Should I put lump sums in the 529 instead of dollar cost averaging?

One of the reasons this blog seems to have become a spendapalooza is that there’s really not any obvious place for extra money to go.

But there actually is one place for extra money to go– the kids’ 529 plans.  (A 529 plan is an awesome way to save for college or vocational school such that the earnings are tax-free.  But, it’s a good idea to max out your retirement before setting money aside in 529 plans because retirement accounts aren’t included in college financial aid calculations and you can take out loans for college but you can’t for retirement.)

In the past, I’ve always said, “and the kids’ 529s are on track to pay for the school of their choice [by the time the graduate college].”  What I mean by that is that we’ve been putting away $750/month in the accounts, even in the summers when I don’t get paid.  (It used to be $500/month, but we increased it when we paid off the mortgage and stopped paying for daycare.)  But we haven’t *actually* put enough money to be able to cash flow the remainder of the cost of (a four-year private) college yet.  We’re just on track to.

Over the next 4 years before DC1 starts college, $750/mo works out to $36,000 (actually a little less than that since it’s November, but it’s an estimate).  Over the next 8 years before DC1 ends college, it would be $72,000.  (That’s a LOT of money!)

We could just put in $36K (instead of $9,000) over the course of this year and then either start contributing again once we know where DC1 is going to college or not based on the cost of hir chosen school.  (Given hir struggles in English, it is likely that HMC is out, but also out with HMC is its insanely high $72K/year tuition.  I told DC1 we could get hir a unicycle anyway.)

Doing it this way loses some dollar-cost averaging benefits, but it gains the benefits of a longer period of untaxed earnings.

There are some wrinkles to doing BIG 529 account transfers.

The first is that even though the account is a custody account and doesn’t actually belong to the child, it still is subject to the annual gift tax.  For 2019, the amount that can be given annually without tax is $15,000.  Each parent can give that amount, so a married couple can give $30,000 in one year.  $36K is more than $30K, but there’s a loophole with the 529.

This wrinkle has its own wrinkle:  An individual or couple can give a larger lump sum, so long as the total given in that five year period is still less than 5 times the annual exclusion.  So DH and I *could* give $150K this year so long as we didn’t contribute again for another 5 years.  (Of course, that’s a moot point because we don’t actually *have* $150K to give, but you get the idea.)  That means when DC1 actually gets into college, we should be able to continue to contribute to hir 529 without penalty.

So our plan is to do a lump sum of $36K this month to DC1’s account (this gets rid of all our excess cash and digs pretty deep into our emergency fund, but the emergency fund doesn’t actually have to be full until May since we can cash flow most emergencies when we’re both being paid).  Then we will stop contributions to hir account entirely.  We will continue as normal with DC2’s account (contributing $750/month) until we build up excess cash and I start to feel like forcing DH to buy all the Apple products again.  At that point we will re-evaluate and decide whether we want to do a lump sum to DC2’s account or if we just want to increase the monthly contribution.  I’m sure I will post about what we end up doing.

In ~4 years when we know where DC1 is going to college, then we’ll decide whether or not to start contributing to that 529 plan again, and we will have a better idea about how much DC2’s account can bear without going over.

Grumpy Nation, I don’t have a good question for this post.

Ask the grumpies: How to save for multiple kids’ 529s?

First Gen American asks:

Once our mortgage is done again, we’ll swap that out with a 529 auto deposit option that comes out of both paychecks….which brings me to another question…Should we funnel a ton now into older kid and worry about younger kid later (he’s 4 years younger) or should we fund both at the same time now? I’m assuming we can roll over older kid’s excess into younger kid if we over deposit but then if we die before kids do, an uneven distribution would screw things up for kid 2. Not sure what to do yet.

I have also spent some time thinking about this.  I am not sure it actually matters that much.

Yes, if you have too much money for kid #1, you can easily transfer the leftover amount to the second child.  (An added wrinkle–if you undersave for DC1, will you take from DC2’s account?  You can, but would you be willing to?)

A quick check on the internet suggests that the 529 does not automatically go to the child who is named on its behalf– you can name a beneficiary.  It is also something that you can talk about with an attorney for a trust if you do not have a successor that you trust not to just liquidate it at a loss.

