Category: Financial Planning

If you really want to make impact in your new grad’s life, make an investment in his or her future with a 529 College Savings account. There are two versions: an investment account and a prepaid account. Assuming you are opening an account now and don’t have time for investment growth, you may need to fund it with a significant chunk of money for it to be useful. The savings plan is good for building an investment balance over time, including while the student is in college. On the other hand, the prepaid option is a good way to reinvest a windfall – such as an inheritance or proceeds from the sale of property.

A 529 College Savings Plan allows the account owner to open, fund, choose the investments and name the account beneficiary – yet you still retain control of the assets. Be aware that contributions do not qualify for a federal tax deduction, but more than 30 states allow a limited tax deduction or credit. While earnings and withdrawals used for qualified education expenses are not taxed at the federal level, there are a handful of states that do impose state taxes.

However, because you – the giver – retain control of the account, you can be assured that the money won’t be wasted on a trip to Cancun or a gap year backpacking through Europe. You determine when, how much and what distributions are used for. If you’re not happy with the student’s choices, you can change the beneficiary to someone else or keep it for yourself.

Gift Strategies for Retirees

There is generally no annual contribution limit to a 529 plan, but the total amount in a beneficiary’s account may not exceed the balance limit determined by each state. 529s are state-sponsored, but most states let non-residents open a plan. In addition, some states allow anyone who contributes to a 529 plan to take a state tax deduction. This way you also can invite friends and family to enjoy a tax deduction while contributing to the account for one big, combined graduation gift.

In 2022, you can contribute up to $16,000 per beneficiary ($32,000 per married couple) to a 529 plan without having to file a gift-tax return. However, if you want to stockpile the account for a big splash on graduation day, the IRS allows you to frontload up to five years’ donations in one year (up to $80,000; $160,000 for a married couple) outside the gift tax limit, although no other gifts can be made to the same beneficiary over the next five years. In this case, you must make the required election on a gift tax return that year to be allocated over five years. This five-year front-loading approach can be an effective estate planning strategy to remove assets from your taxable estate, yet retain control over them.

You also can maximize your gift by making it a two-for-one. In other words, gift it to your high school grad, then keep funding it during his university years. Any leftover balance can be his college graduation gift if he’s planning to go to law school or get an MBA. If not, you always have the option to keep the balance or gift it to him anyway – although proceeds not used for education expenses will be subject to taxes on earnings and a 10 percent penalty.

Student’s Choice

The 2019 SECURE Act enhanced the College 529 plan with additional options. Your new graduate can now use the money to pay for expenses associated with a registered apprenticeship program, or use up to $10,000 to repay student loans. Note that if proceeds are used to pay student loans, the loan interest cannot be used as a deduction that tax year.

The 529 gives your new graduate the option of how and when to use the funds. After all, the pandemic has thrown many young adults off course in different ways. Some are opting to go straight into the job market without a degree, while others are taking a gap year or two to get a feel for what type of career they want to pursue. With the College Savings investment plan, your contributions have the opportunity to grow tax-deferred indefinitely. Some states place time or age limits on the use of a prepaid plan. However, you can always retrieve unused assets from a 529 (subject to earnings and penalty taxes), so they are not lost by any means.

One of the easiest ways to save for retirement is to participate in an employer-sponsored retirement plan. You simply select a percentage of your paycheck that you would like transferred to your 401(k) (or similar) account. Not only does your employer make the transfer for you, but it comes out of your paycheck before income taxes are taken out. This way, you avoid paying taxes on that income from each paycheck, and those taxes are not due until you withdraw the money from your retirement plan. This usually happens once people retire and enter a lower tax bracket.

That’s the simple beauty of investing in a 401(k) plan. However, with a little more effort, you can do a better job of maximizing its potential. The following are strategies to consider.

Take Advantage of an Employer Match

Most employers offer to match your 401(k) contribution up to a certain percentage. For example, an employer might contribute an additional dollar for every dollar you contribute, up to 3 percent of your pay. Although the plan may allow you to defer more than 3 percent, it’s always a good idea to contribute at least the same percentage as your employer agrees to match. After all, the employer contribution is basically free money. Be aware, however, that your contributions, employer matches and all interest, dividends and capital gains earnings in the account will eventually be taxed as income when distributed. If your employer offers a matching contribution to your 401(k) plan, try to defer at least the percentage of your income required to take full advantage of that match.

