In no particular order, here’s a few interesting things I read recently that I wanted to share:
Saving in a 529 is great, for those who can afford it (CNBC, by Jessica Dickler and Sharon Eperson)
Since the IRS created Section 529 of the Internal Revenue Code in 2006, this qualified tuition program (better known as “529 plans”) has gained in popularity but probably not as much as it should have in my opinion. If you know me, you know that I continue to be a big fan of 529 plans, so it was no surprise that total savings in these accounts (finally) jumped a whopping 16% last year. Maybe people are catching on, playing catch-up, or re-allocating some of the money they’ve made in this recent bull market. The problem is (at least according to one study), is that not many people know about them…less then a third of Americans know what they are or how they can help. So my advice to all parents who may want their kids to go to college someday: learn about the benefits of the 529 plan! Simply put, besides potentially getting a state tax deduction, you can have your earnings grow tax-deferred and taken out tax-free, provided they are used for qualified educational expenses. These 529 plans are easy for family members to add to, have low-cost investment choices to chose from, and many can be linked to your credit card spending for points. One other little-known advantage is these plans may also be creditor-proof! I know of doctors who use these accounts, not for kid’s education, but for the cheap creditor protection that they can offer (depending on the state). Sooooo much to know and love about the 529 plan…I can only do my part and help spread the word!
How Do I Use the Bucket Approach for Retirement Income? (Money Magazine, by Elizabeth O’Brien)
This past week I was working on “the bucket approach” for a client, and realized that this was not a topic that I had previously discussed in my blog. This Money magazine article does a good job outlining what the bucket approach is, but allow me to break it down for you. The general concept is that in retirement, the retiree could/should separate their investments into 3 categories…i.e. buckets. One is a cash bucket, which should fund short term income needs (say, two years worth). Second is an income bucket, for more intermediate needs (@ years 3-7) and these investments are primary fixed income and bonds. Third is a long term growth bucket, which should be more of the stock-related investments. By structuring your investment portfolio in these “now”, “soon”, and “later” buckets, one should have more peace of mind and predictability in their cash flow. If there happens to be any pullback in the markets in early retirement, cash flows from buckets 1 and 2 should remain unaffected and there should be plenty of time for bucket 3 to rebound. Where it gets tricky (and thus, where a professional comes in to play) is there are some nuances such as how to rotate the investments from various buckets over time. Also, picking the correct investments for the buckets requires not only discipline, but also prudent risk management across the various accounts (IRAs, 401ks, taxable accounts, etc.). Opposition to this strategy suggests that individual investors – when faced with a major market downturn – are apt to making poor decisions on their own, which would derail the bucket strategy altogether. What I have found though, in most circumstances, is that pre-retirees will benefit from at least considering this strategy, if not implementing it. With the help of an advisor, preferrably, to keep it on track through retirement.
‘My emergency fund just saved me!’ (Marketwatch, by Alessandra Malito)
Here’s another concept that, according to research, most people are not prepared with…an EMERGENCY FUND! You know, that cushion of cash you will be glad to have if your company decides it needs to lay you off? Or similar to what happened to me this month, when the large oak tree roots in front of my house decided it wanted to crack the water main coming into my house. Yes, a fund to help cover these “surprises”. I have read different studies, but can it be possible that nearly half of Americans do not have $400 in cash available to cover an emergency? How about the fact that 57% of America has less than $1000 in their savings accounts. Woowzers. Granted, some households struggle to make ends meet and some have to prioritize paying off their debt before saving. Others may be a little more on the “spend today, save tomorrow” plan. But I think there is also a lack of information about this basic, financial planning principal that most people overlook. Most planners will use a rule of thumb, such as the emergency fund should be an amount that covers 3 to 6 months of living expenses. There are other deviations of that, and some unique situations which require a deeper dive, but start with that rule. Figure out (aka look at your budget) what you are spending each month to keep the lights on, put food on the table, and pay for essentials. Then multiply that by 3 (especially if there are two income earners in the house) or 6 (if you have one source of income) and call that your emergency fund goal. You will thank me later if/when you have some extra cash on the side ready to be deployed if a situation arises. As a side note, I have also seen families who have much more emergency fund cash saved up…above and beyond the rules of thumb. Although having 5 years of emergency funds set aside might be a nice luxury, most people don’t need that much. But hey, whatever makes you sleep better at night!
Enjoy the light reading!