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Personal Finance Advice and Education! (6 Viewers)
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SFBayDuck
Footballguy
Put this in the College Admissions thread, but dropping it here as well for any input....
Any 529 Plan experts in here? I see that you can use up to $10,000 per beneficiary to pay off student loan debt. What if the beneficiary has two separate 529 Plans, one from each (divorced) parent? Is it still $10,000 total, or $20,000?
Once UC Davis updates their financial aid offer, which will include some loans, we'll need to decide which loans to accept. My initial thought is to take at least any subsidized loans offered, since they don't accrue interest while she is in school, even if we could afford to pay that amount now. I want to plan out how we'll use 529 funds, in a way that gives us the most flexibility and ability to absorb anything like a job loss or reduction in income over the next 4 years. For example if we could afford to pay as we go and push off using 529 funds until her senior year and then use the rest to pay off any loans she's taken, that would give us that backstop. It would also possibly give us the flexibility to hold on to the funds for graduate school, if she decides to go that route.
Am I thinking about this the right way?
Any 529 Plan experts in here? I see that you can use up to $10,000 per beneficiary to pay off student loan debt. What if the beneficiary has two separate 529 Plans, one from each (divorced) parent? Is it still $10,000 total, or $20,000?
Once UC Davis updates their financial aid offer, which will include some loans, we'll need to decide which loans to accept. My initial thought is to take at least any subsidized loans offered, since they don't accrue interest while she is in school, even if we could afford to pay that amount now. I want to plan out how we'll use 529 funds, in a way that gives us the most flexibility and ability to absorb anything like a job loss or reduction in income over the next 4 years. For example if we could afford to pay as we go and push off using 529 funds until her senior year and then use the rest to pay off any loans she's taken, that would give us that backstop. It would also possibly give us the flexibility to hold on to the funds for graduate school, if she decides to go that route.
Am I thinking about this the right way?
Lion to myself
Footballguy
My understanding is that it’s $10k per beneficiary regardless of source. And I believe your thinking is sound, flexibility is a good thing
NutterButter
Footballguy
I was thinking the opposite. I was going to use the 529 money first since its use it or get hit with a penalty. The roth on the other hand is probably more in line with what you're thinking. I've been maxing that out from the beginning with the intention of using the contributions for college funds; that's going to be the income source of last resort since I can just divert that to retirement if there's some left over. The subsidized loans are a definite. What I contribute to those as well as potentially grad school depends in large part on how much I wind up paying for undergrad.SFBayDuck said:
My dealer buddy lives over 1,000 miles away from me but I guess he could have been attempting the hard sell so I would take a flight to go get a haircut from him.
Anyway just passing along what he said as it dovetailed into the article posted on used car prices soaring due to lack of supply of new cars. I thought about posting in the Bronco thread as well for those that are interested, he specifically said those will be in very short supply and the full-size model greatly delayed for those that have put orders in.
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I can’t think of a way to take advantage since we’d have to replace whatever we sold. I’m just glad we bought our last car in December when my wife wanted to “look” rather than wait till May for my son to get his real license and give him her Highlander. Used Jeep’s with a year of miles and way less features ($8k+ On the web site) going for just a couple grand under what we paid (ignoring taxes) for a brand new one. I’d have to assume you couldn’t get the discounts on new cars when MSRP is equivalent to buying used.
McBokonon
Footballguy
Yeah I was just curious. I bought it in December 2019 and it had 18K miles, then the world ended so I haven't really added many. I'm sure the lack of driving has helped a lot of people retain values better than usual along with the chip shortage.
-OZ-
Footballguy
I'm thinking the same way for us.
Not 529, but coverdell. I was going to pay out of pocket for our oldest and transfer the funds to our youngest. But instead I'll withdraw the funds needed (he's going to community college, so that's less too) and still probably transfer around $50k to his 6yo sister, and one year of the 9/11 GI bill to boy #2. No point in using the GI bill when the oldest is attending CC and living at home.
But use specific money before general money, IMO.
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NutterButter
Footballguy
Is your plan to stay aggressive with your college funds throughout or shift to more conservative options as time draws near? I'm 3 years out from kid 1 and 6 years out from kid 2. Haven't given it a ton of thought, but will most likely just roll the dice.