Contribute More Each Paycheck

The best way to maximize your 401(k) is to deter the maximum amount of income you can from each paycheck. Remember, it comes out of your income before it ever hits your bank account, so you can learn to live on less while building up your retirement savings. In 2022, employees may contribute up to $20,500 for the year; those age 50 and older can save up to $27,000 (an increase for each group of $1,000 versus 2021). Another benefit is that employer matches do not count toward that contribution limit.

If you are not currently maxing out your 401(k) plan contribution, consider these tactics to help you get there.

• Increase your deferral rate gradually, such as once a year or each time you receive a raise, promotion or bonus. This will enable you save more without changing your take-home pay. Just be sure that increasing your deferral rate does not cause you to exceed the annual contribution limit.
• Some companies implement an automatic escalation feature, such as increasing your deferral rate by one percentage point each year – unless you opt out. If this is the case, don’t opt out of the automatic increase.
• A good time to increase your deferral rate is during the annual enrollment period when you are thinking about the cost of other benefits and how they will impact your household budget.

Consider an Annuity Option

The SECURE Act of 2019 included a provision that limits employers’ liability when they offer an insurer-issued retirement annuity option. A 401(k) annuity option typically offers the ability to convert that portion of your retirement account into a stream of income guaranteed (by the issuing company) for a certain period, or even for as long as you live. It’s usually recommended to put only a portion of your 401(k) savings into an annuity, as it has higher expenses and might have growth potential limitations. However, the annuity option is appealing because it can continue paying out income after your other investment options have dwindled, which ironically works much the same as a traditional pension (which the 401(k) was designed to replace). Not every employer offers an annuity option in their 401(k) plan, but thanks to the new legislation it could become more prevalent.

Invest More Aggressively

Americans are currently seeing the dramatic impact that a rise in inflation can have on their household budget. Now imagine that impact when you’re in retirement and living on a fixed income. One way to increase your potential earnings for a larger retirement nest egg is to invest in more growth-oriented assets now, while you’re still working. That generally means a higher allocation to stocks to help your 401(k) investment surpass the growth of inflation. In fact, many stocks are issued by companies that tend to increase revenues as inflation rises.

With additional effort and strategic planning, it’s not that difficult to get your 401(k) to work harder to help you save more for a long, fulfilling retirement.

If you pay $250 a month for cable and premium channels, that’s $3,000 a year. Over a 30-year period, the total cost would be $90,000. We don’t tend to think about how much we pay in regular expenses over the long term.

However, that’s how various industry analysts report the cost of healthcare during retirement. Recent estimates for a retiring 65-year-old couple fall between $300,000 and $400,000 to cover healthcare expenses in retirement. At first glance, that’s an intimidating number and implies that pre-retirees need to have this much saved by the time they retire.

Fortunately, when you break down the numbers, that’s not the case. First of all, that estimate includes premiums for Medicare with prescription drug coverage, which are typically deducted from Social Security benefits before they ever hit your bank account. According to T. Rowe Price, Medicare premiums account for 76 percent to 82 percent of most retiree’s healthcare expenses, so a large portion of these costs are paid for outside of your household budget.

The true cost of retiree healthcare expenditures is based on how healthy you remain during retirement. And actually, that’s not necessarily related to savings – it’s more a combination of genetics and peoples’ penchant for healthy living before and during retirement. However, it’s always best to prepare for the worst, so the more money you save and earmark for healthcare expenses, the better off you’ll be.

One way to control your monthly premiums in retirement is to shop and compare Medicare plans each year during open enrollment. It helps to keep a running tab of your out-of-pocket expenses each year so that you can increase your Medicare coverage if your costs start trending higher. Higher coverage might mean higher premiums, but that will lower out-of-pocket costs each year.

