Merriman, LLC

At Merriman, we often help our clients plan for more than just retirement. One topic that commonly comes up is saving for college. My colleague, Lowell Lombardini Parker, wrote about the various college savings options in an earlier post, and this three-part series will focus specifically on the 529 plans highlighted in his article. Part I will review 529 plan basics; Part II will evaluate Washington’s 529 prepaid tuition plan, known as the GET; and Part III will take a look at the best 529 savings plan we know – the West Virginia Smart529 Select. (more…)

High school seniors are now in the process of getting acceptance letters to colleges.

When the thick envelope comes, there will be well-deserved joy, possibly followed by the dismaying thought on how to actually pay for those four expensive years.

Hopefully, parents will have done some advanced planning and saving for this major event. There are various strategies which can substantially ease the financial burden of higher education, some of which should be started many years before high school.

Background

Before we discuss strategies, let’s review some key terms, as they say in school.

There are two major financial aid forms which could be completed. The first is FAFSA, the Free Application for Federal Student Aid. This has to be submitted to be considered for any federal financial aid. It can be completed as early as January of the child’s senior year in high school. FAFSA assumes that 5.64% of parental assets can be used to fund annual college expenses, while the assessed rate on the children’s assets is a much higher 20%.

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I am asked this question often, which is good because if someone is not saving enough we can make adjustments and get them on the right track. The people I worry about are the ones who don’t ask this question, either of me or of themselves. Maybe they are afraid of what the answer might be or they figure their employer or the custodian of the plan is looking out for them. Well, typically they aren’t.

In 2006, the Pension Protection Act went in to place. This was a nice step towards increased retirement savings, even for the most complacent of employees. This Act allows employers to automatically enroll their employees in the company 401(k) plan. Everyone has the ability to opt out, but they have to request it. Due to human nature, we tend to follow the path of least resistance, so the results were a huge increase in 401(k) plan participation. According to a recent study done by Aon Hewitt Associates, the participation rate in company 401(k) plans is now at 85% compared with 67% for companies who do not have an automatic enrollment program.

So if you are automatically enrolled in to your company’s 401(k) plan, will you have enough money to retire? The answer is: Not likely. You will need to dig a bit deeper in to your personal situation.

The Pension Protection Act I mentioned also allows companies to set an initial default contribution amount. So a company could automatically enroll an employee in their 401(k) plan, designating for example, 3% of that person’s salary for deposit in to the 401(k) plan. This has turned out to be good and bad. The good news is that the complacent employee is participating in the 401(k) plan and automatically contributing 3% of their salary, unless they make the effort to opt out. The bad news is that 3% savings per year of your salary is not likely going to get you through retirement, unless you are expecting to really reduce your standard of living.

Let’s assume our complacent employee is named Larry. Larry makes $50,000 a year and is 35 years old. He plans to retire at age 65. If Larry adds 3% per year to his 401(k) plan (because he just can’t be bothered to opt out or add more), he will have added $45,000 over 30 years (this is before any investment gain).

If Larry made no investment selections for his 401(k) plan (which we know he probably wouldn’t, as he is Lazy Larry), then he would have automatically been invested in the money market. This would amount to about $45,000 in today’s dollars of spending money when he turns 65. Even with some Social Security, that isn’t going to last Larry long. (more…)

Each year, the IRS releases inflation-adjusted figures for key retirement contribution limits.  Some limits remain the same, while others may experience a slight increase.  Below are the contribution limits for 2012.  The “catch-up” limits apply to those 50 years or older.

2012 Contribution Limits

*indicates a change from 2011 tax year limits.

I have 5 nieces ranging in age from 2 to 14. We want to give them money instead of toys for birthdays and Christmas. We are talking about $25 each for birthdays and Christmas for now. That’s only $50 per year until we can increase it. Where is the best place to put that money?

The ability to delay gratification goes hand in hand with long term success.  Not only will your gift help provide financial security but it will set an important example.  Sure, every kid would love to have the latest and greatest toy.  But – at least to us boring adults – the prospect of an extra several thousand dollars for college, retirement, or a down payment on a home is much more appealing.  Granted this is not as tangible and doesn’t present as well to a 7 yr. old as a box of Legos, for example.

