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The IRS originally announced back in early 2017 that the 2018 HSA contribution limit for family coverage would be $6,900. Then Congress passed a new law in December 2017 that changed how inflation adjustments are calculated, effective in 2018. Based on the new law, the IRS re-calculated the 2018 HSA contribution limit for family coverage in January 2018. It came out to be $6,850.

This late change created headaches for everyone. Employers, administrators, and taxpayers had to jump through hoops for a petty $50. Now the IRS said forget it. We can go by the original $6,900 limit or the new $6,850 limit.

If you only contributed $6,850, now you can contribute another $50. If you already contributed $6,900, and you haven’t done anything, now you don’t have to withdraw the extra $50. If you already withdrew $50 with earnings, now you can put it back into the HSA if the HSA custodian accepts it. If you decide to keep the $50 with earnings, you can go by the $6,850 limit and treat it as a normal withdrawal of excess contribution.

For more information please see IRS Rev. Proc. 2018-27.

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2018 HSA Family Coverage $6,900 OK After All is copyrighted material from The Finance Buff. All rights reserved.

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After I gave my resignation, the first order of business was to buy health insurance. My former employer’s health insurance covers me to the end of the month. I need insurance starting on the first of the following month. Basically I have four choices:

  • Self-insure
  • Join a healthcare sharing ministry or program
  • Sign up for COBRA
  • Enroll in Affordable Care Act (ACA) marketplace
Self-Insure

Self-insure sounds better than “don’t have insurance” but that’s exactly what it is. You just pay everything out of pocket. I think the highest total billed amount for us in any given year in the last 20 years was never more than $20,000. In most years it was less than $2,000. Paying everything out of pocket would indeed be less expensive than buying insurance.

By the same token we never filed any claim on our homeowner’s insurance or umbrella insurance. Our auto insurance never paid more than $10,000. Not expecting high expenses isn’t a reason for not buying insurance. The purpose of having insurance is to cover the unexpected extreme cases.

In healthcare, the extreme can be much worse than in auto and home. Of course the premiums are also much higher.

Self-insuring isn’t a good option for us.

Healthcare Sharing Ministry or Program

A healthcare sharing ministry or program is like a co-op. Members pool money together to pay the members who happen to have healthcare expenses. When you have healthcare expenses other members then pay you. If you are a member of a healthcare sharing ministry program, you don’t have to pay a penalty for not having health insurance. Now that the penalty is reduced to zero starting in 2019, it’s less of a motivation, but the co-op nature still remains the same.

A healthcare sharing ministry or program is not insurance in that other members are not legally obligated to pay your expenses. Because we worry more about the catastrophic expenses than the “normal” expenses, we prefer to have traditional insurance. A $50k expense would be unpleasant but we can pay it if we have to. If the ministry or program chooses not to share a $5 million expense it would be a disaster for us.

For more about healthcare sharing ministries or programs, please read How Healthcare Sharing Programs Compare To Traditional Health Insurance by Jake Thorkildsen on Nerd’s Eye View.

We decided not to join a healthcare sharing ministry or program.

COBRA

COBRA is the 1985 law that required employers to offer continued coverage to recently terminated employees. People now also refer to such continued coverage as COBRA.

Federal law requires the employer to offer 18 months of coverage under COBRA. In California, the state requires the employer to offer additional 18 months. If we decide to sign up for COBRA, we can stay on it for a total of 36 months.

Employees pay the full cost of the employer’s group coverage plus up to 2% administrative fee. The COBRA premium for the same high deductible plan I had is about $1,000/month, versus $280/month when I was an employee.

However, COBRA coverage isn’t eligible for any premium tax credit under the Affordable Care Act. Nor is it eligible for the self-employed health insurance deduction because it isn’t considered to be established by the self-employment employer.

COBRA can be an easy option for us for the next 3 years. The coverage is good. We are familiar with the plans and the providers. Whether it’s the best option for us is only a matter of cost.

ACA (Covered CA in California)

The state of California operates its own ACA exchange called Covered California. It’s very easy to shop and compare plans there. Because we are healthy and we have low expenses, we chose to look at only HSA-eligible plans there. For our ages and zip code, we have three choices. All of them are Bronze plans.

Kaiser HMO Anthem EPO Blue Shield PPO
Unsubsidized Premium $850/month $950/month $1,250/month
Deductible $9,600 $9,600 $9,600
Out-of-Pocket Maximum $13,100 $13,100 $13,100

We do not expect to meet the annual deductible regardless. Therefore the insurance only matters when we have catastrophic expenses. Kaiser HMO has no out-of-network coverage unless it’s an emergency or under other limited exceptions. Anthem EPO is similar to an HMO, except we don’t have to go through a Primary Care Physician. Blue Shield PPO has the broadest coverage. It’s also the most expensive option.