The following guide was developed by T. Rowe Price. It estimates how much retirees spend based on different types of Medicare plans using 2021 premiums and data from the Health and Retirement Study (HRS). Among retirees who enroll in either (1) Medicare Parts A, B and D; (2) Medicare Advantage HMO and Drug Plan; or (3) Medicare Parts A, B, D and Medigap:

• 25 percent will pay less than $500/year in out-of-pocket expenses
• 50 percent will pay less than $1,200/year in out-of-pocket expenses
• 25 percent will pay more than $1,900/year in out-of-pocket expenses
• 25 percent will pay more than $3,900/year in out-of-pocket expenses

As for paying those out-of-pocket expenses, remember that you pay them over time, so it’s not as if you’re paying a large lump sum all at once. One strategy is to fund a savings account with enough money to pay out-of-pocket expenses for the year, based on your prior year’s spending. Then replenish this account each year from other funding sources, such as an annual required minimum distribution (RMD) from a retirement account.

If you have access through your current health plan, pre-retirees can save for healthcare expenses with a health savings account (HSA). Contributions are tax deductible and, over time, you can invest your savings for earnings accumulation. These funds, including investment gains, are never taxed as long as they are used to pay eligible healthcare expenses. The account is particularly useful if you don’t tap it until retirement, when the money can be used to pay for things like dental and vision care, hearing aids, long term care insurance premiums and nursing home costs.

 

Despite those alarming projections about how much healthcare will cost you in retirement, remember that it can be manageable because it is paid out over time. 

In November, President Biden signed legislative funding that represents the largest transportation spending package in U.S. history. The $1.2 trillion Infrastructure Investment and Jobs Act authorized funding for roads, highways, bridges, public transit systems, utility systems, electrical grids, energy projects and broadband infrastructure.

Because the funding extends over a five-year period, it should not have a major effect on the fiscal deficit. This is not only good news for taxpayers, but also investors. Those long-term investments offer the potential for shareholders to get in on the ground floor of reliable and well-capitalized government projects by hundreds of American companies poised to get the business. The new bill is expected to enhance productivity, innovation, improve labor force participation and have a positive impact on inflation. Overall, the bipartisan bill is expected to help drive economic growth for the foreseeable future.

Local Funding

Because this funding has been long-awaited and is badly needed, infrastructure projects that have been in the planning stages for years can finally take off. Furthermore, the federal funds will be allocated to local public-private partnerships, which enable community job development and enhance local economies.

Transportation Infrastructure

More than $110 billion is directed to repair and rebuild 45,000 bridges, highways and major roads across the country. The funding also focuses on climate change resilience, as well as safety (reduce traffic fatalities) and parity across geographic areas and demographic populations. Industries poised to benefit include:

• U.S. steel companies
• Companies that produce aggregate materials (e.g., gravel, crushed stone, sand)
• Manufacturers of construction, roadbuilding, earthmoving and mining equipment
• Companies that lease heavy equipment

Broadband Internet

Presently, more than 30 million U.S. residents live in areas with either poor or no broadband access. Particularly during the pandemic, we have learned how important internet access is to keep Americans connected – in jobs, through online education, with community news and resources – not to mention social networks and personal relationships. The new legislation provides $65 billion in funding for broadband infrastructure, particularly in rural communities throughout the country, in an effort to provide universal access to reliable high-speed internet. Investment sectors that should benefit include:

• Manufacturers of wireless towers
• Power management companies that supply the electrical components and systems for wind and solar farms to integrate them into the national grid

Water Utility Infrastructure

The bill allocates a $55 billion investment into water infrastructure and the elimination of lead pipes for the 10 million American households and 400,000 schools and childcare centers that currently lack safe drinking water. Investment opportunities include utilities and companies that specialize in:

• Water distribution
• Water filtration
• Flow technology
• Water treatment/purification
• Manufacturing pumps, valves and desalination units

Public Transit

Currently, the United States has a repair/replacement backlog of more than 24,000 buses, 5,000 rail cars, 200 stations and thousands of miles of tracks, signals and power systems. To update and expand the nation’s public transit system, $66 billion will go toward passenger rail, $25 billion to upgrade U.S. airports and $17 billion for ports throughout the country. In addition to bolstering the nation’s supply chains and transportation systems, upgrades will focus on reducing emissions and deploying more electrification and other low-carbon technologies. Industry sectors that should benefit include:

