On this week’s show, Karl discusses the back and forth of stocks this week all based on trade. But, by the time the dust settled, a deal had been reached, and stocks rose.
Also, Casey Keller, CFA joins Karl to discuss the best savings account ever created.
Karl Eggerss: Hey, good morning everybody. Welcome to Creating Richer Lives, the podcast version. Thanks for joining us. Appreciate it. My name is Karl Eggerss and if you want to get a hold of us (210) 526-0057 and the website is creatingricherlives.com. We make it nice and easy for you. The name of the website, creatingricherlives.com, the name of the podcast, Creating Richer Lives, pretty easy. And by the way, this show is brought to you by Covenant Lifestyle Legacy Philanthropy. We are also on all the social media outlets and don’t forget too that the podcast is carried in multiple places.
You can just go to our website and listened to it. We have the transcripts are up there as well. So if you like to read the podcast, which some of you do. Monday afternoons, you’re sitting at work, the boss has walked by and he’s on the other side of the office and you want to catch a glimpse of the podcast and you can’t really put the ear buds in or the cool air pods hanging out of your ears. You want to read it. We put that on there for you, so the podcast you can read just as much as you can listen to.
All right. Well coming up in a little bit, we’re going to have Casey Keller chartered financial analyst to tell us about the best savings account ever created. You’ll want to stay tuned for that. The best savings account ever created, that’s coming up in just a minute. But it was a crazy week on Wall Street and while the major averages point to point didn’t seem to move that much, the Dow Jones was up a little less than 1%, the S&P, a little more than half a percent. That wasn’t the real story. The real story was all the up and down due to trade talks and it was quite fascinating because we come in Monday and the Dow falls about a 100 points after some negative reports came out regarding trade.
Then, we saw that Tuesday China would signal that it was going to hit back at the Trump administration because they are going to place eight of the country’s technology giants on a black list over alleged human rights violations against Muslim minorities. So China didn’t like that. And then asked Tuesday whether China would retaliate, their foreign ministry said stay tuned was his quote. Stay tuned. So markets clearly didn’t like that. The Dow Jones fell 300 points, very volatile day, S&P down about a percent and a half.
Now Wednesday we, here we go again, we hear China says, hey, we’re open to a partial trade deal. And so the market jumps 180 points at the open. Pretty strong day. Pretty much a relief rally. Not much internal strength, but a pretty good rally nonetheless. But it was after the bell that we had all the fireworks. We heard that China negotiators were going to leave the US without any progress on a trade deal. And so the futures after hours, most of you probably didn’t even notice this. But if you watch this stuff practically 24/7 like I do, you see that the futures were down about 300 points.
And it was because the Chinese officials are going to leave the United States without a deal. And we were trying to picture this in the office and Justin Pawl, our CIO, said, I can only picture the US officials grabbing the legs of the Chinese officials as they board the plane, don’t go. And sure enough, about two hours later, we hear that tariffs could be removed because there’s some positive negotiations around currency. And by the time the market opens the next morning, it’s flat, and so the ping pong match continues back and forth.
And Thursday, stocks are up 150 because we start getting the sense that maybe trade, maybe there’s a deal coming. And lo and behold, Friday we get the deal. But is it a deal? Well, the Dow jumped 500 points, very solid day, but it stalled off at the end of the day and we still finished up about 300 points. But the caveat is it was called phase one. So it is a skinny deal. It’s a mini deal and it covers some of the basic things, which is essentially we won’t put more tariffs on you and you buy a bunch of soy beans and whatever else from us.
That’s kind of the deal. We don’t touch intellectual property, probably not in some of these more important things. So this is phase one and it was best described this week, not as a de-escalation, but rather just it was it … It froze that we didn’t have further escalation, so just didn’t get any worse. But did it really get better? Who knows? But it was a relief rally, nevertheless, and it was a kind of a comeback. But the whole week was dominated by trade. Now, over the next couple of weeks, it’s going to shift rather dramatically because we’re going to see next week 53 of the 500 S&P 500 companies are going to be reporting earnings.