Among these three we would choose Blue Shield PPO. Again having coverage is more important to us than the cost, both in premiums and in providers’ billing rates.

COBRA and then ACA?

We are not eligible for a premium tax credit this year. It’s possible to sign up for COBRA for the rest of this year and then switch to ACA at open enrollment for next year. For this year, it’s going to be $1,000/month on COBRA versus $1,250/month on ACA. After the self-employed health insurance deduction, the ACA policy comes out to be slightly less expensive.

I don’t know whether we will be eligible for a premium tax credit next year. It will depend on how successful I am with my self-employment.

If I’m not that successful, we will be eligible for a premium tax credit. The net premium of the ACA policy will be $470/month.

If I am successful, we won’t be eligible for a premium tax credit. The current $1,250/month number for the ACA policy will likely go up quite a bit more. In that case we are better off paying $1,000/month for COBRA. We have only 60 days to decide whether to sign up for COBRA. After the window closes, the COBRA option will disappear.

If we decide to sign up for COBRA, it only covers us for 36 months anyway. Long-term we will have to get on ACA. If I am successful with my self-employment, then the success can pay the extra premium. So we don’t have to worry about the increased premiums after all.

Paying $1,250/month for insurance we don’t expect to use sounds like a lot, but it’s considerably less than the taxes we used to pay. It’s not that bad when you see it from that angle.

We decided to enroll in ACA right away. Either we will pay less when my self-employment isn’t that successful, or we can afford to pay more when my self-employment is successful.

Dental and Vision

Covered CA offers dental and vision plans as well. There is no premium tax credit on dental or vision coverage. The two major carriers for large employers, Delta Dental and VSP, also offer individual plans. After comparing costs and benefits, we decided to use COBRA for dental and vision for the next three years.

By enrolling in COBRA for dental and vision coverage, we also preserve our right to get back onto COBRA for medical coverage at open enrollment for next year. Active employees who opted out of medical coverage now can add medical at open enrollment for next year. So can we as COBRA enrollees. If for some reason we see COBRA as a better option we will have a second chance.

I see a policy intervention here. By extending the COBRA period indefinitely, people who don’t get a premium tax credit on ACA policies will have an out. It doesn’t cost the taxpayers anything. It doesn’t cost the employers either because former employees pay the full premiums under COBRA.

Enrolling in Covered CA

Enrolling in Covered CA was relatively easy. I did it online. When I had a problem with my password, customer service answered in one minute and helped me reset it. Because I froze my credit, I had to do a verbal ID verification with Experian. Covered CA gave me a toll free number to call and a referral ID. Within minutes of verifying my identify with Experian, I was able to continue online.

After I completed the application I was directed to a page to pay the first month premium. I gave a credit card for them to charge. Everything went very smoothly.

Say No To Management Fees

If an advisor is charging you a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice: Find Advice-Only.

Self-Employed Health Insurance: COBRA, ACA, Health Sharing Ministry is copyrighted material from The Finance Buff. All rights reserved.

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I had two jobs in the last 11 years: one full-time job at my employer and one part-time job in writing this blog, and more recently, helping people find Advice-Only financial advisors. As of yesterday I’m left with only one job. Although the full-time job paid very well and I don’t hate it, it still takes hours in the day I’d like to spend on my own initiatives. So I resigned.

If I sensationalize it I would yell I RETIRED! Nowadays in order to be inspirational you have to be willing to say something untrue. As Andrew said to me on Twitter, the bar for the untruth also moved higher and higher.

Flat abs in 28 days might have sold better years ago. Now it's 18 days. Much like attaining FIRE at 40 gets a yawn now since we got FIRE bloggers in their 20s!

— Andrew (@LiveRichCheaply) March 21, 2018

But seriously, I don’t see going from two jobs to one as retirement. Neither do I see going from working for an employer to self-employment as retirement.

I will still work on this blog. I will still work on helping people find Advice-Only financial advisors. I started writing another book a few years ago but I just didn’t have the time to finish it. Now maybe I will. As Jonathan Clements wrote in his blog post Second Childhood, people in self-employment often work harder for less money than when they worked as an employee.

I didn’t retire. I pivoted to self-employment. More than 9 million people in the U.S. are self-employed. It’s not that unusual.

The opportunity cost of leaving a job is huge. Every day I don’t go to the office I lose $1,000, after tax. Saying no to a good salary is a luxury lifestyle, the opposite of being frugal.

One change in this pivot is in how we will support ourselves. After our first pivot when my wife quit her job in 2015, my salary still covered our expenses. We still had health insurance through my employer. Starting in 2019, we expect the income from self-employment will cover some but not all of our living expenses. We will have to withdraw from our investments to make up the difference. For the first time in many years, we will have to go by a budget.