• Railroads
• Airlines
• Trucking
• Marine transportation
• Delivery services
• Logistics companies

Sustainable Energy Sources

The infrastructure bill allocates $65 billion toward upgrading the nationwide power infrastructure with new lines for the transmission of renewable, clean energy. Another $7.5 billion is earmarked to install 500,000 electric vehicle (EV) chargers along highway corridors to accommodate the fleet of electric consumer and commercial cars currently in production. Opportunities in sustainable energy investments include:

• Electric vehicle industry, including government fleets of electric vehicles, such as U.S. mail trucks
• Companies that build EV charging stations
• Commodities used in green materials, such as copper (electric vehicles and renewable energy sources use four times more copper than internal combustion vehicles)

Given the breadth of infrastructure opportunities on tap, one way for investors to get exposure across the wide range of industries is to invest in a diversified infrastructure or utility funds (mutual fund or ETF). Through a single, professionally managed investment, investors can spread their capital across a wide spectrum of engineering and construction firms, rail travel companies, electricity providers, water and sewage services, and more.

Venture capitalism comes from an investor who offers money to start-up companies in exchange for an equity stake – much like you see on the ABC television show, Shark Tank. As a general rule, a venture capitalist (VC) invests after the new venture is up and running and looking for additional capital to further commercialize its product.

Once a privately held enterprise reaches a value of $1 billion, it is referred to as a “Unicorn.” This is because new start-ups that reach this level of success are so rare that they are considered comparable to the mythical creature. What is interesting these days is that the current labor market is so disruptive that we are seeing more start-ups, and this trend is expected to continue. At some point it becomes a numbers game – the more new start-ups established, the greater the likelihood of Unicorns achieving success.

Ever since the onset of the COVID-19 pandemic, the United States has experienced a shortage of workers. It started with massive layoffs during the shutdown, but even though jobs returned – not all workers did. The lack of child and elder care forced many working moms to leave their jobs. Today, the controversy over low wages not keeping pace with the cost of living has many people rethinking their career choices. It used to be that a position with a company with generous health insurance benefits was the very definition of a good job. Now, in the wake of the Great Resignation, it appears more workers are looking for a job that is fulfilling. In fact, because workers can now purchase affordable healthcare insurance on government exchanges, they are no longer tethered to a specific employer.

This combination of frustration and flexibility is empowering would-be entrepreneurs to go ahead and take the leap to starting their own business. In 2021 alone, there has been a tremendous increase in new business filings. Furthermore, venture capitalists have been pouring money into these new ventures at a record pace, with more than $240 billion invested this year alone through September. The largest of these investors tend to be private equity firms, hedge funds and corporations.

With more new start-ups, come more Unicorns. Historically, the number of new Unicorn businesses averaged about four per year in the United States. In 2021, however, more than 260 have reached $1 billion status. And the United States isn’t alone in experiencing this trend. Young adults in Japan also are leaving traditional corporate jobs to start their own businesses – and many of them are receiving financing from VCs and other institutional investors in the West.

In China, where TikTok was born and became a global phenomenon, there are presently more than 800 Unicorns. India is the third largest start-up ecosystem in the world, with more than 65 companies recently reaching Unicorn status.

Did you know that homeowner’s insurance doesn’t cover flood damage? Because of this, homes located in a Special Flood Hazard Area (SFHA) are required by lenders to purchase a separate flood insurance policy. However, there are millions of homes at risk that also experience periodic flooding but are not located in the most hazardous zones.

Regardless, any homeowner can purchase flood insurance and the good news is that, for some, rates will be reduced this year.

Starting on Oct. 1, the National Flood Insurance Program (NFIP) launched a new program called Risk Rating 2.0. This program is designed to encourage communities throughout the country to deploy measures that help mitigate potential damage due to flooding. The lower the risk resulting from these efforts, the higher the rating. This means that many homeowners who live in highly rated areas may benefit from lower premiums going forward. However, be aware that there is only one source of insurance sponsored by the government, rates are standardized and payouts are capped at $250,000.