Lion to myself
Footballguy
If you plan on tapping some of the funds in three years it would be prudent to move at least that amount to something conservative in my opinion.
Every time I crunch the numbers for the age at which to begin claiming Social Security, I always end up thinking that it is best take it as soon as possible (age 62 at this point in time). The key factor is life expectancy which I'm going to be optimistic and use 85 even though most men in my family die by 80 Even then, the extra five years of claiming money (from 62- 67) makes up for the difference in monthly checks. For example, they are telling me that I can get $1765 starting at 62 or $2500 starting at 67. Those five years net me over $10000, not to mention whatever gains one might get on that money if invested. Using 6% average ROI, I think one would need to live well beyond 85 to make it worthwhile to wait to take SS money.
One factor which concerns me, though, is if I plan to work in retirement. At 62, I may need to pull down a decent salary but as of this moment, they really ding you if you're collecting social security and also making a full salary. I see that as a significant limiting factor in collecting benefits at 62.
What other factors am I not considering? I think retiring at 62 would work for us if I didn't need to work full time but at that time, our daughter will be 17 (I know) so we'll need money for college and probably will work to 67 to make it to the finish line. But putting that aside, I think claiming social security at 62 is the way to go unless you have great genes. Thoughts?
One factor which concerns me, though, is if I plan to work in retirement. At 62, I may need to pull down a decent salary but as of this moment, they really ding you if you're collecting social security and also making a full salary. I see that as a significant limiting factor in collecting benefits at 62.
What other factors am I not considering? I think retiring at 62 would work for us if I didn't need to work full time but at that time, our daughter will be 17 (I know) so we'll need money for college and probably will work to 67 to make it to the finish line. But putting that aside, I think claiming social security at 62 is the way to go unless you have great genes. Thoughts?
wilked
Footballguy
You make 8% every year you wait on SS. Tell me where else you can get a guaranteed risk free 8%?
I know you use 85 as a “longest I could possibly live” number. I don’t personally agree. Why can’t you make 90, or 95? The odds might be low (say 5-10%) but if it “hits”, wouldn’t you want to be comfortable in those years?
to me, delaying SS is basically long term care insurance. It might (probably) won’t come into play, but if it does you’ll be #### sure happy you have it
Desert_Power
Footballguy
The Z Machine
Footballguy
I think the difference is that you're continuing to work from 62 -> 67, taking salary. That's money you can bank for later on. Retiring at 62 and taking SS at that point means you don't have that salary for 5 years, right?
You are missing a huge thing. When you wait, you don’t have the “nut” on which you are making 8%. You just get 8% more a year once it starts. Pecorino is also missing a zero. In his situation, if you start at 62, you’ve got $106k in the bank by 67 without accounting for any gain in those 5 years. Starting from there, you get $735 more a month at 67. That means if you are making 8% on your nest egg, you earn $8472 a year if you started at 62.
Basically, you break even on the difference except for the fact that you are sitting on $106k more. If you make 8% from 62 to 67 and after, starting at 67 would actually make you less each year and you’d have about $150k less in the bank account to start.
If you pass early, your spouse and/or family would inherit a lot more too.
I’ve run scenarios like this and you have to earn a low rate of return to allow the late start to catch up many year later, if ever. The biggest thing again is that extra $106-150k you have in your pocket at age 67 that can produce enough income to match the difference.
You can work and collect SS. There is a limit where you lose some of the benefits, so that’s a different calculation. In my case, I’d want to be retired before 62 or 67, but would start getting SS at 62. For my “hopefully” scenario and maybe his, we wouldn’t be waiting on SS by working the 5 years to make up for it. I want to retire early. Hopefully, I make it.
-OZ-
Footballguy
I've shifted a little for funds probably being used within the next 3 years, but really not much yet.
Agreed.
But here's our deal:
Son 1, community college living at home, we'll probably need like $5k each year. He has over $60k in the account, so we expect to transfer $50k (plus gains / minus losses) to his 6yo sisterb or 10yo brother. So we don't need to withdraw much soon and can stay somewhat aggressive.
Son #2, sophomore, over 4.0 GPA and will get some decent scholarships for undergrad. He wants to get an MBA, and vanderbilt has a yellow ribbon program which covers the difference in tuition from the 9/11 GI bill. So he'll probably use 2 years (of my 4) there. We'll need to cover some undergrad but expect a healthy amount to be left to also transfer to his younger siblings.