And then it’s going to get even busier after that. On October 24, there’s going to be 51 companies report just that one day. And in the last week of October, you’re going to see 162 companies in the S&P 500 report their earnings per share. Now when you start looking at the checklist in terms of can the market break out to new highs, you have to look at trade. That’s a big one because as we’ve been saying for months, as soon as tariffs were introduced, pretty much the market has had a lot of trouble making new highs.
We saw the market make new highs in January of ’18 and at that point the Dow was sitting somewhere about, we’ll call it, 26,600. Where are we today? 26,800. So, we’re basically at the same level we were more than a year and a half ago and it’s tied directly to tariffs and trade. So we may have some positive news on that. So what’s next? Well, the next thing is we need the earnings to come in better than expected that’s the next catalyst in the next few weeks. If we can get good earnings, which again is really what you are buying when you’re buying a stock is profits.
We need those to be good. And then probably the last ingredient is just the overall economy and we are still seeing some positive news out there. We’ve got some negative things happen in as well. But again, if it doesn’t get any worse, you remember we heard about yield curve inversion. Remember the short term rates higher than the long-term rates and why that typically leads to a recession. It’s a warning sign. Some of that’s been corrected and some of it’s not, but is it going to get any worse? If it doesn’t get worse, you have the trade deal getting better.
You have earnings getting better. You keep getting some positive economic news. Then, yes, we can, I think, go up to new highs and in a pretty good fashion because remember we’re still seeing a lot of money flowing out of the stock market. I know it doesn’t really make sense and it is hard to wrap our brains around. What do you mean going out of the stock market when the stock market’s at the same level it was a year and a half ago? So aren’t there equal sellers and buyers? Yes, that is the case.
But if you track the fund flows, some of the fund flows rolling out of the stock market right now in the billions are worse now than during the financial crisis. So you’re still having a big pessimistic theme happening and that can be reversed pretty quickly with positive news as we saw on Friday with a trade deal and the Dow Jones at one point was up about 500 points and a lot of big, big winners, three, four, 5% up on a lot of stocks. That’s what happens when people are in a sour mood and some positive news takes them by surprise, you get short covering and you get buying and that’s what we saw this week, so that can continue.
But to me those are the three basic ingredients, economy, trade and earnings. And we kind of have one at least checked off partially for now. Now a couple of quick notes before we get to our interview. Did you see the Social Security news, Social Security, COLA, cost of living adjustment? This is how much they gave you extra on your Social Security check each year. And when I say extra meaning the increase, the inflation adjustment. Well, it looks like it’s going to be 1.6% in 2020 and that is down from the 2.8% received this year.
So therein lies the issue, guys, that for those of you on pensions, on fixed income, relying on Social Security, the raises you get, the increases typically do not keep up with inflation. Now if we look at the government inflation numbers, yes, they would say, look,
Karl Eggerss: This is what we’re basing it on. If social security’s inflation is only 1.6% the COLA, then that’s what we think the inflation rate is. But you and I know that your inflation rate is probably a little higher than 1.6%. Thus, you have to have a diversified portfolio that’s going to beat inflation, so over time your portfolio grows more than that and you will have enough to take out for your living expenses. That’s the general idea. We are seeing a drop in the COLA for 2020. That was one thing that caught my eye this week.
The other thing is that there’s a lot of charts circling around now saying, “Look, this is the time of year from a seasonality standpoint that we should see a positive move for equity markets.” We already went through the low period, the tough period for equities. If you look at a long-term picture of the market and you averaged out every day for the last 50, 100 years, you have a pattern. Because you take every January 1, every January 2, cetera. You put them together and you get this pattern. We’re entering the period right now where typically you see the stock market rally. So we have that on our side. Is it something we all rely on? No. Every year is different. Every situation is different, but it is something that could offer a tailwind because other people see it. Other people might use that.