But not to worry, flood insurance also is available in the private market. Private insurers are able to customize premium quotes and the forces of competition help keep premiums reasonable, so it’s a good idea to comparison shop. Private flood insurance policies also offer additional coverage options that the NFIP does not, such as:

• Up to $1 million or more in building coverage
• Enhanced coverage for detached structures
• Replacement cost for contents and secondary residences
• Additional living expenses
• Pool repair and fill
• Business income coverage

If your home is not in a SFHA and you are wondering whether or not to purchase flood insurance, consider how much you can afford to pay out-of-pocket for flood damage. Use this statistic as a guide: 1 inch of floodwater can cause as much as $25,000 in damages to a home.

In other words, paying for flood insurance is kind of like paying a fee to protect your home equity and investment portfolio. Compare a flood policy to buying a warranty for a new appliance. The risk is that the cost of repairing or replacing that appliance would put a strain on your finances. If you apply that same logic to 1 inch of flood damage, you can see that a flood policy would offer a much higher return on the amount you invest in its premium. Since a single flood event could wipe out all of your assets, it stands to reason that insurance is critical for perils that pose high financial risks.

If you still need more data to help decide whether to buy a flood insurance policy, consider the impact that extreme weather events have had on your property in recent years. In many areas, flood damage isn’t caused by a hurricane, but rather by storm surges or heavy rainfall. Even if you haven’t experienced significant events, that could change due to the constantly evolving environment. Rising sea levels and new weather patterns are expected to produce higher intensity flooding from hurricanes and offshore storms.

One way to see the local flood patterns in your area is to visit Floodfactor.com. Navigate the Floodfactor map to pinpoint your home’s exact location, and compare patterns based on past, recent, and projected future weather events. 

Today, 70 percent of college students graduate with an average of $30,000 in student loan debt. The average payment is nearly $400 a month and will take about 20 years to pay off. On an individual level, paying off high debt can delay hopes of saving to buy a house, start a family, launch a business or invest for retirement.

On a broader level, the national burden of student debt could impact America’s economic future. When young adults are unable to afford home ownership, that reduces spending on all types of consumer products that accompany home buying. It also reduces property taxes used to support local resources and reduces the insurance pool of property owners used to help repair and rebuild homes after extreme weather crises.

Whether you’re a graduate or the relative of a graduate in this situation, it’s worth considering various strategies to help pay off this debt. After all, it may be better – for both your offspring and the country’s GDP – to financially help them out now rather than later via a larger inheritance.

High Interest and Consolidation Considerations

The strategic way to approach student debt is to focus on paying off high-interest loans first. This generally includes private loans and any others with variable interest rates that may increase over time. Be aware that with federal student loans, there are different types and the borrower is permitted to switch to a different payment plan that better suits his needs over time. Another option is to consolidate student loans. However, if sometime in the future federal student loans are forgiven, your student could miss out on that by transferring or consolidating to a privately held loan.

Employer Assistance Programs

In recognition of student loan debt as both a personnel and national concern, many employers are starting to offer repayment assistance programs – even to parents paying off parent student loans. It’s important to inquire whether or not an employer offers this benefit, as they are not always promoted – especially to current workers. However, these programs have become more appealing to companies since passage of the CARES Act, which extended pre-tax employer-provided educational assistance for up to $5,250 per employee, per year through 2025

Another program that some companies have introduced is the ability for employees to convert the cash value of unused paid-time-off (PTO) toward their student loan payments. In other words, if a worker is not able to use all of his accrued paid vacation days in a given year, he can request the employer contribute that income toward his student loan debt.

College Savings Plans

Each state sponsors a Section 529 college savings and investment plan, which feature tax-deferred growth and tax-free withdrawals when used to pay for qualified education expenses.

In 2019, as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, Congress included a provision that permits up to $10,000 (a lifetime cap, per each beneficiary) from 529 College Savings Plans to be used to repay student loans. For example, if a family has three college students, the parents may withdraw up to $30,000 to help pay off that debt from their 529 account(s). Note that a 529 account owner can change the 529 plan beneficiary at any time without tax consequences.

