minimal or no pensions.

Sinking all your money into an illiquid asset – a house – is a big drawback. You probably never thought of your “free and clear” home as having an associated cost, but that’s exactly what it is – the opportunity cost of the money tied up in it. Home equity lines of credit and reverse mortgages can be used to offset this drawback, but they have their own downsides.

A house does not care whether it has a mortgage or not. It exists for people to live in and enjoy. Mentally coupling money tightly with housing can restrict your overall financial options when thinking about strategies appropriate for your total financial circumstances.

Going with investing, pros and cons

Assuming you can capture only half the return of stocks in the last 80 years, that’s half of 10% or 5%; you are still getting a better return on these investments than the 4% you’re getting paying down or paying off the mortgage (ignoring taxes). But that return may fluctuate considerably over time. A more conservative and predictable approach would be to compare the percentage return from a very low risk investment such as a Treasury note or bond with your mortgage rate. When comparing returns always consider the tax effects – taxes potentially reduced from the mortagage interest deduction and taxes potentially owed from investment returns.

Investments such as stocks and bonds are far more liquid than real estate. Asset diversification is improved as you now have investments, real estate, and investments that can be turned easily and quickly into cash when needed.

Unlike your monthly mortgage payment, you will have to monitor the performance of your investments either by yourself or through turning them over to a broker or financial adviser. And these values will fluctuate. You should ask yourself how comfortable you are with that –  How to Gauge Your Tolerance for Investment Risk.

Two different simple but meaningful perspectives for deciding

From an emotional perspective, consider what is most appealing to you, and what you can live with. Decisions based on emotion are not necessarily bad; they merely need to be acknowledged for what they are.

From a practical perspective, consider how easy it is to undo whichever choice you make, as there may come a time when you need to do exactly that. Having options is always good given the difficulty of predicting the future.

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Challenges for Millennials: significant student loan debt, challenging job markets, frequent job changes, distrust of investing money in the stock market, elimination of pensions as their parents had, fewer traditional employer-sponsored retirement plans, and concern that social security will not be there when needed.

The good news – you have one huge advantage over the rest of us: time. If you make good use of that you will likely do fine. Here’s a plan to support that claim.

Step 1 – Don’t even think about investing any money in the stock market or anywhere else until you have successfully met these prerequisites.

Invest in yourself first – your “human capital”. If you need to improve your job skills by taking a course, set aside money to allow for that. You have complete control over investing in yourself, and you will never have that level of control over investing or anywhere else. You can also make extra money apart from a regular job by developing a second or related set of skills.

Establish an emergency fund for yourself. Think about what your biggest exposure is and set aside money to cover it. Examples include an unanticipated car repair bill or vet bill.

Understand the difference between good debt and bad debt. Good debt is money owed on an asset that is likely to appreciate such as a house bought at a fair price. Bad debt is money owed on credit cards or money owed on assets that depreciate such as a car.

Pay off credit card debt and make a solemn vow never to charge anything that you are not able to pay off in full the following month.

Start developing a sense of what economists refer to as “opportunity cost”. Simply put, if you have a choice between putting money towards option A or option B, choosing one means you lose the benefits (or sometimes the costs) of doing the other. If you decide to try to pay off student loans earlier than the terms your loans require, you do not have that same money to invest, to save towards retirement, or to do anything else you could have done with it.

These decisions can be complicated and may have considerable ramifications years later; if you think you need help then consider meeting with a financial adviser How to Choose and Work With a Financial Adviser.

Be clear on your income and outgo. If you’re not sure you need a budget, read Should You Have a Budget?.

Do your own taxes. Not only will you have control over the data in your returns, you will learn about the US tax system in the process. And you might pay less taxes the more you learn.

Step 2 – You’ve gotten past step 1 and now wonder what to do next.

Take 10 minutes and define your long term goals in general terms: be debt-free, start your own business, hold satisfying jobs, do some traveling, buy a house, get married and eventually start a family, be able to retire at a reasonable age. Your goals are probably not significantly different than your parents’ were at your age, but how you get there is likely to be different.

Take 10 more minutes and do an honest assessment of your personal strengths and weaknesses. And then distinguish between what you can change, what you think you cannot change, and what you don’t want to change.