Because the stock market valuation is high and the bond yields are still low, we will have the risk of  lower returns in the future. Vanguard said the rate of return for a 60/40 globally balanced portfolio will only average 4-5% in the next 10 years. That number is before inflation. This is far lower than the historical return of 5%+ after inflation.

On top of lower returns, we will also have the risk of poor sequence of returns. The current bull market has been going for quite long. The tide may turn soon. Maybe the tide has already turned and we just don’t know it yet. If returns are especially bad in the early years of taking money out of our investments, it will further reduce the amount we can safely withdraw from our investments.

Because we will buy health insurance on our own now, we will have the risk of adverse changes to the Affordable Care Act and adverse changes to the health insurance market in general. The health insurance we buy has a $9,600 deductible (I will have a detailed post on this next week). Practically speaking we will be paying 100% of our day-to-day healthcare expenses. We will be subject to the higher inflation in healthcare costs.

Our goal is to increase the self-employment income to once again cover 100% of our expenses, including healthcare. This will mitigate our risks. However, this goal itself is also a risk. We may not be able to achieve it.

Because this blog has always been about sharing what I learned about personal finance along the way, I will continue to write about what I run across. To those who already retired, I will finally write more about taking withdrawals, whereas previously it was mostly about putting more money away. To those who are still working, you will get a preview of what happens when you start taking withdrawals.

Our income will be much lower. So the topics will also shift, from backdoor Roth when your income is too high to the Saver’s Credit when your income is so low that you get extra help.

Because I value quality over quantity, I never committed to any preset schedule of publishing new blog posts. It was about once a week recently. Now I can’t say whether I will post more frequently because I will have more time or I will post less frequently because I will have other pursuits. If you haven’t done so already, please or RSS feed. When a new post comes out you will get it automatically. When I go silent you know that’s because I’m busy with something else. I intend to still send out the weekly digest email on Fridays but I can’t promise it either. So please don’t be surprised when you don’t get one. You are still on the list. You will get it when I send an update.

I will also experiment with opening the blog for guest posts from subscribers. If you have something to share and you don’t want to bother setting up a blog of your own, you can send it to me, as Steve did last week on maintaining and executing an estate plan.

Thank you for staying with me along on this journey. The journey continues. Let the second childhood begin.

Say No To Management Fees

If an advisor is charging you a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice: Find Advice-Only.

From Two Jobs to One, a Second Childhood Begins is copyrighted material from The Finance Buff. All rights reserved.

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You make your will and trust. The real test for whether they worked or not only comes after you die. Between now and then you have to keep your will and trust updated. Reader Steve kindly shared his experience in maintaining his parents’ estate plan and executing the plan after they passed away. Here’s the guest post from Steve:

Funding the Trust

The attorney handled getting my parents’ home transferred to the trust. He wrote letters for transferring life insurance policies, bank accounts, and brokerage account to the trust. My parents signed those letters, with necessary attachments, and mailed them in.

I later found that some insurance policies and particularly broker/financial accounts had not completed the title transfers. I had to follow-up with the brokers’ and insurance companies’ back office to get the accounts and policies transferred. It’s very important to follow-up on this. The job is not over until you see account statements titled properly in the name of the trust.

Their car was not transferred to the trust. Some experts advise not transferring ownership of assets like cars to trusts, for liability reasons.

Moving To Another State

When my parents relocated to my state, we had another estate planning attorney review the trust and other documents to see if changes needed to be made. The trust document did not have to be changed, but I believe he recommended revising the healthcare power of attorney and the general power of attorney to comply with this state’s laws.

What the Trust Did and Didn’t Do

The trust reduced my parents’ state estate tax bill, after both of them died. In years since, state estate tax law changes have eliminated this benefit.

The trust allowed faster disposition of assets and distributions to beneficiaries than their non-trust assets which were controlled by probate.

The trust also allowed more privacy than for non-trust assets.

However, the trust did not eliminate the need for an attorney. The trust was complex enough that when my parents died, I needed to consult an attorney to understand proper steps. Also, laws change and a trust established earlier may need to be reviewed/updated over time.

The trust did not eliminate probate and the related costs. Assets outside of the trust such as personal effects, automobile, auto insurance policy refunds, other miscellaneous post-death income get included in the probate estate, even if the will says such probate assets “pour over” into the trust. This means filings with the court, and approvals from the court.

The trust did not simplify tax preparation. Once a trust owner dies, the trust becomes irrevocable and a separate tax entity, requiring trust income tax returns if the post-death income is over a small amount. Same for estate income tax returns for income from the probate estate. These are income tax returns, not estate tax returns.