We have target-date accounts for our children in their 529s, so it makes sense in terms of risk to fund them separately.  That means DC1’s account has less risk in it right now (a larger bond to stock ratio) than DC2’s does because DC1 is closer to college.  But I’m thinking of them as separate buckets and we’re aiming to fully fund 4 years at a private school given that we’re not expecting much financial aid.

If you’re not thinking of them as separate buckets, then you might want to think of it as if you are going to “retire” and you know you’re going to be alive for 8 years after “retirement” and then suddenly “die” (if you’re planning on funding post-college education, or your DCs might take more than 4 years to graduate, then you might want to add some years to that).  What kind of investment portfolio would be optimal in that scenario?  It’s going to depend on your risk aversion, but you probably could pick a single fund that would fit your risk preferences given that scenario.

In terms of how we’re funding, I don’t actually think that our method of putting in $X/month to each child’s fund is necessarily optimal.  It would make better sense while we have excess cash to put in lump sums right now and stop contributing later (allowing for more tax preferred earnings).  But $X/month/kid is predictable and is easy to fiddle with should our situation change.

The important thing that gets brought up in the comments when we talk about this kind of situation is the perceived fairness of the situation by the kids.  Pick some rule that seems fair for both kids and stick to it.  If you have to make adjustments, make sure that you adjust for the other kid as well.  For us, we’ve decided that fully funding tuition without loans is what we consider fair, so we will be ignoring the actual costs and financial aid for the schools.  Our kids will get college paid for by us no matter what college they choose.  Other people choose a specific dollar amount (though I hope they adjust it for inflation!), or may have a rule like, “we will pay up to the cost of state school X”.  What you don’t want to do is pay full freight for one kid and force the other to take out loans for the full amount because that can lead to them writing about how you don’t love them on money forums, and nobody wants that.

Grumpeteers– How do you think First Gen should save for two kids’ college?

529 plans and astonishment at compounding

Club thrifty had a post recently about funding her kids’ college education, which caused me to take a look at how my kids’ 529 plans are doing.  We’ve been putting in $500/mo since each of them was born.  At the time of writing this (though not the time of posting), DC1 is 7.5 years old.

So if we’d just put $500/mo away in our mattress, we’d have $45,000.  That’s a lot of money, and would currently fund in-state tuition for four years at many state schools without any aid.

That’s not how much my 7.5 year old has in hir 529.  How much is in there, do you ask?  $69,874.56.

Let me say that again.

$69,874.56

That means the stock market and compounding has added something like $25,000!

~$25,000 just because we put $500/mo in the stock market instead of in a mattress (or instead of spending it!)

Doing this exercise has given me a few scattered thoughts.

1.  Compound interest from stocks over a long period of time is AMAZING. It’s just in one of the Vanguard target date funds from the Utah system, so we’re really just matching the market with a little bit of adjusting to bonds as ze gets older.

2.  This kind of thing is how the rich get richer.  The best truly passive income is reaping profits from the sweat of the proletariat.   Rent-seeking is where it’s at.  Getting those returns to capital.  The poor get poorer by comparison because they have to spend their money to live and can’t have their money make money.  It’s terrible.  At the same time, as a member of the upper middle class, it’s something we need to do to keep from sliding down the income/wealth scale.  Because if you only have a choice between rich and poor, it’s better to be rich.  We need major political change in this country.  Yes, charitable donations are nice, but the entire system needs a new Great Society overhaul.

3.  Sacrificing early and starting early with savings is the way to go.  We never really felt the $500/mo cut to our income because it coincided with our employment.  We made our decisions based on a smaller income.  When you get a new job, if you can max out your retirement funding before you get used to the higher paycheck, that’s definitely the way to go.  (Of course, high interest debt is also worth paying off– the trick is not to get used to a higher level of spending that you then cut down.)

4.  I don’t think it’s time to stop contributing yet.  We suspect DC1 will end up going to a private school (or, less likely, an out of state public that costs just as much).  Right now with both of us employed we’re in the middle area of whether or not we’d be considered for any financial aid at all, and there’s that hope that by the time DC1 gets to college we’ll be in the “no financial aid based on income alone” bracket (we can dream, right?).  If not, we still have time between our two kids to adjust based on what kind of aid the eldest gets or doesn’t get.  If DC1 gets aid, then we simply stop contributing to DC2’s plan at that point.