Accept the idea that living on a percentage of your income is likely to be the single smartest thing you can ever do for achieving financial stability over a lifetime. Start with a small percentage – say saving 5% and living on 95% – and ratchet that upwards as you are able.

Make it a way of life; over the years the compounding effect is significant. Think about it as paying yourself first – your best and wisest investment.

Work smarter, not harder. Use your research skills and familiarity with electronic media to look for apps help you like Mint, Clarity Money, Digit, Stash, Tip’d Off, Wealthfront, FutureAdvisor, SigFig, Learnvest.

Go to Annual Credit Report and pull your free credit reports. Make sure they are accurate. Also look for sites such as Credit Karma where you can get your credit score. You want one above 700.

Familiarize yourself with Bankrate. You will find a wide variety of useful information and applications there including where you can get better deals on checking and savings accounts than you are probably getting now. For those who want to start with very low risk investments, you can use this site to look for institutions offering CDs and shop for rates.

Look for free money. The first place to look is a company match if you are fortunate enough to work for a company that matches a percentage of your contributions to its 401(k) plan. If you work for a company that offers a 401(k) and you haven’t signed up, read Should you participate in a 401(k) plan?.

Step 3 – Now decide what to do with your “extra” money.

Do a brutally honest self-evaluation as to your knowledge, willingness, availability of time, and emotional skills to manage your own investments. Don’t underestimate your ability to learn, and don’t ever think you’re smarter than everyone else. Read I’ve Got Money to Invest – Should I?.

Consider some tools to build an investment portfolio by searching “building an investment portfolio”.

Step 4 – Don’t be in a rush to buy a house.

Create a separate savings account for a house fund if your goal is to eventually buy one.

Monitor your credit score. Your minimum goal should be at least 700 (average score nationwide for April, 2022 is 716). 

Don’t start the process by looking at houses and then trying to figure out how you can meet the monthly payments. Start with what is an affordable monthly payment, and then look at the houses that are in the price range for that monthly payment.

You’ll likely be tempted to use some of your retirement savings either through borrowing from a 401(k) if your employer allows it, or simply withdrawing the money altogether. Don’t do it. Seriously.

Step 5 – Consider hiring a fee-only financial planner or investment manager when you:

Do not have the time, interest, or emotional detachment to make some financial decisions.

Need someone to help clarify your lifetime goals.

Want a single point of contact for financial advice.

Need a second opinion on an upcoming important financial decision.

Need someone to explain complex financial jargon in clear and understandable terms.

Need someone to clearly explain analyses such as paying off student loans versus investing the money.

Are making investment choices when you may be unaware of the behavioral issues influencing them.

Need someone on occasion to review your progress and to keep you on track for achieving your goals.

Want someone who is legally obligated to give you advice in your best interests.

Want someone who is always available and who can give you occasional advice at no cost on simple issues.

Step 5 – How do you find a professional adviser who is trustworthy?

 Think about what you want help with, and read How to Choose and Work With a Financial Adviser.

Look for a fiduciary What’s a Fiduciary and Why Should I Care?.

Ask friends and relatives for referrals. But don’t choose on that basis alone as a recommendation might not be right for you for many different reasons including the fact that advisers may be good in some areas of financial planning and investment management and less good in others.

Do a search on The National Association of Personal Financial Advisers.

Be willing to interview more than one, and don’t be shy about asking questions!

Don’t be dismayed or overwhelmed by all of the above. The important thing is you start somewhere and build on it over time. Good luck!

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Advantages of owning a home

Purely emotional reasons. This should not be discounted as a factor.

Possible deductions for mortgage interest and property taxes depending on income and your overall tax situation, and also dependent on the state in which you live or are thinking of moving to.

Fixed cost in recurring mortgage payments provided you get a 15 or 30-year fixed mortgage.

Possibility of building equity. Contrary to popular opinion, this is not guaranteed, and depends greatly on where the property is located.

Stability. Assuming you pay your mortgage on time you can’t be forced to move except under unusual circumstances.

Option of getting a reverse mortgage when you’re much older and have built up substantial equity.

Disadvantages of owning 

Requirement of a down payment that could strain or exhaust your financial resources.

Upfront purchase costs including realtor’s commissions. That money is gone forever.

Ongoing costs of maintenance and repair, typically 1% – 4% annually of the value of the home depending on its age. And frequently not considered by new buyers.