The other thing I saw in this was a tweet I put out. I saw a commercial for the new Apple card. Have you seen the new credit card by Apple? Obviously you can use your phone, but they have a physical credit card now. It’s pretty cool. It’s got some nice features. One of the coolest things is you ever get your credit card statement and you look at it, and the description of one of the places you went doesn’t make any sense. You’re like, “I don’t understand what this is. It’s got a bunch of letters. It has a bunch of numbers.”
Well Apple, what they do is they use their map technology and where you swipe the credit card, put that together, and give you the actual name of the business where you purchased something. So it makes it easier. They got some reward points, et cetera, et cetera. But they say in the commercial they claimed “not created by a bank” but yet, do you know who backs that card? Goldman Sachs. Do you know Goldman Sachs is a bank? Interesting. I thought I’d share that with you. When you see that commercial come on next time, think of me. Think of CreatingRicherLives.com because when it says “not created by a bank,” it kind of is. Goldman Sachs is backing it. Maybe they didn’t create it, but it’s still a credit card backed by a bank.
All right. As I mentioned earlier, we have Casey Keller, Charter Financial Analyst in studio with us. Casey, welcome to the podcast.
Casey Keller: Glad to be here, Karl.
Karl Eggerss: We teased it at the top of the hour as the best savings account ever created. Why? Or I should say not why are you calling it this, but what is the best savings account ever? Especially given that we’re still in a low interest rate environment, so this piques people’s curiosity. What is the best savings account ever created in your view?
Casey Keller: Yeah. Karl, it may surprise some people, but it’s called a Health Savings Account. It’s basically just an account to help you pay for medical expenses, either today’s medical expenses or future if you have a high deductible health insurance plan.
Karl Eggerss: The Health Savings Account, most people know them as HSAs. You may have heard that term not really understanding exactly how they work. We’re going to explain it a little bit, just real high level about the plan. But really what we wanted to talk about was the main benefits of the plan that most people don’t even think about. We’ve talked to CPAs. We’ve talked to financial planners. We’ve talked to all types of folks that don’t realize what this can really be used for. In terms of a Health Savings Account, we started out in the eighties and nineties HMOs, PPOs. Those were a traditional copay. You have a little lower premium and you go to the doctor and you pay a certain amount. Then you do have a deductible. It really worked for people that go to the doctor a lot or sick a lot.
Health Savings Accounts came out in 2003 as part of the Bush tax cuts I believe. They’ve been around for awhile and they’ve gained popularity, but these are high deductible plans. What we’re talking about with PPOs and HMOs were generally a little lower deductible. You could raise them. These are pretty much exclusively high deductible plan. Number one, who generally uses high deductible plans? What are the negatives of that first?
Casey Keller: Sure. Well, I’d say more and more people are probably using them because they’ve seen their health insurance costs rise and they started to explore other options. They’re starting to look and see what are other options to get my premiums down. If you’re looking in that direction, a Health Savings Account or a high deductible plan usually will pop up as an option. You start to look at it and compare. Nowadays, I believe the minimum requirement to qualify for an HSA is like $2,700 deductible for a family. So it may not be as high as one would think. That’s typically-
Karl Eggerss: So you pretty much pay for everything out of pocket up to $2,700 for a family?
Casey Keller: Correct. For a family. Yeah. I mean you are going to incur more costs upfront. You’re going to be paying for-
Karl Eggerss: If.
Casey Keller: If you have this plan.
Karl Eggerss: Yeah.
Casey Keller: So it varies in terms of how you look at it. I would say more and more people, if they looked at the details of high deductible plans, some of them may be less frightening or less costly than they may think.
Karl Eggerss: You really do have to go back and analyze your medical history, your family’s medical history, your kids, how often they are sick or not.
Casey Keller: Medications that they may need. A lot of that needs to be a part of the conversation. It’s not for everybody, but I think more and more people would qualify or benefit from it than they may think.