5.  Because of the way that financial aid is calculated, most people should max out their retirement savings before contributing to a 529.  We’re doing that now, but we weren’t doing that this entire time because we had *too* much room for retirement and didn’t realize that DH would be getting a better job that paid more, so we didn’t put away all 72K/year that we could have, figuring we’d need some of that money to pay for college! [Note:  For those who haven’t been following our finances for the past few years, DH no longer works for the government so we can no longer put away anywhere near 72K for retirement because he no longer has a 457 option or a second 403b option, just a really lousy 401K with high fees and a lousy match.]  Yes, you can withdraw ROTH contributions to pay for college, but it would probably not be enough.  The 529 is still a much better place for your child’s money than a savings account in your child’s name, for financial aid purposes.  That’s because the 529 in your name counts as your savings whereas any savings in your child’s name is expected to go 100% to college, which cuts down financial aid from the school.

6.  Regular savings that you don’t miss because you’re used to that money not hitting your checking account really add up.  However, if you can’t afford auto-deducting any of your paycheck (though automatic retirement savings should be a priority), 529s are a great place for monetary gifts for your kids to go.  A little bit early on really does go a long way.

What are your thoughts on retirement and 529s and compounding stealth saving?  Also, how often do you look at your accounts?

A post for Ana on 529 plans

We were poking around on medical moms blogs when we came across this comment from reader Ana. She said she wanted to just be told what to do with 529 plans because she’d hit the paradox of choice and everything was all complicated.

The post was almost a month old so  we felt silly for replying to it there, so we figured we’d reply to it here and hope that Ana saw it.

Also:  a disclaimer.  We’re not financial advisers.  Take our “advice” such as it is at your own risk.

Step 1:  Check to see if you live in one of these states that offer tax breaks for 529 contributions.

1a.  If you do, then go with your state’s 529 plan.

1b.  If you don’t, then go with Utah.  There are some other 529 plans that are now just as good as Utah’s but Utah’s has always been ranked among the top and we hope will continue to be ranked so.

Step 2:  Pick a plan company within the plan.

2a.  If Vanguard is one of your options, go with that.

2b.  If not, then look at the fees.  Pick one with low fees.

Step 3:  Pick a fund from your choices.

3a.  You want to look for terms “age-based”, “life-cycle” or “target-date”.

3b.  If there are multiple choices among these options, then it doesn’t really matter which one you pick.  They’ll be different in terms of risk and possibly fees.  You’ll again want to focus on the lowest fee plan first.  If your kids are little, more risk is better, if they’re closer to college, less risk is fine.  Don’t worry about the risk if you can’t decide– flip a coin or something.  It’s better to pick something randomly than to pick nothing at all because you’re worried about getting the “best”.

So, if you’re in a state that doesn’t give a tax advantage, you want the Utah UESP Vanguard Age-Based Aggressive Global fund.  And you’re done.  If you’re in another state we’d be happy to poke at their options for you.

Put in what you can.  We like putting some away automatically each month.  Something is better than nothing.

Are you saving for your kids’ college?  How?

August Mortgage Update and ponderings on 529 plans

Last month (July):

Balance: $102,221.27
Years left: 8.666666667
P = $798.18, I =$416.22, Escrow = 621.66

This month (August):

Balance: $100,747.56
Years left: 8.5
P = $803.97, I =$410.44, Escrow = 621.66

One month’s savings from prepayment:  $2.62

Hopefully by this time there’s a new addition to the family!  If not, I hope ze comes out soon.

In any case… For DC 1 we’ve been putting away $500/month every month since ze was born.  Ze has a pretty sizable kitty now, and is on track to be able to pay for the private school of hir choice should we keep this up (depending on the calculator we use and the assumptions we make).  We’re hoping to be making enough money that we don’t qualify for financial aid.

The question is:  What should we do for DC 2?  We could do the same thing, ignoring inflation, and start putting away another $500/month.  Then DC2 will also be on track, give or take, to pay for the private school of hir choice come college time.