Be aware, however, if 529 college funds are used to make principal and interest payments on a qualified student loan, that student loan interest cannot be claimed as a deduction on their tax return.

President Biden re-entered the United States in the Paris Agreement. This is an international treaty first signed in 2015 in which countries around the globe committed to mitigating climate change. Specifically, the goal of the Paris Accord is to limit global warming to no more than 1.5 degrees Celsius above pre-industrial levels.

This objective would generate what is called a net zero global economy, which means creating a balance between the amount of greenhouse gases produced and the amount of greenhouse gasses removed from the atmosphere. The main engine that places carbon back into the soil is healthy vegetation that grows all years round, these are called cover crops and reforestation. You can help by using the Ecosia search engine. 

The initial benchmark is to achieve net zero carbon dioxide emissions by 2050 and net zero emissions of all greenhouse gases by 2070. However, accomplishing these lofty goals will require a remarkable transformation of the global economy and global farming practices.

A way to measure global warming is through “temperature alignment” – a forward-looking benchmark that compares the level of emissions today against the potential for reducing them by a certain date in the future. The measure can be applied to a specific business, government, or investment portfolio.

For investors, global greening provides an opportunity to invest in companies positioning for a future net zero economy. After all, it’s important to recognize that climate risk represents substantial investment risk. Companies that prepare for the transition to sustainable energy sources will be able to deliver long-term returns, while those that do not could become obsolete.

If Net Zero is your path consider the following steps to align your investment allocation with the goals of a net zero economy. For example:

• Reduce your exposure to high-carbon emitters and companies not making forward-looking commitments to transform to the net zero economy.
• Prioritize investment decisions based on companies actively reducing reliance on fossil fuels and meeting science-based targets.
• Target specific sustainable sectors (e.g., clean energy, green bonds) based on your asset allocation strategy – and diversify investments among those holdings.
• Monitor ongoing research and available data to measure temperature alignment to ensure your issuers and investments are meeting published transition plans. This benchmark should be reviewed with the same rigor as traditional financial data.

The United States and the entire world have a choice to reduce the global. However, the effort also offers an opportunity to invest in climate innovation. The future will bring the survival of the fittest, is your portfolio ready.

According to Fidelity Investments, the average 65-year-old couple retiring today will need about $300,000 for out-of-pocket healthcare expenses during retirement. And that doesn’t even include long-term care. One way to help pay for this enormous cost is to open a health savings account (HSA), which is a savings and investment vehicle designed to help people pay for medical-related expenses on a tax-free basis.

To open one of these accounts, you must be enrolled in an HSA-eligible, high-deductible health insurance plan (HDHP). These are offered by many employers and also are available on the individual insurance market. One of the little-known advantages of the HSA is that if you delay withdrawing from it until retirement, you’ll have money ready to tap for those out-of-pocket expenses on as-needed basis.

An HDHP works exactly as it is named; comprehensive coverage does not kick in until the plan member reaches an annual deductible that is typically higher than other healthcare plans. The trade-off for the higher deductible is that monthly premiums are lower. Therefore, this type of plan is generally suited for healthy individuals or families that do not have a lot of ongoing medical expenses.

In 2021, the annual HSA contribution limit is $3,600 for individuals and $7,200 for family coverage.  In 2022, these limits increase to $3,650 for individuals and $7,300 for families. Account owners age 55 and older may add another $1,000 “catch-up” contribution. With a work-sponsored HDHP, both the employee and the employer may contribute to the savings account, but their combined contributions may not exceed the annual limit. As long as you are enrolled in an HDHP, you may contribute to the HSA. Even when you no longer contribute, the account belongs to you and maybe invested for growth and tapped as needed.

Investment Advantage

An HSA is maintained at a financial institution, such as a bank. Once saved assets have reached a certain threshold, that custodian will allow the owner to invest a portion of the balance. While the HSA rules technically allow you to invest starting with your first dollar, many custodians have their own minimums required in the HSA (usually $1,000 to $2,500) to be available for medical expenses. Beyond that the balance, the savings can be invested for growth. Also, the owner can transfer money to and from the bank and the investment account as needed.