Karl Eggerss: So that’s the basic fork in the road. You’ve got low deductible traditional plans or high deductible where people are trying to save on their premiums, but it’s a higher deductible plan, so you’re on the hook when those things do occur. That’s what it is. Of course, you still go to your doctors and you still do those types of things.
Casey Keller: One other thing I’d add to it as well, Karl, is that I think it does make you a smarter consumer. If you have a high deductible health care plan, you’re going to start thinking a little bit more about how you handle healthcare because you are paying the first part of it out of pocket. It does help you ask more questions and be a little bit a smarter consumer. Not that everybody could fit, but it’s kind of like if you extrapolate that across the whole country, you could see how it can really benefit healthcare overall.
Karl Eggerss: Unfortunately most people probably don’t want to see behind the curtain of what some of these things really do cost when you start digging in, what am I being charged? I’m being charged 12 bucks for a Kleenex.
Casey Keller: Right. Then you start to realize I can go to this place versus this lab to get some blood work or lab work done and actually save money. There’s a lot of ways that you can become smarter about healthcare.
Karl Eggerss: Yeah. A $10 bandaid is not what it should be.
Casey Keller: Right.
Karl Eggerss: We know what that plan is. Employers offer it. You can get them on your own or employers were offering them. Sometimes they’ll match and have some incentive as well. But where does the savings account come into play? When you participate in one of these, you’re putting money into this pot, right?
Casey Keller: Correct.
Karl Eggerss: Then the idea is that it grows and you’re able to use it later or anytime for medical expenses.
Casey Keller: Right.
Karl Eggerss: Right? That’s the traditional sense. Does it grow tax deferred, tax free? Do you get a tax deduction? Explain some of that.
Casey Keller: Sure. Well, I think first of all, I think it gets confused a lot because there is another healthcare plan called a Flex Spending Account. Folks may be familiar with that. That’s a little different animal. That does require you to spend every dollar you put into it at the end of the year.
Karl Eggerss: Use it or lose it.
Casey Keller: Use it or lose it. Sometimes this account gets confused with that so people think they have to spend it all. That’s one misconception. With an HSA, you have to know if you have a difference between an HSA or a Flex Spending Account. But if you have an HSA, you’re not required to spend it. Basically, it allows you to have your money go in tax deferred or pre tax. If your employer’s putting dollars into the plan for you, it doesn’t count as income for you.
Karl Eggerss: Okay. Basically the employer puts in and you’re putting in, so you’re not paying. You’re getting a deduction yourself and whatever the company’s matching, you’re also not paying taxes on that right now either. You got both of those sources of money going into this bucket called an HSA and it’s growing.
Casey Keller: It’s kind of like a 401k or an IRA in that sense. But the beauty of it is that like with an IRA, if you’re putting money in, not a 401k, but an IRA, if you’re putting money into that each year, there are limits on your income. If you make over certain amounts, that income or those contributions will not be tax deductible after a certain level. HSA have no limits on that. So it doesn’t matter what your income is. If you’re putting into an HSA, you’re always going to get the tax deduction for it.
Karl Eggerss: The money goes in there and as opposed to a 401k or an IRA, this grows tax free, which is very different than tax deferred. Right? Because on a 401k, you took a deduction now. You’re going to have to pay the taxes on the gains later. With an HSA, that’s not the case. Right?
Casey Keller: As long as you take the money out for qualified medical expenses, that’s the key.
Karl Eggerss: Here’s where it gets interesting, right? Because you don’t necessarily have to take it out for qualified medical expenses, but you do have to take it out for medical expenses that were incurred at some point in your life.
Casey Keller: Correct. Yes. That’s the key part there. But to reiterate that, just like
Casey Keller: An IRA or 401k we said any savings in there, if it’s invested can grow tax deferred.
Karl Eggerss: So you can actually invest this money too. Flexible spending just sits in a silo, right?