The problem:  What if DC1 decides to go some place that doesn’t cost hundreds of thousands of dollars?  What if ze gets huge amounts of merit aid*?  What if I move to a university that pays tuition costs?  Basically, what if ze doesn’t liquidate hir 529 for school?  Then we’ll want to be able to transfer it directly to DC2 (since we don’t really believe in paying for graduate school as much as we believe in paying for college), but if DC2’s 529 plan is also pretty full we might end up with more money in 529s than we actually need.  We would then have to transfer it to some other relative, pay for our own kids’ graduate school, or take the money out at a penalty (in which case, why use the 529 in the first place?).  None of those options are appealing.

However, there are several years between DC1 and DC2, so in theory if we saw DC1 costing less than predicted, we probably could just stop putting money away to DC2’s plan at that point.  Right now putting $500/month away probably isn’t going to put us in any danger of oversaving in 529 plans.  We, of course, may have to readjust once our work situation changes.

So I guess that’s what we’re gonna do.  Put $500/month for each kid until we have some reason not to.  After all, it’s the early savings that are going to benefit the most from the tax advantage since they’ll have more time to generate earnings.

*Currently it looks like there’s a way to take money out without penalty up to the amount of a merit scholarship, but there’s no guarantee that will still be the case in the future.

Why we didn’t open a Chase bank account to get a $1K bonus

IF YOU CAN EARLY VOTE:  GO DO IT!  (Don’t forget regular voting day is Tuesday, Nov 5th!)

Somehow the fact that DH and I are high income has been made known to credit card and bank companies.

Chase banking has been trying to get us to open an account for a couple/few years now.  Usually they’ve offered something like a $200 or maybe $300 bonus offer which we don’t even look at because it’s not worth the hassle to us.  But most recently, they sent a $1,000 welcome bonus offer.

  1.  Open a new Chase Sapphire bank account by mid-November
  2. Transfer $75K NEW money to checking/saving/J.P. Morgan investments (but not cds or retirement or 529 accounts) and hold it for 90 days

We’re not going to be switching our investments to J.P. Morgan when there’s Vanguard and plenty of other lower-cost brokers out there.

If the balance drops below $75,000, a $25/month fee will be assessed each month.

So, ideally we would drop $75K in and then remove it and close the account after the $1K deposit on day 100 or 101 (they say the deposit will occur after 90 days).  This sounds like a hassle, but for $1K we could probably deal with that hassle in a way that we wouldn’t for a mere $200.

But is it really $1K?  No– we have to be aware of the opportunity cost of money.  $75K is a lot of money and it has to come from somewhere.  Unless we’re saving for an unpaid leave, I don’t keep that much in cash (I try to keep a slush fund of $30K in my primary emergency fund which covers the summer even with slow reimbursements or potential DH job-loss).  Selling stocks would trigger tax implications in addition to requiring too much thinking (though I could theoretically undrip dividends– though those are generally quarterly so I may have missed my chance).  I can probably get $75K by temporarily moving our primary credit union emergency fund (we don’t really need that money until summer), moving money from our online high interest secondary emergency fund, closing out our Wells Fargo account (it’s useful for ATMs when traveling and for checks), and then using my next two paychecks, overdue reimbursements, and overdue summer salary.

Ok, let’s then assume that I have gathered all 75K and instead of putting it into the stock market, I decide to go with the risk free alternate option to put it in my Capital One online savings account that pays 1.90% APY (which we opened up because they gave a $200 bonus AND had a good interest rate AND we already had a capitol one credit card).  Holding onto that in my already existing Capitol One account for three months provides total interest of $356.81 according to this online calculator.  Of course, I would actually need to hold it a little longer to make a direct comparison (it takes time to transfer money, time to get the Chase match, time to close an account etc.), though probably not a full additional month (another month in that savings account would bring in $476.13 total), so it will be more than that, say $400 (which is about a third the difference between 4 months and 3 months added to 3 months).  If I were instead to look for the best online rate out there, there’s a 2.75 rate (that may or may not be real) on one of those bank rates websites.  Three months of that would provide $516.18.

How much does the Chase savings account that they want me to put $75K in earn?  .01% APY.  Which is practically nothing.  That’s even less than our Wells Fargo account.  Three months of that is $1.88.  Four months is $2.50.

And, of course, we have to pay taxes on that $1K, minimum 15%, so at least $150, making it really only $850 of free money (though any other method of earning interest will also be subject to tax).