Son 3, 7th grade so it's too early to tell really, but he's all As so far and tests well. So, again scholarships seem likely. Will probably use one or two years of the GI bill.
Son 4, 4th grade. Does not do as well as 2 and 3 but we'll see. I expect him to use a lot of the remaining funds. Will use whatever GI bill remains.
Daughter, kindergarten right now might do another year of kindergarten (english is her second language and the short version is she's had less time in preschool than we'd like) 13 years away, we'll keep rolling the funds to her. But it's difficult to know what she'll need or even college costs at that point. Not eligible to use the GI bill (wasn't here when I retired).
We're planning this out with a lot of unknowns.
wilked
Footballguy
Good post above
a couple things I think missing are the tax implications. That 106-150 doesn’t account for taxes I don’t think, and assumes it all gets saved / invested.
the big one also I didnt mention is spousal survivor benefits. If your SS is much bigger than your wife’s, it can make a serious difference to have that larger number transferred to her/him. Especially as wives are likely to outlive their husbands. My grandmothers lived to 95 and 99 each so I think about that when considering it all. For them a fixed check each month would have been preferable to managing an investment account.
No, it doesn’t include taxes. Way too much work. Some states don’t tax SS and some do. Also, if you are like me and have a good chunk of taxable accounts, you don’t need to pull out retirement accounts right away thus keeping income down. My wife and I (both hoping to retire before 62) should both get the max SS and it would be 85% taxable and at the current tax rates, that’s 9-10% effective tax rates. If we waited, it would likely be about the same. Then you get into capital gains with what you invest. I just tried to make sure the rates would be similar and not think that hard.
At the end of the day it’s more about whether you have to have the money or you can actually invest it/use it and keep from drawing from retirement funds and what your rate of return will be.
At the end of the day it’s more about whether you have to have the money or you can actually invest it/use it and keep from drawing from retirement funds and what your rate of return will be.
ConstruxBoy
Kate's Daddy
-OZ-
Footballguy
yep
-OZ-
Footballguy
That's where we are, and we're inclined to wait because of it. (Also I didn't take the survivors benefit plan for my pension, so her SS is more important than if we took it) and she has no desire whatsoever to manage investments, and that's unlikely to change when she's in her 70s. I'd almost buy her an annuity instead of having the investments (if an annuity were reasonably priced)
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SFBayDuck
Footballguy
With my daughter off to school in the fall, 80% of my balance is in a 2020/2021 Enrollment Portfolio. It's current allocation is 16% equity, 36% Fixed Income, and 48% "Capital Preservation".NutterButter said:
I upped and switched my monthly contributions about a year ago to a mix of a "Diversified Equity Portfolio" and a "Growth Portfolio", so that makes up the other 20% of the balance. I figure with a 3-4 year horizon to touch that money I can keep it that way for now, but at some point in the next year or two I'll probably want to shift that to something more conservative.
Sand
Footballguy
And it's insurance for your spouse if she earns less - getting a bigger spouse benefit may be a big boon for the wife (who, let's face it, probably outlives the husband). If this is the case normally the best strategy is delay the high earner until 70 and have the lower earner to claim at 62.wilked said:
BTW, the breakeven age is 79 for SS benefits no matter when you claim. They have that math worked out pretty well.
There is a lot of personal choice in when you claim because of that equality in breakeven age. However, the two player game definitely has strategies that are clearly better than others. If interested I have some links to follow to help calculate that.
Do you have a link for that 79? My wife and I aren’t in the spousal situation as we should both have enough qualifying years to get the max by 62. I am interested in the assumptions because I’m looking only at a both retired (hopefully) before 62 so pure rate of return. If SS is the main source of income in retirement that would change things and also likely changes when you retire anyway
Your retirement situation is the biggest driver and according to most stats I know I’m in a different situation because unfortunately the median amount saved for retirement on average for people in their 60s is $170k (average is around $220k, so small amount with lots). In the average case your nest egg is only earning $7-10k a year, so SS is the driver. FBGs aren’t average.