Casey Keller: Exactly. So it can be saved and I’ll get into that just in a moment. Just a little more detail on that. But it can be saved and it is tax deferred, just like an IRA. But the kicker is, it can be pulled out or taken out tax free as long as it’s to offset either incurred expenses from previously medical expenses or current medical expenses. So here’s how it works Karl, here’s how the strategy would work, would be that you’d put money into the plan. The current limits are $7,000 per year if you have a family, for an individual it’s $3,500.
Karl Eggerss: Is that including the match by the way?
Casey Keller: That includes the match, so you can’t go over-
Karl Eggerss: Okay, so 7,000 total.
Casey Keller: Total, whether it’s employer or individual. So if the employer puts the full 7,000 in, you can’t put any extra. But let’s just say you’re max out. Let’s just say a family, you’re putting $7,000 in. The idea is that if you have the means and then you would just incur medical expenses throughout the year.
Karl Eggerss: Cashflow then basically.
Casey Keller: your cashflow, and you have a doctor’s visit, you have some medications, you’re paying for that out of pocket. And then you start to build up that balance that’s in each year, let’s say 7,014 it’s building up.
Karl Eggerss: So let’s just say after 10 years, they have $70,000 plus whatever it’s grown to.
Casey Keller: Exactly. Most of these a HSA accounts now offer the ability to invest the balance so you can choose to go pick mutual funds. Some even allow brokerage accounts where you can go in there and invest in whatever you want, and the idea would be to grow it. Meanwhile, in the meantime, you’re incurring medical expenses and you’re keeping track of those. So if you’re going to the doctor, a lot of these sites now, they’ll keep track and say, okay, I went to doctors, it was $80 and you put that in there, paid for this medication. You’re tracking all these expenses.
So you have this running tally of expenses and let’s just fast forward to retirement. Let’s just say someone started this in their forties, they started doing this, and now they’re 65. They could very well have hundreds of thousands of dollars in this plan, this HSA plan. And maybe they’ve incurred over that time $50,000 in expenses and they’ve kept track of that. So they’ve never touched it, but now they can reimburse themselves for $50,000 worth of expenses over the last 20 years, 25 years. And so they can go out and reimburse themselves if they want, take the family on vacation-
Karl Eggerss: And that’s tax free, right?
Casey Keller: That’s tax free because-
Karl Eggerss: Now here’s what most people probably are wondering, okay, you say somebody has, let’s just say $200,000, it’s built up over time, they’re in retirement. They’ve got receipts proving that they have 50,000 worth of expenses. So what about the other 150,000 that’s in the HSA? Is it trapped in there?
Casey Keller: No, I mean, potentially you pre-funded your retirement medical care or costs.
Karl Eggerss: So you could use it, if you did have another $5,000 medical expense at that time, you can take it out for that at the time. So as opposed to cashflow in it.
Casey Keller: At that point, you kind of switch gears and you say, I’m not saving anymore, now I’m in retirement, I’m going to use this account for my medical expenses. So every time you go to the doctor or anything comes up, you’re going to use that account at that point. And if you are fortunate enough to where you’ve overfunded it and you have it too much money in there, worst case scenario is it just becomes like an IRA. If you end up not having enough medical costs to use the account for, you can pull the money out and it’s just taxed like an IRA, just like a paycheck.
Karl Eggerss: And what happens if somebody, let’s say a husband and wife pass away, what happens to the remaining balance in the HSA? It basically goes to their heirs and it would be taxable to them. But it still grew all those years, tax deferred at that point, and they just pay the taxes on that at that point?
Casey Keller: Correct. Basically the worst case scenario is that you’ve created another IRA for yourself.
Karl Eggerss: Yeah, right.
Casey Keller: Best case scenario, you’ve gotten to use it for medical expenses tax-free and for all of your life. You basically have to pay for your medical care.