The trust did not simplify acquiring control of assets in the trust. When the trust owners die, getting distributions from broker accounts and insurance policies titled in the trust takes extra paperwork and hassle. I needed not only the death certificate, but documents relating to the trust. With some financial institutions, this can take a lot of follow-up.

Other Lessons Learned

1. Choosing the trustee. The paralegal at the attorney’s office told me that the most important part of the term “trustee” is trust. With little supervision by the court, an untrustworthy trustee has the ability to misuse trust assets. Pick your trustee carefully.

2. The more the trustee and the executor know about the details of the trust and the other estate planning documents, the better. Because my parents lived locally and they involved me before they died, I was able to understand the situation and their wishes.

3. A middle class estate took about a year to settle and distribute all assets from the trust. There were no conflicts or problems. It was just the time required to do the steps required.

4. Make sure original, signed copies of the trust documents and other estate documents are in a safe place, and survivors know where they are located.

5. The role of an attorney at death. The attorney’s staff billed on an hourly basis. I told the attorney I would handle gathering information, dealing with financial institutions, and other paperwork, except any filings for the court. The attorney handled court filings, and preparation of the state estate tax return. This separation of duties reduced attorney fees. I had the time and knowledge to do this.

6. Watch out about naming co-trustees and co-executors. Name successor trustees/executors instead. Settling a trust and estate with multiple trustees/executors needing to understand and sign documents will slow things down.

7. Some wills are considered self-proving, meaning that they can be filed with a court with relatively little hassle. If the will is not self-proving, it will likely need an attorney to get it accepted by a probate court. Ask your attorney about this.

Say No To Management Fees

If an advisor is charging you a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice: Find Advice-Only.

Maintaining and Executing An Estate Plan is copyrighted material from The Finance Buff. All rights reserved.

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This is part 2 of our experience in setting up our basic estate planning, which included a revocable living trust. Please read part 1 Will and Trust Through Employer Legal Plan for the background.

After we signed the trust documents at the lawyer’s office, we had a small stack of paper. Other than ourselves and the lawyer who drafted the documents, nobody else knew that the trust even existed. Just hanging on to the stack of paper wouldn’t do much for us. We had to let the trust own some assets. The trust only has effect over the assets it owns.

Putting assets under the name of the trust is called funding the trust. The lawyer told us many people didn’t follow through in funding their trust. They ended up wasting the money and the effort in creating the trust in the first place.

In part 1 I covered how we transferred our home from under our own names to under the name of the trust. That was done very easily. We also added the trust to our homeowner’s and umbrella insurance as an additional named insured. Next we needed to change the ownership of our investment accounts from Joint Tenants With Rights of Survivorship to the trust.

We only had to do it to regular taxable accounts. Retirement accounts such as 401k’s and IRAs would stay in our own names. Although you can name the trust as the beneficiary of those retirement accounts, our lawyer said we should just name individual persons as beneficiaries in order to preserve the ability to stretch the distributions. She said there was a way to make the trust the beneficiary and still make it possible to stretch the distributions but it would be an overkill for us.

We have investment accounts with Fidelity, Vanguard, and Merrill Edge. I sent a secure message to customer service at each company asking what their procedures were. Each company responded quickly with clear instructions. They all have well established procedures with different degrees of difficulty.

Fidelity

Fidelity has a Trust Application form and a Certification of Trust form. The Trust Application opens a new account in the name of the trust. To transfer over an existing account already in individual names, you just put the account number(s) in Section 4.

The Certification of Trust form requires signatures to be notarized. Instead of using Fidelity’s form, I just attached a copy of the trust certification document prepared and notarized by our lawyer.

I dropped off the forms at a local Fidelity investor center. The trust account was opened in the afternoon on the same day. Two days later all assets in the existing joint account were transferred over as-is to the new trust account. The joint account was automatically closed. All cost basis and lot information came over intact.

This was the easiest and smoothest. Because the trust account was a new account, I had to set the preferences again for dividend and capital gains distribution (reinvest or put into cash), cost basis accounting (average cost, first in first out, or actual cost), linked bank account, etc.

Vanguard

Vanguard also required a new trust account application. The application was done by filling out a PDF form online through DocuSign. Because all new accounts at Vanguard must be a brokerage account now, we couldn’t stay on the simpler mutual-funds-only platform any more. The new brokerage account for the trust was created the next day after we completed the electronic signatures through DocuSign.

Next we needed to transfer the existing joint account to the new trust account. To be honest I was very afraid that Vanguard would screw up the cost basis accounting during the transition. I read multiple reports on the Bogleheads investing forums that Vanguard had trouble in keeping the cost basis straight. I printed out everything from the existing account. I would have to check line by line to make sure they transferred correctly.