Sand
Footballguy
https://ssa.tools/
Best calculator I've found, by far. You'll need to access your social security record to make use of it (copy in your earnings history).
Decent article on break even age: https://www.cnbc.com/2018/08/13/those-social-security-break-even-calculations-can-be-misleading.html In general 79 is considered breakeven. They're all pretty close, though, so it shouldn't be the primary consideration. And the two player game is very different. I look at my benefit as longevity insurance for my wife and will be waiting to maximize her payment on my death.
-OZ-
Footballguy
Yeah, if you're using it all in the next 4 years you could almost go entirely cash / CD. 20% (or so) equities makes sense imo. If you're looking to pay for her grad school it might be smart to up the equities a bit.
ConstruxBoy
Kate's Daddy
SFBayDuck
Footballguy
Yeah I'll have to play that by ear a bit. Waiting for the updated financial aid package, and that will give me a better feel for what to expect I'll need to contribute each year. She doesn't even know what she wants to major in yet, let alone have a feel for whether grad school will be in the cards. So my hope is to keep contributing/investing monthly and touch as little of these funds as possible in the next two years until we have a bit more clarity on the possibility of grad school.
I might be in a position where her schooling for the next four years costs me less than her private high school did. And 11 years of child support payments ends in September, that'll be more funds available to put towards school, into the 529, or just save.
Sand
Footballguy
My parents paid less for college than they did for high school. This says a lot about both the cost of college back then (though I was a nerd and got scholarships) and how bad public schools in New Orleans were (and still are).
Thanks. I was hoping it would have more data or at least lay out the assumptions. It mentions the rate of return should be compared with TIPS which is just over 2% but many of us discussing have investments so we won’t be trying to earn 2.3% a year. It also mentions taxes due to continuing to work and that is a big assumption. Also, I noticed again the part about earning 8% on your money but again you are comparing a situation where you have the nest egg in hand versus this magical non existent nest egg getting you 8%. Yes, the “income” is higher waiting but in one case you own the principal and in the other there is no principal.
I know my back of the napkin calculations get me ahead taking it early, but my wife should have the same as me, I’ll be investing the money I would have had to spend if I waited and we want to retire before 62.
Yes, in my case the path is clear. My wife will outlive me plus I will need to work until 68 anyway (when my daughter will presumably be just out of college). However, as noted earlier, for single folks who can retire at 62 and bank the SS payments, I think it is a good move unless you have reason to believe your life expectance is north of 85.
-OZ-
Footballguy
I think over 85 is a good working rebuttable presumption, unless you have good reason to think otherwise.
Sand
Footballguy
Most of the equivalence calcs out there assume that the money is spent, not invested. Certainly if you save and invest it the calculations change. Given that you are playing the two player game it might be worth it to pay a SSA advisor to look at the situation. I'm not a big believer of paying lots for financial advice, but SSA is a big decision and the money adds up - might well be worth your money there.
Personally, my benefit will be significantly larger than my wife's, so my main focus isn't on lifetime earning, but the monthly nut she'll get when I croak. Longevity insurance.
If we were still allowed to have tontines my strategy here might be quite different.
Yeah, I’ve always tried to add my assumptions because there are a lot of nuances. I do think it’s funny though that this is the second one I’ve seen where they talk about that rate of return (8%) but never mention that in the early scenario you actually own the nest egg as well. I’m sure it’s somehow in the calcs but more the reasons thrown out.
TBH, I don’t know if I’d be spending the SS or spending the IRA withdrawals and investing SS. It’s sort of 6 of one, half dozen of the other. I’m pretty up to speed on short/long term gains and tax rates, but there is an advantage to getting the money into taxable accounts at low tax rates and then getting long term capital gains. Right now (and hopefully when retired since I won’t be banking $1M+), if you make $80k or under the long terms capital gains tax is 0%. Makes me realize that after we retire and before we draw on SS that selling some stocks for gains might be warranted to take advantage of 0% long term gains.
I also hope to take advantage of the 59.5 to 62+ time period having little income to try and move over as much as I can to back door Roths. Right now, married filing jointly has only a 12% income tax rate up to $80k. That’s a helluva lot better than the tax rate I would be paying on all the money we put in 401ks right now (it would have gotten taxed at our maximum rate).