The invested portion of an HSA is transferred to a brokerage account. There, the owner has a variety of options to invest in, including mutual funds and individual securities. According to Morningstar, more than 80 percent of HSA investment funds have earned gold, silver, or bronze analyst ratings, and the lower end of investment fees range from 0.02 percent to 0.68 percent a year. Note that some investment management fees run higher, so it’s important to compare fees just as you would with any other type of investment.

Triple Tax Advantage

The health savings account features more tax benefits than any other type of investment, including a 401(k), a traditional IRA, or a Roth IRA. That’s because all contributions are tax-free (either through payroll deductions at work, which also avoid FICA taxes or as a tax deduction when health insurance is purchased independently). Moreover, HSA investments grow tax-free. If eventual withdrawals are used to pay for qualified medical expenses, they are not taxed either. So essentially, savings, investments, and gains from an HSA account that are used to pay for healthcare expenses are never subject to taxes. If you do use this money for nonqualified expenses, you’ll have to pay income taxes and, if taken before age 65, a penalty fee as well.

However, consider when most people encounter their highest medical bills: during retirement. If you pay for all out-of-pocket expenses with current income throughout your career, your HSA has the opportunity to grow into a substantial nest egg by (and during) retirement. The most effective use of these funds is to pay for health-related expenses, such as Medicare premiums, dental, and vision care, long-term care insurance premiums, and nursing home costs.

An additional advantage is that health savings accounts are not subject to required minimum distributions. However, be aware that when an HSA is left to a non-spouse heir, it converts to a taxable account – so it’s best to use up these assets while you’re still alive.

A SPAC is a special purpose acquisition company. It is typically sponsored by a venture capitalist or a private equity firm that has expertise in a specific sector or industry, such as green technology. A SPAC launches as an IPO, but it is nothing more than a shell company that raises money from investors. Post-IPO, it has a limited amount of time (one to two years) to merge with an existing company, where the capitol is deployed. Once that happens, the private operating company trades publicly under the SPAC name.

While SPACs have been around for about 30 years, they’ve only become popular in the past year or so. In fact, this year investors have already poured more than $100 billion into these vehicles, and that’s more than the total amount raised since they were first introduced. SPACs offer investors the opportunity to buy into a startup, which might be at early-, middle- or late-stage development when it partners with the SPAC. In 2020 and 2021, industries heavily represented by SPACs include electric vehicles, consumer-oriented technology, communications and retail.

What makes the SPAC particularly interesting is that investors do not know what company they are buying into since the entity has no commercial operations of its own. As such, they are sold largely based on trust in the management sponsor and belief in the growth potential for the industry it represents.

SPACs differ from traditional IPOs in that the IPO price is not based on the valuation of an existing business. Instead, investors typically pay $10 per common share of regular stock at the initial offering. These shares are referred to as units. Each unit also includes a warrant, which offers the right to purchase the company’s stock at a specific price and at a later date. Once a SPAC merges with a private company, the shares and warrants are listed and publicly traded on the stock exchange. Capital raised by the sale of warrants is typically used to compensate the SPAC sponsor.

One of the appeals of the SPAC model is that individual investors have the opportunity to invest in a startup that has been vetted and funded by an experienced private equity partner. This presents less risk as well as a ground-floor opportunity that is usually not feasible for individual investors. Most IPO opportunities require higher capital investments and occur at a later stage of development. SPACs provide the opportunity to commit a smaller investment at an earlier stage in a company’s life cycle, which often offers the potential for higher returns.

Unfortunately, the lack of a longer, established track record also increases risk – which is something the Securities and Exchange Commission (SEC) is currently scrutinizing. For now, the SEC has taken a hands-off approach, hoping the market will regulate itself. However, if SPAC sponsors oversell the entity’s capabilities or investors become disillusioned with the returns on their investment, the SPAC market may be subject to considerable regulation in the future.

As for investment returns, the outcomes are mixed. Initial SPAC IPOs tend to outperform the S&P 500. However, once SPACs merge with their respective private companies, the results tend to be less impressive. Given their recent surge in popularity, there’s no way to gauge their long-term performance success.