Vanguard’s ownership transfer form asked for a Medallion Signature Guarantee. I asked around. Nobody was interested in giving a Medallion Signature Guarantee to make it easy for a competitor. They would give it for their own forms but not someone else’s. I don’t blame them.

Vanguard was aware of this situation. Its instructions specifically said we should contact customer service for additional options if we were unable to obtain a Medallion Signature Guarantee. I called. The rep said because we were co-trustees of the trust account and joint owners of the existing account, we could just send in the form without the Medallion Signature Guarantee.

I mailed the ownership transfer form. As of this writing the transfer didn’t complete yet.

Merrill Edge

Instructions from Merrill Edge were also very clear. We had to fill out a trust application, a trust certification, a letter of authorization, and attach the first page and the last page of the trust document. The trust certification had to be notarized. I asked the local Bank of America branch whether they could do it for me. They said they couldn’t but they would reimburse me for the notary fee if I had it done elsewhere. That worked. We had it notarized at a package shipping service store.

Instead of opening a new account under the name of the trust and transferring assets from the existing account to the new account, Merrill Edge would do it by simply changing the title on the existing account. The account number wouldn’t change. The linked bank account and all other settings wouldn’t change either. In a way this method is simpler.

I mailed the documents to the address given in the instructions. As of this writing the process didn’t complete yet.

Say No To Management Fees

If an advisor is charging you a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice: Find Advice-Only.

Switching Brokerage Account Into A Trust: Fidelity, Vanguard, Merrill Edge is copyrighted material from The Finance Buff. All rights reserved.

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Like many large companies, my employer offers a legal plan as part of our benefits package. At open enrollment in October or November, employees can sign up for the next year. Among other things, the legal plan covers basic will and trust. I signed up for one year at the last open enrollment to take care of our simple estate planning. I’m writing down our experience in using the legal plan for this purpose for others who may be looking to do the same.

The legal plan is offered by MetLife’s Hyatt Legal Plan. It costs about $200/year. Unlike other benefits, the cost is deducted from the paychecks after tax. According to Hyatt Legal Plan, they offer the plan to employers at no cost. In other words there’s no employer subsidy.

We don’t have complex estate planning needs. I thought of doing it using software like Nolo Quicken WillMaker Plus & Living Trust. I even bought the software a few years ago. I just didn’t have the confidence to trust it completely. I decided to pay a little more to a human lawyer for the peace of mind.

The legal plan has a directory of lawyers. You can search by subject area. I found a few names nearby. Then I picked one with good reviews on Yelp. For our simple needs I figured any lawyer would be able to do it.

Standard Package

We made an appointment with the lawyer for an introduction meeting. After reviewing the questionnaire we filled out before the meeting, the lawyer explained her standard estate planning package:

  • Will for each of us
  • A joint revocable living trust for both of us (we live in a community property state)
  • A trust certification, which is basically an outline of the trust
  • Transfer deed to put our home under the name of the trust
  • Assignment to put everything not explicitly titled to the trust under the trust
  • Durable Power of Attorney for each of us
  • Advance Health Care Directive for each of us

The legal plan covers everything except the Assignment, notary fees, and recording the deed. I told the lawyer we can record the deed ourselves. That saved us $100. We still paid $500 extra for the Assignment and notary fees.

The lawyer said the package would otherwise cost over $3,000. I doubt the legal plan really pays that much to the lawyer given that we only paid $200 for the legal plan and there is no employer subsidy. The extra fees for services not covered by the legal plan provide additional profits to the lawyer. The lawyer also has a chance to get future business from new customers brought by the legal plan.

After we signed the engagement letter and paid 1/2 of the agreed fee, the lawyer gave us another list of questions for how we’d like to distribute our assets after we die, who we would appoint as the successor trustee to carry out the distribution, etc. We answered those questions over email. A few weeks later we signed the documents in her office.

We finally got estate planning off our to-do list. It has stayed on our to-do list for years. If paying a moderate fee can motivate you to finish it, it’s worth it.

Could we have done the same with software? Possibly but you never know. As a one-time cost, $700 all-in isn’t too bad even though it’s 10x the cost of software.

Could we go without the revocable living trust and just title everything as Joint Tenant With Right Of Survivorship? Possibly. As I understand it, the trust will be helpful after both of us die. The benefits are marginal when one of us is still living. Because it’s part of the standard package, we just went along.

Recording The Deed

The lawyer prepared the deed to transfer our home from our own names to the trust. I wanted to record the deed ourselves to save a little bit of money and also learn the process. I looked up instructions from the county’s office. The process is very straight forward. Basically you just mail it in with a check. Two weeks later the deed came back in the mail with the official stamp.

