Retirement Revealed Jeremy Keil

David Lau of DPL Financial Partners discusses the in’s and out’s of annuities, what to look for in a good annuity and how to utilize them properly in your retirement plan.



Annuities are a hot button topic among investors, but my guest in this week’s “Retirement Revealed” podcast, David Lau of DPL Financial Partners, sees the inherent problems with how annuities have been treated in the past. He shared his thoughts on how we can change the way annuities are purchased and perceived.



The Controversy of Annuities



Annuities often find themselves at the center of controversy in the financial world. On the one hand, Nobel Prize-winning economists and retirees alike appreciate the security and guaranteed income they provide. Yet, the mention of annuities can provoke strong negative reactions, mainly due to their high fees and the commissions they generate for salespeople. The irony is that while people might dislike annuities, they cherish their pensions and Social Security, both of which are essentially forms of annuities but without the hefty fees.



High Commissions: The Root of the Problem?



The high fees associated with annuities often stem from high commissions. This structure has led to situations where clients are sold products that might not be in their best interest, simply because they generate higher commissions for the advisor. For example, I had a client who was recommended to switch from one annuity to another. Upon review, the new annuity did not offer better guarantees, yet the advisor stood to earn a significant commission from the switch. This kind of practice erodes trust and tarnishes the reputation of annuities as a financial product.



The Long Surrender Periods



Another significant issue with many annuities is the long surrender periods. I recall a case where an annuity purchased in 2005 had a 17-year surrender period, with a penalty as high as 20% in the initial years. Such conditions can trap clients in unfavorable contracts, making it difficult for them to access their funds without substantial penalties. This lack of flexibility further contributes to the negative perception of annuities.



Evaluating the Real Benefits



Despite these drawbacks, annuities can be beneficial under the right circumstances. They offer tax deferral, guaranteed lifetime income, and downside protection, which can be valuable for certain individuals. However, it’s crucial to evaluate whether these benefits align with your financial goals. For instance, if you’re not seeking lifetime income or don’t need the tax deferral benefits, an annuity might not be the best choice for you.



The Importance of Tailored Financial Advice



What stands out in the annuity debate is the need for personalized financial advice. The Retirement Income Style Awareness (RISA) profile, for example, helps determine the best investment strategies based on your individual goals and risk tolerance. This approach contrasts with the one-size-fits-all mentality that sometimes pervades the industry. Everyone's financial situation is unique, and the right financial product should fit their specific needs, not the other way around.



The Role of Different Financial Advisors



Understanding the type of financial advisor you’re working with can also shed light on the recommendations you receive. Advisors affiliated with big brokerage firms, registered investment advisors, or insurance companies may have different biases and product offerings. For example, insurance company advisors might lean towards selling more insurance products, while registered investment advisors might not offer enough insurance options. Striking a balance and ensuring your advisor is independent and unbiased can help you receive more holistic and beneficial advice.



Moving Towards Fee-Based Models



One promising development is the shift towards fee-based models, which can eliminate the conflict of interest inherent in commission-based sales.

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Identifying the common health savings account mistakes, identifying key strategies to maximize your HSA and exploring some of the practical ways to utilize your HSA over your lifetime.



If you're like many people, you might not be getting the most out of your HSA. Let’s explore why that might be and how you can change it.



Understanding HSA Contributions and Limits



Firstly, let's clarify how much you can contribute to your HSA. The contribution limits for 2024 are $4,150 for individual coverage and $8,300 for family coverage. However, many people aren't maximizing these contributions. Why? One common misconception is that you can only contribute through payroll deductions. While this is the most common method, you are able to contribute outside of your payroll deductions all the way up to the max. This could significantly enhance your retirement savings due to the triple tax advantage HSAs offer.



HSA vs. FSA: Don't Confuse Them



Another mistake is treating your HSA like a Flexible Spending Account (FSA). Unlike FSAs, HSAs don’t have a “use it or lose it” rule. Funds in an HSA roll over year after year and can be invested, allowing your money to grow tax-free over time. This means you can contribute the maximum amount to your HSA and not worry about spending it within the same year.



The Power of Investing Your HSA



A significant error many people make is not investing their HSA funds. If you're only earning a meager 0.5% interest on your HSA balance, you're missing out on potential growth. In fact, I recently helped a client move their HSA to a provider offering a 5% interest rate, resulting in an additional $6,000 in interest annually. This change alone can make a substantial difference in your retirement funds.



Using HSAs for Qualified Medical Expenses



HSAs are often referred to as "medical IRAs" because they offer similar benefits but with added advantages. Contributions are tax-deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free. This makes HSAs incredibly valuable for covering future healthcare costs, which are a significant concern for many retirees.



You can also use HSA funds for certain insurance premiums, such as long-term care insurance, COBRA, and Medicare Part B. This flexibility adds another layer of security for your retirement years.



Strategizing Your HSA Usage



Instead of viewing your HSA as a passive asset, you can get more out of it by taking a more strategic approach:




Max Out Contributions: Contribute the maximum allowable amount each year.



Invest Wisely: Choose an HSA provider that offers high-interest rates or investment options.



Delay Withdrawals: Pay for current medical expenses out-of-pocket if possible, and save the receipts. You can reimburse yourself later, allowing your HSA funds to grow.



Keep Detailed Records: Maintain a spreadsheet of your medical expenses to simplify future reimbursements.




Planning for Excess HSA Funds



If you find yourself with excess HSA funds later in life, there are several options. Once you reach 65, withdrawals for non-medical expenses are treated like distributions from a traditional IRA, subject to income tax but no penalties. If you pass away, your spouse can inherit your HSA and continue to use it for qualified medical expenses. For other beneficiaries, the HSA balance becomes taxable income. Consider leaving excess HSA funds to charity, which can provide a tax-efficient legacy.



Maximizing your HSA can significantly bolster your retirement savings and provide a buffer against future medical expenses. To get the most out of your HSA, ensure you're fully funding it, investing wisely, and using it strategically.



For more detailed guidance, check out my YouTube channel, Mr. Retirement, where I delve into the top HSA mistakes and strategies, and rank the best HSA providers based on interest rates and fees.



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