Thanks for making me think this out although I’ve got plenty of time!
wilked
Footballguy
Big article in the Times on the chip shortage
You had it exactly right, sorry GB for the sarcasm. Thanks for sharing...
The Z Machine
Footballguy
I work in product development and we are getting hit big time on chip shortages. Demand for products is through the roof and no one can keep up. Seeing 35-50 week lead times on some ICs. It's nuts.
The Z Machine
Footballguy
I finally finished doing my 2020 taxes. It was a royal pain this year. The 3rd Stimmy package that Biden signed in March changed the way that unemployment benefits were taxed in 2020. The first $10.2k benefits were now federal tax free. The kicker is that the cutoff was $150k, whether single, married filling jointly (MFJ) or married filing single (MFS). It didn't double like most other deductions. I was in that boat where MY income was lower than $150k, but with my wife is was not.
So I needed to run my numbers multiple different ways to see what worked best. Furthermore I had to try an optimize which one of me or my wife got the dependents, and which one of us listed the charitable contributions. Also, I had to split all mortgage interest deductions, property taxes, etc. down the middle since itemizing deductions is beneficial in our case. Ugh. Took me like 15 hours in total.
However, the end result is that if I had filed MFJ, I would have owed about $5k in taxes between state and federal. Instead with MFS and optimization, I got that down to $250 owed between state and federal. That's worth my time and headache.
Hopefully I never have to do that again and do MFJ from now on. Also, instead of being at 88% of AGI being taxable, it was down to 84% of AGI. Hopefully with some more smart investments to shield more income from taxes in 2021, I can get that down further.
So I needed to run my numbers multiple different ways to see what worked best. Furthermore I had to try an optimize which one of me or my wife got the dependents, and which one of us listed the charitable contributions. Also, I had to split all mortgage interest deductions, property taxes, etc. down the middle since itemizing deductions is beneficial in our case. Ugh. Took me like 15 hours in total.
However, the end result is that if I had filed MFJ, I would have owed about $5k in taxes between state and federal. Instead with MFS and optimization, I got that down to $250 owed between state and federal. That's worth my time and headache.
Hopefully I never have to do that again and do MFJ from now on. Also, instead of being at 88% of AGI being taxable, it was down to 84% of AGI. Hopefully with some more smart investments to shield more income from taxes in 2021, I can get that down further.
I’m not looking forward to taxes. Had some capital gains and I always owe so it’s going to hurt. I just need to figure out how to get my son in college his stimulus. I think I just need to not declare him a dependent but we’ll see.
The Z Machine
Footballguy
He’s over 18 so it’s reduced or gone already and I don’t think I qualify anymore. I’m not going to complain about my wife and I working but we are old enough now that we are at the tail end of our careers so doing well. It means we have gotten almost nothing on these huge credits/stimuli. It does suck in a way because we aren’t close to wealthy, just now above the line.
I just want to feel like I got some free money because my son won’t ask me for more!
The Z Machine
Footballguy
Gotcha. Then, yes. I think if you don't claim him and he files a return even with no income, he can get some stimmybux(tm) as a tax refund.
You could use this as a teaching moment for how to do taxes. See if he can fill out a 1040EZ (or whatever the light version is) by himself.
Sand
Footballguy
Luckily I was nowhere near this line. So much for the goal of "taxes on an index card". It just keeps getting worse.
Turbotax may be the next 2T company.
berndog
Footballguy
I’m glad you asked as I hadn’t really thought about that. I checked and your dependent doesn’t have to be a tax dependent. They just have to depend on you for support (like paying for college), be under 26 and not file a joint return (they can be married). He requires our support, isn’t married and is obviously not claimed as a dependent by anyone else.
I know our taxes have never come up before in terms of setting up our healthcare dependents but they’ve been on our medical plans since they were all under 15.
-OZ-
Footballguy
I'll share here as I don't want to elsewhere. For the first time ever, we meet the "4% rule" in an average month. Our expenses are no lower than usual (we're generally within a few hundred each month) but with the market going up nicely, we could cover all expenses with the 4% annual withdrawal from our retirement accounts. We had been hovering in the 90% funded level for a long time not including the drop last March / April.
That's a nice feeling, even as I have no intention to retire any time soon. But now I just have to weather any storm, and there will be storms.