Add Trust to Insurance

One thing I didn’t know before was that after your home is put under the name of a trust, you should add the trust to your homeowner’s insurance and your umbrella policy. I was glad I read the lawyer’s post-signing instructions.

I called the insurance companies. They were all very familiar with it. The homeowner’s policy charged a small extra premium for adding the trust as an additional insured. The umbrella insurance didn’t charge.

Funding The Trust

Putting brokerage accounts under the name of the trust was more involved. I will have to cover it in a separate blog post later.

Say No To Management Fees

If an advisor is charging you a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice: Find Advice-Only.

Will and Trust Through Employer Legal Plan is copyrighted material from The Finance Buff. All rights reserved.

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This is a sponsored post written by me on behalf of Green Dot. All opinions are 100% mine.

One day I was at a retail store picking up an online order. A young woman in front of me approached the counter. She pulled out $8 from her pocket, and she asked the customer service person to add it to her prepaid debit card. Apparently, she needed the $8 on the card so she could use the card to pay for something she couldn’t do as easily with her $8 in cash. Apparently the $8 would make a difference. It’s a different way of managing one’s money.

When you always have a large cushion in your bank account, traditional banking is very convenient. You have debit cards, credit cards, online bill pay, checks, and direct debit. However, when every dollar counts and every day counts, some of those conveniences get in the way. You don’t have control over when things clear and you don’t know exactly how much money you have available at any moment. A small miss means a $35 overdraft fee. A few misses in a month means you are out $100 or more.

A prepaid debit card helps avoid overdraft fees. It offers finality, which is very important when you must keep a very close eye to your money. When you pay for something you want that money gone right away so you know how much is still left. With a prepaid debit card you can still have many of the same conveniences of a traditional bank account, but with clear visibility of your money and without overdraft fees.

Green Dot is a pioneer in prepaid debit cards. They sent me a Green Dot Bank Cash-Back Visa Debit Card to try it out.

The card came in a very secure and visually attractive clam shell package. You can buy this card for a small fee at a retail store or you can request one online at greendot.com.

* Cards issued by Green Dot Bank, Member FDIC, pursuant to a license from Visa U.S.A. Inc.

The money on the card is FDIC-insured. The first thing I did was to register the card to my name. I will receive a personalized card with my name on it in the mail. Some features are only available to the personalized card with your name, but the card without your name is ready to use right away. Registering doesn’t require a credit check.

Because it’s a Visa debit card, I can use the card almost anywhere. With online access or through the Green Dot mobile app, I can see the activities and the remaining balance in minutes (carrier message and data rates apply). I used it to buy lunch, mail a package at the post office, and I used it pay a utility bill online. It worked smoothly.

The remaining balance is always displayed clearly in large font:

To put money on the card, you get a bank routing number and account number for direct deposit. For depositing a paper check, you can use the Green Dot mobile app. After you get your personalized card, you can activate bill payment. Just like online bill pay in a traditional bank account, you can pay bills through the prepaid debit card.

One unique feature of this Green Dot Bank Cash-Back Visa Debit Card is you earn 5% cash-back up to $100/year on everything you buy. Although the card charges a $9.95 monthly fee (other fees and limits apply), you get up to $100 in cash-back after one year. That makes the net cost of using the Green Dot Bank Cash-Back Visa Debit Card much less, compared to just one overdraft fee from a traditional bank account, for those who must keep close tabs on their money.

Bank Smart. Get Rewarded. Get a Green Dot card today!

Disclosures: Carrier message and data rates apply to mobile alerts and using the mobile app. Bill pay and mobile deposits are available only on personalized cards; limits apply. Other fees and limits apply.

Say No To Management Fees

If an advisor is charging you a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice: Find Advice-Only.

Manage Your Money Closely With A Prepaid Card is copyrighted material from The Finance Buff. All rights reserved.

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I participated in a panel discussion on Financial Independence Retire Early (FIRE) at a South Bay Bogleheads meeting on March 12. South Bay Bogleheads is a local group of people who read or post on the Bogleheads Investment Forums. Here’s a gist of what I told the group.

Sensationalized Clickbait

I don’t really like the FIRE acronym, especially when it’s linked to a young age. I see it as more of a sensationalized clickbait, akin to the headlines on magazine covers like “Flat Abs in 28 Days!” The techniques may still be helpful. Just the results can be overblown. Magazines know these headlines attract our attention. That’s why they use them. We just can’t take them too literally.