The option you choose depends upon the circumstances of each child.  If the goal is to fund college my first recommendation would be to use the West Virginia Smart 529 Select plan.  This plan has a low minimum initial investment and offers age-based portfolios that allocate amongst stocks and bonds based upon the beneficiary’s age.  As the child approaches the distribution phase (college) the portfolio automatically adjusts to a more conservative allocation.

However, the West Virginia does assess a $25 annual maintenance fee for smaller accounts.  The details of which can be found in the aforementioned link.  In your case it may be best to explore the 529 plan associated with your state of residence.  When the account meets one of the exceptions for the $25 West Virginia plan fee you can roll the assets into it.

Another option would be contributing to a custodial account such as a UTMA or UGMA.  The downside to a custodial account is that there are no real tax advantages.  However, if the child is not going to go to college it may be a sensible option.  Unlike 529 plans the only restriction for a custodial account is that the money must be used for the presumed benefit of the minor.  As mentioned above this would be an appropriate vehicle to save for something such as a down payment on a home.

Finally, once the kids begin to earn income you have the option of helping them set up an IRA.  What I love about this option is the time horizon and the shared responsibility.  Not only could you contribute $50/year, but you could encourage them to do the same.  Again, this is setting an example that will help shape their perspective and increases their chances, in this case for retirement success.

At the end of the day the foregone toy will be a distant memory.  More importantly, you will have made a lasting contribution to the financial security and education of your nieces.

As the old adage goes, it is best to focus on what you can control. The weather, for instance, is not worth fussing over. In the world of investing, two of the most important things we can control are our budget and how much we contribute to our retirement accounts. Fortunately, both of these items are very closely related. The more you save in your budget, the more you can afford to contribute to your retirement accounts.

We’ve all heard the old song and dance about how skipping your $4 dollar daily latte can have profound impact on your budget. Well, guess what? It’s true. That’s $120/month that could have been better spent. With 7% interest over a 30 year period that adds up to $147,000 dollars!

I don’t want to pester you over your daily decisions; rather I want to point you in the direction of a budgeting tool that will help you identify the “latte” expenditures in your budget.

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Editor’s Note: Below is an article published first on MarketWatch.com that was written by Larry Katz, CFA – Director of Research at Merriman.

A major concern of many people is whether their savings will last for their entire retirement. If the savings do last, it’s a success, but if the savings don’t last it could be considered a failure.

Key factors which influence whether savings will last for your entire retirement include the size of your portfolio at retirement (bigger is better), the amount of periodic withdrawals (the lower the withdrawals the greater the chance of not running out of money) and longevity (the longer you live, the more you need at the start of retirement).

Another consideration is the diversification among various asset classes within the portfolio. The greater the diversification and exposure to beneficial asset classes, the lower the portfolio risk, and the greater the chance of financial success in retirement. (more…)

Merriman Director of Research Larry Katz wrote an article for MarketWatch.com in the Personal Finance section of their website: How to invest so your money lasts in retirement.

Like millions of people, I read Thomas Stanley, Ph.D.’s fascinating book The Millionaire Next Door when it first came out in 1996.  So when I noticed recently that he’d written a new book called Stop Acting Rich…And Start Living Like A Real Millionaire, I wondered if it contained anything new.  As it turns out, it does contain some new insights.

My biggest take-away:  The greatest impediment to becoming wealthy is all the spending people do in order to make themselves appear wealthier than they really are.  Marketing professionals understand this and exploit it to the max.

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An article in the Wall Street Journal (Debt Hobbles Older Americans, 9/7/11) paints a sobering picture of the impact that rising debt levels have on people’s retirement plans.

Thirty-nine percent of households headed by people aged 60 through 64 had primary mortgages in 2010, up from 22% in 1994. The median value of mortgage and home loan debt, adjusted for inflation, for homeowners aged 60 to 62 also increased, from about $40,000 in 1994 to $80,000 in 2008.

Housing price declines have made it more difficult to pay off these mortgages, forcing people to work longer before retiring.

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