So, yes, there’s a big one-time cash infusion for opening up one of these Chase bank accounts, but it has to be with the strategy of closing it as soon as possible because the interest rates are so extremely low and the minimum required balance to avoid fees is so high.  And it is not worth even $600 to gather together money from all those different sources (while hoping an actual emergency that can’t be cash-flowed doesn’t occur), open a bank account, deal with the paperwork and hassle and so on, then remember to close the account and deal with all the attendant hassle of doing that, and then figure out where to place the money after.  Heck, I might pay $600 to avoid all that potential stress.

Now, I’m not planning on actually putting all those reimbursements and incoming checks into a savings account, not even a fancy higher interest online savings account.  I probably should sit down sometime and figure out a long-term strategy for our money now that we’re doing all the obvious things, but I’m not sure it’s going to be any better than putting money into a broad-based index fund of one kind or another every couple months (is it time to look into munis?  Maybe?).  So until I actually figure out what we’re going to do, that’s what we’ll be doing– keeping our emergency funds full and shoveling any excess money into Vanguard taxable.  Doing so does have higher risk than a Chase savings account, even at .01% APY, but we can chance it.

How much would a bank have to give you as a bonus to make you willing to switch?

Ask the grumpies: How much to save for different long-term priorities

Ali asks:

How much to save for college vs retirement vs other savings, etc.  Basically, tell me what to do.

The vast majority of our readers should max out their retirement savings prior to saving for kids’ college.  The reason for this is that you can get loans for college, but you can’t get loans for retirement AND US colleges don’t include retirement savings in their financial aid calculations.   That means every dollar that you hide in retirement is a dollar the universities don’t take into account for their financial aid calculations.  If worse comes to worse (ex. student loan rates are high), you can contribute less to retirement while the kids are in college (because you already have so much saved up) and cashflow some of those college expenses with what you would have contributed to retirement.

Disclaimer:  This is not what we did.  Originally I paid a lot of attention to the “recommended” savings percentages in various books and made sure we were putting away 20% of our income for retirement (recommended is 10-20%, we were on the “went to graduate school and need to save extra to make up for low savings years” track).  Then some extra money went into 529s (tax advantaged college saving) for our kids and then the stock market went crazy in a bad way (remember 2008?) and we started prepaying our mortgage as well.  It wasn’t until later that we started contributing to a 457 plan, even though that would have made more sense than contributing to the 529s.

The following assumes you have no debt other than a low interest mortgage.

  1. Save an emergency fund that will get you through a missing paycheck or late reimbursement or small emergency.
  2. Put money into retirement up to any employer match.
  3. Save an emergency fund that will get you through a reasonable job loss or other large expense.  (A Roth IRA is a good place to stash this when you’re just starting out since you can tap the principal without penalty and it can go to retirement if you don’t have a major emergency.)
  4. Save 10-20% of your gross income for retirement (or the max if are a high earner).  Play with retirement calculators to get more specific on the percent.
  5. Start putting money away in a 529 plan based on how much you’re planning to contribute and what schools your kid is considering.  We have more details here, and also more generally with other 529 posts.  The short is you’ll want to play with some college savings calculators AND the financial aid calculators at individual schools that you’re looking at.  (You might want to pay down your house at this step instead because colleges don’t use most housing wealth in their calculations for financial aid, but play with those different assumptions with the calculators.)

I DO think it is important to have a 529 for relatives to put monetary gifts in if you have relatives who are likely to think that’s a good idea, and don’t just have one for the oldest boy even though the money is fungible across kids.  That’s not how gifts work– people want to give to both kids, not just one.

So… I guess that’s the basic advice.  There are exceptions to the above– people who have access to a backdoor 401k at work but don’t have high incomes might never be able to max out their retirement, for example.

Grumpy Nation:  What advice would you give?  How do you decide how much to save where?

Link love

DH was out of town this week so… links are light again.  There have been plenty of horrible things happening and I’ve been doing voter registration drives and protesting climate change.  It sounds like Trump maybe asked the Ukraine for help smearing Joe Biden?  And the FBI had silenced another credible threat against Kavanaugh while the senate rammed his confirmation through.   There’s just so much.  But we have to keep pushing.  Now is a great time to write some post-cards to voters or to call an elected official about something important to you.