Instead of FIRE, I prefer Financially Comfortable and Pivot. Being financially comfortable means having assets that may not support your lifestyle for a lifetime without working but your assets are large enough to give you some options. Pivot means going off your current track onto something else. There are many ways to pivot, such as:

  • Change career — work on something you identify with but doesn’t pay as much
  • Go from working full-time to working part-time
  • If you are married or in a committed relationship, go from both partners working at an employer to just one partner working at an employer
  • Take a gap year or several gap years
  • Start a business that may not become fabulously successful

You don’t have to wait until you are truly financial independent before you pivot because a pivot greatly reduces your risk than retiring early. If your pivot comes with healthcare, you just removed a huge unknown from retiring early. If the income from your pivot still covers your expenses, you will withdraw 0% from your portfolio. If it even covers half of your expenses, you will withdraw 2% instead of 4%.

The level of risk you have when you pivot is completely different than the level of risk you have when you support yourself only from portfolio withdrawals.

Second Childhood

Former Wall Street Journal columnist Jonathan Clements wrote a blog post in January with the title Second Childhood. It described the pivot very well.

Jonathan said now that he’s working on his own projects, he’s working harder than ever while making only 1/3 of what he used to make. He’s happy because he gets to choose his work: how much work, what he works on, when, and where. With the freedom to explore in this second childhood, you are allowed to make mistakes. He thought he would enjoy teaching, but after trying it for one semester he realized he didn’t. So he just dropped it, and that’s totally OK.

My wife wasn’t with me that evening. She was enjoying her second childhood with a group doing backcountry skiing in Canada. The pictures she sent were just amazing.

Our Journey

You become financially comfortable by saving and investing. My wife and I maxed out our 401k’s every year  since our very first job. Shortly after we also maxed out our IRAs and invested in taxable accounts. We made some mistakes along the way. Fortunately they were made early enough when we didn’t have as much money. After those mistakes we followed Bogleheads principles, which worked very well for us.

We took our first pivot three years ago when my wife quit her job. We cut our income by 50% but the remaining income still covered our expenses. We still have health insurance. We don’t worry about withdrawal rates at all because we are not taking any withdrawals. Our spending actually increased as our income decreased. We remodeled our kitchen. We bought a new car. The spending made our life more enjoyable.

Future Challenges

When we take our second pivot, we will cut our income again, to a point where it won’t cover 100% of our expenses. We will have to take withdrawals and also buy health insurance on our own. We will see challenges from three major areas:

1. Low expected returns. Equity valuation is very high by any measure. Bond yields are still very low. The expected returns of a globally diversified portfolio would be 4-5% before inflation as opposed to the historical returns of 5%+ after inflation. That’s a big difference. Low expected returns means we won’t be able to withdraw from our portfolio as much as historical returns would indicate. Our defense: income from the pivot reduces our dependency on portfolio withdrawals.

2. Sequence of returns risk. Low expected returns would be bad enough. If even poorer returns happen in the early years it will make the situation worse. Here the pivot becomes helpful again. It allows us to keep it gentle in tapping our portfolio in the early years.

3. Healthcare. We don’t know how stable the Affordable Care Act will be. High healthcare cost inflation will keep putting pressure on the system. Nobody has a magic wand. We will just to have to be prepared to deal with it.

In short, our approach to Financial Independence Retire Early (FIRE) is not retiring early but taking a pivot, in a way, “retiring” early by not retiring early.

Say No To Management Fees

If an advisor is charging you a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice: Find Advice-Only.

Financially Comfortable and Pivot is copyrighted material from The Finance Buff. All rights reserved.

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I had a small adventure on Sunday. When I tried to go out, my car didn’t have any battery power. When I turned the key, nothing happened. I had no radio, no light, nothing. I thought I somehow drained the battery by forgetting to turn off a light. Or maybe I didn’t close a door completely and that made a light stay on.

I jump started the car. Next I thought I would charge the battery by taking the car out for a ride. I was maybe two miles out when the car died in the middle of the road! It caused a traffic situation because other cars had to go around me. In a panic I put the car in Park. A few people offered to help me push the car to the side of the road but without power the shift lock prevented me from shifting to neutral. Only quite a while later a nice guy figured out how to override the shift lock by prying off a small cover and sticking in a flathead screwdriver.

Then I had to wait two hours for a tow truck. A tow truck was coming but then it got diverted by a police call. After the tow truck finally took me home, the tow truck driver pointed out to me that my battery cable connection to a battery terminal was loose. I wasn’t able to charge the battery with a loose connection. That made the car die in the middle of the road.

The whole ordeal was caused by a loose connection. If I suddenly lost battery power on the freeway it would’ve been very dangerous. Who installed the car battery and connected the battery cables last time? I did.

Replacing a battery looks very easy, but I never knew what the consequences would be if I didn’t keep the cable connections super tight. Those of you who are more familiar with cars will probably say it’s only too obvious. It wasn’t to me even though I replaced a battery a few times before. I had to learn it the hard way.