Ongoing time required for maintenance and repair. Don’t underestimate this.

High probability of future rising property taxes.

High probability of future rising homeowner’s insurance premiums.

Lack of liquidity. You cannot easily and quickly convert your house to cash.

Advantages of renting 

Flexibility. It’s much easier to move to a different rental than selling a house and moving elsewhere. You might surprised at how many times people on average move to other residences.

Liquidity. Since you do not have money tied up in a down payment for a house or tied up in the equity of a house, you have greater control and more options of what to do with that money. Don’t underestimate the importance of this.

Possible lower monthly cost. See the financial analysis below.

No hassle maintenance. If something breaks, it’s someone else’s problem to fix it.

Upscale amenities usually not found in homes: gyms, swimming pools, movie theaters, basketball courts, and wine cellars.

Disadvantages of renting 

Emotional – “I’m throwing money away”. Not really valid: you’re spending money on a place to live as contrasted with spending that same money on something else.

Potential loss of control. Possibility of eviction through changes in ownership of the rental.

Exposure to rising rents over which you and other tenants have little if any control.

Less flexibility in choosing neighbors. Another one not to underestimate.

Financial analysis – the Price to Rent ratio

Here’s a way to look at this more objectively. Go to Zillow and find the median home price and median monthly rent for the area you’re interested in. Divide the median home price by the median annual rent to give you a price/rental number. The number could be anywhere from 12 to 25.

Now take the sale price of a specific house you’re interested in, find a rental in the same area that’s roughly equivalent to the house, and then compute the price/rental number.

The higher the number compared to the median P/R number the more you should consider renting. You can compare the two numbers – the median P/R number and the house-specific P/R number to get an idea as to whether the house is reasonably priced for that particular area.

Possible outcomes of your financial analysis

1) The costs of renting and owning are comparable. With no clear financial advantage with either choice, I would spend some time defining where you expect to be and what you expect to be doing in 3-5 years. The more uncertain your future, the better renting looks as it avoids all the sunk costs that come with purchasing.

And it doesn’t tie up money in a house in the event of an unanticipated downturn in housing prices like the US experienced in 2008/2009. This could happen again and could be initiated by a nationwide credit crisis.

2) The cost of renting is higher than the cost of owning on a monthly basis. First thing I would do is ask “Why?”; what is it about the local market that is causing this? If the answer is acceptable, then I would consider buying, but only after I had done the 3-5 year exercise mentioned in the previous paragraph.

3) The cost of owning is higher than the cost of renting on a monthly basis. I’d choose renting to give you the maximum flexibility and options. It gives you the opportunity to familiarize yourself with the entire area relative to costs, traffic, and school systems, while monitoring price changes in neighborhoods of interest.

And you can save or invest the difference in the cost between owning and renting in the meantime.

Recommendations for deciding 

Consider both the emotional aspects and financial implications.

Be clear on your assumptions, including how long you expect to live there.

Do the price/rental analysis.

If buying, buy the least expensive home that meets your needs in an area that has the greatest potential for appreciation. Do not be swayed by realtors who try to get you focused on the most expensive house you can “afford”.  Never buy into the sales pitch “you’ll grow into it”.

If renting, try hard to save the money you expect to save having made the decision to rent rather than buy.

The post Rent or Buy? appeared first on Thoughts On Mastering The Three Phases of Life.

If you decide an annuity may be appropriate for your needs, first realize that typical commissions for a sales person average around 7%, meaning that selling a $100,000 annuity results in an upfront commission of $7,000. That’s like walking in the door with $100,000 and writing out a check to the salesperson for $7,000. Therefore it’s critical that you find a financial professional you have considerable confidence in, meaning a person you believe will act in your best interests when discussing the various types of annuities available to you for purchase, and whether an annuity is the best option for you in the first place relative to your total financial situation.

What is an annuity? 

An annuity can be thought of as buying insurance to protect against outliving your financial assets. No retiree wants to confront being unable to meet living expenses sometime in the future.

Where should I start?

You should begin by categorizing your assets into three buckets: your stable and consistent income base (Social Security, pensions if you have one), your total investments and variable return from these investments, and your emergency fund.

If your income base is sufficient to meet your recurring expenses and your emergency fund is adequate to meet unanticipated future expenses, then you can focus on whether you want to convert some or all of your liquid investments to one or more annuities.