Offered without further comment

JD Roth on his anxiety and depression.

Ask the grumpies: Getting started with money

Mel asks:

What books do you recommend for someone who is looking to understand the basics of investing for retirement and how much money a person should hold in their savings account for emergencies? Or to that end, also understanding which comes first: having savings you can reach for at a moment’s notice or putting money into a retirement plan? I’m looking for that sort of information in a book form.

I have a fairly (I think?) healthy relationship with money, carry no debt beyond the mortgage, and feel the word that best describes me is “careful.” So I don’t really need to understand budgeting or how to pay off debt, but I do want to make sure that we’ve saved enough for retirement, saved enough for college (and aren’t going to be locked out of applying for certain loans because we have too much in a savings account vs. moved over into a retirement account — is that even a thing?), and saved enough for emergencies.

I’m looking for big picture books to understand how the various plans work as well as books to avoid because they contain terrible advice.

A good primer on all things personal finance is JD Roth’s book, Your Money:  The Missing Manual.  The numbers will be out of date (you can now save $19K annually in a 401k and 6K annually in an IRA), and we now know that you can legally do a Backdoor Roth, but it is really good at explaining the basics.  Like the difference between an investment (ex. a specific stock fund) and the bucket you save an investment in (ex. a 401k).  It also summarizes many of the best ideas from the best personal finance books.

How much a person should hold in their savings account for emergencies isn’t something there’s 100% agreement on.  In general, most people agree that you should have at minimum around 1K (give or take, probably more given inflation) to cover small emergencies.  After that people tend to think in terms of months of expenses– you need 1 month of regular expenses in case your work has a billing mistake.  You need 3 months of expenses to cover things like car problems or a short-layoff.  You need 6 months of expenses to cover a lengthier spell of unemployment.  Some people will argue a year of expenses, but that’s a luxury.  Other factors are also important like how stable your industry is– if there’s more uncertainty, you need a larger emergency fund, if you are hard to fire then you need a smaller emergency fund.  If you have dual incomes and a spouse can increase hours or cover expenses you might need less.  If you own rental properties you might need more to cover tenant absences or large repairs.  Some people will keep part of their emergency fund in something safe like savings, but keep the bulk of it in an investment that could be tapped in an emergency without penalty, for example the contribution part of an IRA Roth or taxable accounts (or a 457 plan for government employees).  All Your Worth by Elizabeth Warren (yes, that Elizabeth Warren) and Amelia Warren Tyagi does an excellent job helping you think through what your monthly expenses are and how emergencies might affect them.

All Your Worth also does a great job in providing heuristics about how much you really can afford to spend given your income.  It provides great guidelines for what percent to put in required spending vs. optional spending vs. savings to provide stability in when there are emergencies.  It’s a really great read and a smart book.  As a note– one thing people often get wrong about her balanced money formula is that they think that they *must* spend what she says to spend and save only what she says to save, which isn’t true– if you read carefully, the spending amount is an upper bound and the savings amount is a lower bound.  She does note that if you are unhappy with your spending and you are saving the recommended amount then you can loosen up, but you don’t have to, especially if you’re considering early retirement.

Once you understand these big picture ideas, you can do one of two things.  You can read the Bogleheads Guide to Investing, or you can just figure out the cheapest target-date fund that your savings provider provides (ex. my work provides Fidelity so I use that for my 403b, outside of work the cheapest is usually Vanguard which I use for my backdoor Roth and taxable investments).  With the target date fund you can just pick a single date (when you plan to retire) and set and forget and it will take care of all the rebalancing and diversification and so on for you.  Easy peasy AND it matches the market, unlike the majority of active managers (who get out-performed by the market).

Here’s a couple of advanced posts on diversification of your overall personal portfolio (not just your retirement investments).  Here’s an ordering strategy of how you could choose to use your money.

In terms of college savings and financial aid, you definitely want to read this series of posts from Forbes Magazine.  Here’s one of our many posts discussing retirement vs college savings.  The short version is that depending on what schools your kids are considering and how much money you make (say, under 300K/year) then you are likely to want to shove as much money into retirement vehicles as possible.  (If I had to go back, I’d funnel some of our 529 money into 403b and 457 accounts, but I didn’t know we’d be as high income as we are now and I didn’t know that financial aid at fancy schools went so high up the income distribution.)

