Sunday Morning Coffee

Last week I made my 2008 HSA contribution and I thought it might be useful to write about the relevance of saving versus performance.

In most posts about planning or long term results I try to throw in that saving is probably more important than results and the HSA might be a good example of this.

HSA stands for health savings account and if you are unfamiliar you can read about it here.

2008 is the third year I have funded it. For 2006 I believe I put in $2500 and $5000 each for 2007 and 2008 for a total of $12,500. I have this money invested very conservatively in an account at Options Express--in my view an HSA, compared to other types of IRAs has the most visibility for being tapped in an emergency so I do not want this account exposed to normal stock market volatility.

I won't disclose the current value so as not to violate rules about stating performance but the goal is along the lines of bases on balls (using the baseball analogy of singles and doubles versus home runs).

Using the value of the contributions as a dollar benchmark it is clear that the $5000 every year will be the more important thing for many years to come than whether I get a 5% or 10% return on the money. After my 2012 contribution, assuming zero growth, the account will be worth $32,500. If I somehow made 5% in 2012 after the contribution that would be $1625 which would be a small fraction of the $5000 I would contribute in 2013.

The way I view things the act of saving will be far more important than the return I get on the money for many years to come. That being said I am obviously going for better than zero and have disclosed owning a couple of absolute return products in past posts (the names are not relevant to this post) that hopefully will do very little month to month but that every so often I'll notice that hey they're doing ok.

In certain IRA and 401k plans that allow for larger contributions there is a similar effect of savings being more important for a while than returns. To be clear a normal IRA or 401k it is appropriate for normal stock market exposure relative to your target allocation and clearly returns matter but if you $10,000 a year into a 401K I would submit that going from zero to $100k in the first ten years will be the big thing. At some point, whether it is less than ten years or not, the returns become the more important piece but giving up on savings at the point would be a bad decision.

A 50 year old with $400,000 in his 401k planning to work ten more years can add another $100,000 ($10k per year) which is meaningful amount of money compared to the $400k (I have been a SEP person for a while and while I believe the 401k max is more than $10k I do not know the figure) but probably not as meaningful when compared to averaging 10% per year on the $400k if he should be so lucky.

The picture is from New Zealand.

I am coming back from San Francisco this morning and published this via Blogger's new time bomb publishing and won't be able to respond to comments until late this afternoon.