Note that when you consider your entire financial circumstances as an integrated whole made up of the three buckets, your current objectives for your investments could change.

For example, if you bought an annuity to meet your present and expected future basic living expenses, you could consider raising the investment risk on your remaining investment assets and then characterizing this bucket as a “growth” portfolio as contrasted with an “income” portfolio. That could be beneficial should you live longer than you planned for.

Why might I want to convert some or all of my liquid investments to an annuity? 

For two reasons: emotional – I want to stop worrying about fluctuations in their values, and financial – I believe a large, highly-rated insurance company is likely to do a better job than I or my investment advisor has done in the past. 

Are there good alternatives for annuities that could also meet my objectives? 

There may be: laddered strategies with CDs, Treasury bonds, or other highly rated bonds or bond funds.

Note the income from these types of investments is 100% income as contrasted with annuities that return a combination of income and capital (your original capital).

If I decide to purchase an annuity, what should I pay attention to? 

First make sure you have clearly defined your objectives for purchasing one. Include in these whether you have a legacy goal to pass money to heirs or to charities. If there is any foreseeable reason that you might need access to these funds in the future, be able to explain why you are willing to tie up your liquid assets in an annuity.

What is your inflation expectation for the future, and for how many years do you expect this to potentially impact your future expenses? Will you require an annuity with a fixed COLA, or a variable COLA tied to an index?

What are your assumptions in terms of living to what age? This is important as it will change fairly dramatically the amount required upfront for purchase.

For example, if you are in your 80s and start looking at estimates you may find the return is much higher than you expected. There is a simple reason for this: the insurance company is betting that you will not live longer than they plan for, meaning  they will get to keep most of your money.

What are the ongoing fees and surrender charges? These can be substantial depending on the type of annuity.

Are there commutation options? Commutation options allow policyholders access to funds in the annuity in the event of unexpected need. This can be a valuable option depending on how you have allocated your total assets.

How will the income be taxed? Will some of the monthly income be treated as income and some as return of capital? How will this affect your tax planning for your financial assets in total?

An example of a basic, straightforward annuity  – SPIA – Single Premium Immediate Annuity 

Pros: longevity insurance at a reasonable cost, protection against cognitive decline, and no annual fees. Note this does not mean there are no fees, only that the fees are included in the upfront purchase price you are quoted.

Cons: lack of liquidity (depending on commutation options), inflation risk, and risk of insurer default.

Where can I go to find good online resources to help with my research? 

To get cost estimates of annuities: https://ImmediateAnnuities.com.

For asset allocations, life expectancy data, and computing fair SPIA prices:  https://AACalc.com.

This site can be a bit daunting, but it has lots of good information and analyses and will be worth your time and effort if you can deal with detail.

My bottom line on annuities

Be able to explain to anyone your reasons for purchasing one. Keep your reasoning simple and explainable in your own words.  If you can’t explain your reasons for purchasing one, don’t do it.

Make sure you have evaluated alternatives before making any decision. Whenever I have an important decision to make given several options, I always ask what it would take to undo a decision that turned out not to have been the best one. Undoing the purchase of an annuity will be costly.

Evaluate annuities as part of your total retirement plan by assessing what role they could play. For example, if you have a need for a specific amount of fixed income but also want to keep investment growth as another important goal, you could put some of your retirement funds in an annuity and invest the rest in stocks.

Annuities should never be considered in isolation, they should serve as one option in meeting your overall financial needs.

The post Annuities appeared first on Thoughts On Mastering The Three Phases of Life.

I believe I can make better financial decisions for myself than anyone else.

While it’s theoretically possible that you might be able to make better financial decisions than anyone else, it’s a remote possibility. Why do you think Warren Buffet has a business partner? Did you know that some of the smartest and most competent people in the financial world discuss their opinions and practices with their peers?

These people spend their lives studying financial matters, and the best of them still seek out others to discuss and debate ideas.

My financial life is so simple that I don’t need anyone advising me what to do. 

You may think your financial life is simple, but if you started writing down all the financial decisions you make on a regular basis you’d be amazed.

Anyone who has taken the time to put together a budget will tell you of their surprise when they looked at the result. And then there are taxes, insurance, managing debt, dealing with emergencies and, when you get past all that, investing and risk management.