Karl Eggerss: Yeah, and I think that’s the misconception, is that people think, well, number one, whatever I put in there is going to be used for medical expenses and I don’t want to over-fund it and all those things. What you’re suggesting is if you have the means, you cashflow your medical just like you normally would, except you get the benefit of putting $7,000 on something that you’ve got a deduction on that’s growing tax free and withdrawn tax free. So what you’re saying is this is triple tax free. I don’t know of another vehicle that has those characteristics.
Casey Keller: No, in fact the real popular Roth IRA has two of those.
Karl Eggerss: Yeah, so the Roth IRA you put in after tax which means you were taxed on the dollars you put in already.
Casey Keller: Correct.
Karl Eggerss: So that’s the, that’s already out of it. Then it grows tax free and it can be taken out tax free. So it’s very beneficial.
Casey Keller: Which is great, it is.
Karl Eggerss: Yeah. Awesome. However, it’s two of the three. 401k, deduction upfront, didn’t pay taxes, but guess what? It’s tax deferred. So the growth is going to be taxed down the road. And actually all of it’s going to be taxed at some point. You got the deduction up front, you pay the taxes down the road.
Casey Keller: Right.
Karl Eggerss: This goes in with a deduction, grows tax free, and withdrawn with medical expenses to counteract that is tax free as well. Triple tax savings.
Casey Keller: Exactly, and that’s what’s unique about it.
Karl Eggerss: Pretty phenomenal. So really, I mean, you think about who wouldn’t do this? I think this is where to me comprehensive financial planning comes in, because if you just look at some of these things in isolation, like for example, well, I go to the doctor a little more. Okay, well did you take in consideration how much money you’re going to save in tax free growth that may be greater than the money you… Yes, maybe you did spend a little more on medical by going this route, but if you factor in the tax free growth down the road, maybe that supersedes the medical expenses. You see what I’m saying? In other words, you can’t just look at, well, I go to the doctor a lot so I can’t use an HSC.
Casey Keller: No, and I think a real important factor here is that you have to have some liquid savings to be able to cover unexpected medical needs if you-
Karl Eggerss: Or good income.
Casey Keller: Or good income, one or the other. You need to have something to be able to pay for these things that come up. If you have a broken bone, stitches, things like that, that can be more costly with the high deductible plan. But if you have the cash there, it’s better to pay cash out of your savings than to pull out of the HSA and lose the growth potential, tax free growth potential of that account.
Karl Eggerss: This is a really excellent technique because it’s taking something that’s available to most people, that are used in traditional sense, but they are not using it or understand what else it can do. It’s like driving around with a turbo and you didn’t know you had to flip the switch to kick in the nitrous or the turbos, you don’t know it’s under the hood. You have this ability in this plan and most people probably aren’t using it to its fullest extent.
Casey Keller: Right, and if you really kind of embrace the power of what it can do, you would almost treat it as this cherished asset that you want to protect and you don’t want to ever tap into it. I think that’s when you start to realize how it works, you go, this is powerful. This can really be really beneficial long term. And then you go, how can I pay for medical expenses in another way? Your thinking changes. It flips in a different manner going I want to protect this account.
Karl Eggerss: Well, here’s what’s interesting too, just to kind of put a bow on it, it’s the fact that people come to us all the time, they go, “Boy, I hate paying taxes, I hate this. I’ve already maxed out my 401k. I guess there’s nothing as an employee left to do.” It’s right here. This doesn’t impact your 401k. You can still put in 19,000 as of right now, 19,000 if you’re under 50. 25,000 if you’re over 50 per year into a 401k and you can do 7,000 into the HSA.
Casey Keller: Correct.
Karl Eggerss: Those are mutually exclusive.
Casey Keller: That’s correct.
Karl Eggerss: Wow. This is awesome. The best savings account ever created. Casey Keller, thanks for this information. Very, very valuable and we will have you back soon.
Casey Keller: My pleasure, Carl, thanks.
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