In email conversation you also mentioned that as a freelancer you wanted to know more about ways for self-employed people to save for retirement.  If anybody has book recommendations, that would be great.  I found a couple useful web articles on the topic.   You also mentioned you’d be interested in finding out more about how to tap into retirement money without penalty before age 59.5.  For that there’s something called substantially equal payments that you can use in some cases.  You can also always take money out with the 10% penalty.  Or take the principal out of a Roth (or 457 if you leave that employer).

In terms of what books to avoid:  Dave Ramsey is awesome for debt payment, but he is absolute garbage for investing.  Do not follow his advice for investing.

Grumpy Nation– What books do you and don’t you recommend for Mel?  Any web resources?  How should she get started?  Any advice specific to freelancers?

Ask the grumpies: When to get a fee-only planner?

Ali asks:

When does it make sense to get a (fee only) planner?

Disclaimer:  We are not professional financial advisors.

I think the answer to this question is going to vary a lot.  I think most people don’t actually need one if they are making a reasonable amount and managing to put away 15-20% of their income away for retirement.  Those folks can just use a low-fee index-based target-date fund, continue paying down their mortgage (on schedule or early), and doing whatever system they use for budgeting shorter-term needs.  There’s just not much there that a financial planner can add that will be better than the basics, and unscrupulous folks can give so much worse advice (hence the (fee only) that you mention in your question).

People who are low income generally can’t afford a fee-only planner.

In some cases, I’m not sure if it would be better to get a financial planner or an accountant or lawyer who specializes in your particular problem.  For example, say your parents die and their finances are a tangled mess.  You might want a forensic accountant or to hire someone from a team that specializes in this kind of untangling (my mom says she plans to use Charles Schwab should my father pre-decease her).  Or let’s say you’re obscenely wealthy and interested in cheating the tax man– a tax attorney seems like the best bet for finding and exploiting loopholes.

Money Under 30’s perspective on this question.  Here’s smart-asset on the different kinds of fee-only financial planners.  Here’s the simple dollar’s answer to this question.

The Simple Dollar’s post seems the best of these three to me, though I have some commentary on it.

1.  I think that yes, it makes sense to hire a financial planner for a limited number of sessions (so not as a % of assets, and not as a retainer) to develop a retirement plan when you’re nearing or in  retirement.  They can tell you how to best withdraw your assets, any rebalancing you should be doing, and how to best deal with the spousal issues involved in claiming social security.  You can find all of this out yourself, but it’s complicated and is probably worth a $1K one time fee for many people.

2.  Starting a family– I don’t really see this as a good reason to hire a financial planner.  If you’re super wealthy, then you’re going to want to be talking with a financial lawyer to get trusts and things figured out.  The point that if you’re joining finances– that again seems like something you should be talking to a lawyer who specializes about.  I don’t think a financial planner will be much value added for most college savings plans either– $1K or more seems like a steep fee to be told which 529 plan to use and to put numbers into a “how much should I save” calculator for you.  The answers won’t be any better either.  Maybe if you’re high income there will be some good advice about how to game the system, but a financial accountant may be better able to help with that.

3. You’re a high earner.  A financial planner may be able to help… but a good accountant will probably be able to help more.

4.  Self-employed.  See #3.

5.  You have high net worth.  See #4.

6.  You have a specific planning need.  Maybe?  But again, having a child with long-term special needs seems more like a lawyer thing than a planner thing.  But perhaps a lawyer in conjunction with a planner (one to set up a trust, the other to talk about … how to fill the trust?  I don’t know.)

So… I guess my best suggestion is if you feel like you need one as you’re approaching retirement, go for it.  Don’t set up a long-term relationship where they get 1% of your assets each year though.  Just get things figured out.  For the other things, think about if you need an accountant or a lawyer instead.  And if you don’t know what to do or who you should hire for your specific situation, I think my first step after googling would be to make a bogleheads account and ask on their forums.  They seem to give really sensible advice, better than many financial planners, and it is free.

Grumpy Nation, have you ever used a fee-only planner?  Was it worth it?  When would it make sense to you to get one?

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