Many people mistakenly believe that the most important financial decisions are made when they are older when in fact the opposite is true; financial decisions made when you are younger have greater long term implications which are frequently overlooked at the time these decisions are made.

I don’t need to be concerned about saving for retirement because I’ll just keep working as I get older and work things out as I go along. 

You cannot predict whether you will want to continue working in your 60s or 70s because you cannot predict your health later in life, the possible future obsolescence of your job skills, and the job market in general. Of these three, the first – health – is probably the most critical. Statistics on declining health, both physical as well as mental, are readily available, and can be sobering.

I can wait until I’m in my 40s to start thinking about saving for retirement since I can easily make up the money later. 

You can, in fact, wait until your 40s to think about setting aside money for retirement, but you cannot “easily” make up the money at that time. Why? Because the amount you will have to put aside will be substantially higher than if you had started 15-20 years earlier. Compounding is the reason.

Here’s a way to grasp this: in the first 15 years of a 30-year period, the money you contribute makes up most of the balance. After that, appreciation on this money begins to take over and subsequently far exceeds the amounts you contribute. The earlier you start the better.

I know exactly how much money I’ll need to save for my retirement.

No, you don’t. See How Much Do I Need to Retire? 

I don’t need to be concerned about the future because I’ll be getting a big inheritance later.

Inheritances are great. I wouldn’t ever rely on getting one. Catastrophic medical expenses can wipe them out before they even get to probate. Divorce and remarriage can complicate things. Poorly written wills can cause unforeseen problems. Wills can be contested after the fact especially when one sibling is favored over another. And people can and do change their minds as they age.

Relying on something that is totally out of your control is not the best way to plan for your future.

Only wealthy people need the services of financial planners.  

Have you considered the possibility that some people became wealthy by embracing financial planning when they were younger? Defining and setting goals and making plans to support them is financial planning. Some financial planners manage investments, and some do not.

Financial planners can help with budgets, insurance needs, college financing, retirement projections, estate planning, mortgage guidance, and debt management, among other things. 

One of the biggest benefits a financial planner can provide is to get you thinking like a finance person – setting financial goals for yourself, figuring out ways to achieve these goals, and then tracking your progress towards meeting them.

Financial planners are far too expensive to even consider. I don’t need yet another expense on top of my already challenging financial life. 

“Expensive” is a relative term. It’s possible that some financial decisions you’ve made in the past are costing you far more than you realize; a $100,000 student loan with a degree in art history is expensive. A $60,000 new car that depreciates 35% in the first three years is expensive. Paying someone outrageous fees for managing your investments and getting mediocre results is expensive.

A financial planner who charges $150 an hour is expensive, but a good planner may be able to show you how you can make up that fee many times over through better budgeting, reduced taxes, and lower investments costs with better investment choices.  

Consider thinking of it this way; if you see your family physician for a checkup every few years or change the oil in your car every 5,000 miles, then you might consider getting a period checkup for your financial life.

I can rely on advice from financial planners that is always in my best interests. 

Yes, you can, but only if they are fiduciaries, are willing to sign a fiduciary statement, and are therefore legally obligated to always act in your best interests. See What’s a Fiduciary and Why Should I Care?.

I’m a “now” person and just don’t have the interest or discipline to plan for the future.

I am reminded of this comment usually attributed to Eubie Blake: If I knew I was going to live this long I’d have taken better care of myself.

You don’t have to choose between good health and financial stability – you can have both. Go for it!

The post Questionable Financial Beliefs appeared first on Thoughts On Mastering The Three Phases of Life.

Some things to avoid:

Not having an emergency fund.

Spending that exceeds your income, resulting in building up unhealthy levels of credit card debt.

Failing to take into account the amount of student loans you take out relative to your future career possibilities and your ability to subsequently pay them back.

Paying too much in rent or buying a house that exceeds a reasonable percentage of your income, making it difficult or impossible to allocate your income in productive ways.

Waiting too long to begin saving for retirement, thinking you can make up for the shortfall later.

Some things you can do:

Create and fund an emergency fund.

Ignore most of what you may have read about how much such a fund ought to contain; that depends on factors such as your age, health, and job security. Think of this fund as an insurance policy that pays you when you need it.