Back to our personal finance and investing world, some things are OK to experiment and nothing bad will happen even if you didn’t do it quite right. The worst can happen when you buy T-Bills is probably you earned a tiny bit less than leaving the money in a money market fund. Some other things are more complex and you can create a mess if something unexpected happened.

Wise people know their limits. They don’t put themselves in a situation that can potentially become a mess to begin with. They give up on some seemingly obvious edges such as the cost savings of assembling one’s own target date funds. They don’t chase moves that look smart. They stay away from tilts, factors, gold, commodities, MLPs, closed-end funds, covered calls, P2P lending, or real estate crowdfunding, not because those are necessarily bad investments. They simply stay away from overconfidence and trying to be clever, which they know can cause great harm.

I bought a car battery charger for $35. Trying to charge the battery by driving was a very bad idea. I simply didn’t know better.

Say No To Management Fees

If an advisor is charging you a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice: Find Advice-Only.

Know Your Limits is copyrighted material from The Finance Buff. All rights reserved.

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The solo 401(k) has become the go-to retirement plan for self-employed business owners who don’t have other employees. It allows a larger contribution at a lower income level than SEP IRA. It also provides sanctuary for pre-tax assets to those doing the backdoor Roth.

I signed up for the Informed Delivery by USPS service. USPS emails me every morning a scan of my incoming mail that day. This serves as both a heads-up and a security tool so that I will know if anything is missing from my mail.

When I saw a letter from the IRS with a from-address in Ogden, UT, I knew it was about my solo 401k plan. I file my Form 5500-EZ every year to that address. “Did they not receive the 2016 5500-EZ I sent in last year?” It just so happened I couldn’t find my copy of the 2016 form. I have it for all previous years except 2016. “Did I forget to file it when I was busy with my kitchen remodeling?” Because it’s just a two-page form, I just used regular first class mail. Although I think I filed it, I don’t have any proof. “What if it was lost in the mail?”

I Googled “5500-EZ late penalty.” The filing deadline was July 31, 2017. Late filing penalty is $25 per day. It’s been over 200 days already. If I did forget to file the form or if it was lost in the mail but I have no proof of mailing, I would be on the hook for over $5,000!

There is a Penalty Relief Program. If you come forward on your own, the penalty is reduced to $500 per offense. But, it says “If you’ve received a delinquency notice for the overdue form, you can’t use this penalty relief program for that year’s return.” It becomes a catch-22. You usually don’t know you are late until they tell you. By the time they tell you, you can’t use the Penalty Relief Program any more.

I kicked myself all day for possibly forgetting to file a simple two-page form or not using certified mail and keeping a proof of mailing. I left work a little early to get home and face the issue. The mail from the IRS turned out to be just a friendly reminder to file the 5500-EZ for 2017, due on July 31, 2018. Whew!

This scare shows you have to take a solo 401k seriously. It’s not just like a larger IRA.

Mainstream brokerage firms such as Vanguard, Fidelity, Schwab, TD Ameritrade, and E*Trade all offer a solo 401k for free. These solo 401k providers make you feel as if it’s just like a larger IRA when they don’t provide much help on the administration side. They just take the money you send in. Some providers don’t care whether it’s employee contribution or employer contribution, or which plan year it’s for. They certainly don’t check whether you are allowed to contribute that much to begin with or whether your contribution is made timely. You are a business. You are supposed to know.

A solo 401k is still a 401k. There are many rules, which you are still supposed to follow even if the plan only covers yourself and your spouse. There are many ways to mess up. The brokerage firms won’t stop you from messing up. Correcting the mess-up can be very expensive.

Did you know if you make employee contributions you must have a written contribution election in place before you contribute? If you are an S-Corp, you have to run payroll and deduct the contribution according to the pre-established election. You can’t just decide to contribute $1,000 this month from your personal account on a whim as you do to an IRA.

Someone paid his spouse $20k annual salary on a W-2 from his business, had her contribute $18k to the solo 401k and then made $36k profit sharing to her account. Is that allowed? How to fix it if it isn’t?

If you have a solo 401k, treat it with some respect. Either learn the rules thoroughly or hire someone who knows the rules. Document everything. Remember to file the 5500-EZ when the plan assets exceed $250,000. Keep the plan as simple as possible. Don’t borrow from it. Don’t buy real estate in it. The more angles you have on the administration side, the more opportunities there are to trip on some rules. Don’t ruin a good thing.

Say No To Management Fees

If an advisor is charging you a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice: Find Advice-Only.

A Solo 401k Is Not A Bigger IRA is copyrighted material from The Finance Buff. All rights reserved.

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