Document what your potential exposures are: job loss, health expenses, car repairs or replacement, home maintenance expenses, etc. You want enough money in the fund to avoid catastrophic events such as getting evicted from your apartment, foreclosure on your house, losing your means of transportation, and being unable to pay unforeseen and unreimbursed medical expenses (including pet expenses), to name a few of the critical ones.

It may be helpful to divide your list into known ongoing or anticipated upcoming expenses, and possible unanticipated future expenses. You don’t have to cover every possible catastrophe – start with your biggest exposure and go from there. The point of an emergency fund is to allow you to get back to where you were prior to getting slammed with a catastrophe.

Don’t confuse your emergency fund with a sinking fund. A sinking fund is a special kind of savings fund dedicated to a specific short-term or long-term goal. Examples include a house down payment, a car, a vacation, and everything in between. Keeping this money separate from your emergency fund will help you resist the urge to dip into your emergency fund, use credit cards, or borrow from friends or family.

Determine what your goal is – define a dollar amount for it – and open a separate savings account for it. Online savings accounts are a good choice for this as they generally pay the best interest rates and offer the capability to have multiple accounts.

Live below your means and pay yourself the difference.

This requires separating wants and needs not once but on a continuing basis. If you live paycheck to paycheck you are never going to make any progress.

To make progress, you (and your spouse, if married) first need a quick assessment of where your money is going – what you’re spending it on. Track your spending for a month or two; that will give you a good idea as to what your priorities are as reflected in what you’re spending money on. Many people are surprised and even shocked to find out.

Take the time to make a budget. Pay attention to what constitutes fixed expenses in your budget and what expenses are controllable and discretionary.

Divert a percentage of your income automatically from every paycheck to a savings account. Note this should be considered in addition to creating a separate emergency fund.

Set some financial goals.

Only pick those that are relevant – have good reasons as to why you are choosing and setting each one.

Now put them in categories: short term, medium term, and long term. And then think about which are well-aligned (complementary), and which ones might conflict.

Finally, find a way to make them visible so you are reminded of them and review them periodically.

Budget some money for self-indulgence. This is often overlooked – don’t make that mistake.

Some would argue this is just part of an emergency fund. I disagree. I think it should be totally separate, and should contain money you put aside to use any way you want, any time you want. This can give you a feeling of freedom that we all need and can help alleviate the ongoing burden of trying to be financially conscientious in every other way.

Do everything you can to avoid going into debt for assets that will do nothing other than depreciate.

Mortgage debt is “good debt” as housing usually, but not always, appreciates in value, although the expected appreciation will not be anywhere near what most people believe to be true.

Car debt is “bad” debt doubled down – you pay interest on the loan to the lender and you suffer instant and continuing depreciation on the asset.

Maybe you’re thinking you can’t possibly pay cash for a car – that idea is simply not realistic. Perhaps not, but you don’t have to succumb to these other behaviors: buying a car that is more expensive than your financial circumstances dictate, buying a car with a 7-year loan when you have every intention of trading it in before the loan period is up, buying a new car when you could buy one that’s 2-3 years old with low mileage at a price that is likely to be 35% lower in price than the same car’s price when new. Be smart and prepared about this, otherwise you are easy marks for salespeople at car dealerships.

Never charge anything that is not a true emergency on a credit card you know you cannot pay in full when the bill comes due.

Ignoring this means you’re investing in your credit card company without the benefit of owning their stock rather than investing in yourself. Would you rather pay a credit card company 24% interest or have an investment that pays you 24%?

Pace yourself – achieving financial security is like running a long-distance race.

Don’t try to implement all the above at the same time; tackle a piece at a time and build on your successes. Millions have succeeded and millions have failed. You only need to decide which group you want to belong to.

How do I know if I’m on track to be successful?

There are two simple but important ways: monitor your debt/income ratio, and keep track of what’s happening to your net worth.

Your debt/income ratio is the total of all your monthly payments divided by your pretax monthly income. It’s a measure, right now, of the role debt plays in your  achieving financial success. The lower the ratio the better: below 25% give yourself a pat on the back, over 36% you’ve got a long way to go.

Your net worth is the market value (current market value, not what you paid for it) of everything you own minus the total of everything you owe. Over time (every year), that number should go up. It may be small or even slightly negative when you are in your twenties, but over time it needs to go up. If that’s not happening, you need to examine your spending habits and overall debt. Think of rising net worth as a signpost on the road towards financial independence.

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