Five Minute Finance

I have a client, we’ll call her Amanda, that I’ve been working with for years. Amanda’s mother passed away two years ago, not unexpectedly. She had two children, Amanda and her brother and had remarried and acquired three step-children. She worked her entire life, leaving behind some assets in trust and a will to assign her retirement accounts and two businesses to her beneficiaries.

While it may seem as though Amanda’s mother had her plan carefully arranged, it turns out that asset allocations were a lot trickier than anticipated. The plan was to give her retirement account, valued at $1 million to Amanda and her brother to split. The two businesses were valued at $500k each. $100k was set to be given to each step-child from that while the other $700k was to go to her widowed husband. Unfortunately, the businesses were not worth $500k each, making the distribution of funds a nightmare for her survivors. Had the assets been accounted for prior to her death, the plan could have been reevaluated without the tremendous effort and headache left for Amanda to deal with upon her passing.

When it comes to saving for education, 529 accounts have long been a go-to option for many families. These tax-advantaged accounts allow you to set aside funds for educational expenses, and any earnings within the account grow tax-free. While they have been traditionally associated with saving for college, Congress has recently expanded the horizons of 529 accounts, making them an even more versatile tool for financial planning.

We’ve done a number of episodes on 529’s. In episode 55, we talk about how to pay for education expenses. Then we do a deeper dive into education savings in episode 83 and round it all out with an All About 529’s breakdown in episode 84. Check those out if you haven’t already, because today we will be talking about 529’s as a potential savings vehicle for retirement. 

First things first, 529s in brief: A 529 account is a tax-advantaged savings plan designed to encourage saving for future education costs. These accounts are sponsored by states, state agencies, or educational institutions and come in two primary types: prepaid tuition plans and education savings plans.

Initially, 529 accounts were created to cover qualified higher education expenses such as tuition, fees, books, and computers. However, their utility has expanded significantly over the years.

1. Qualified education expenses (for more, see the US News Article from 2021):
2. Traditional 4-year college costs, 2-year colleges, graduate schools, and trade schools
3. Books and computers 
4. Here's a significant development: off-campus housing and rentals are now qualified up to the cost of room and board on campus, along with food expenses
5. K-12 Education: The Tax Cuts and Jobs Act (TCJA, 2018) expanded the use of 529 plans to include covering up to $10,000 per student in tuition for public, private, or religious elementary or secondary schools.
6. Paying Off Student Loan Debt: The Secure Act 2.0 (2022) introduced a provision allowing individuals to use 529 funds to pay off up to $10,000 in student loan debt.
7. Funding Roth IRAs: Yes, you read that correctly! Perhaps the most exciting development is the ability to transfer $35,000 (total) from a 529 account to a Roth IRA belonging to the 529's beneficiary. This can serve as an "escape hatch" option to fund a Roth IRA thanks to an update to the Secure Act 2.0 which will go into effect in 2024.
8. To execute this transfer, the 529 account must have been open for at least 15 years.
9. Only funds that have been in the 529 for at least 5 years are eligible for the transfer.
10. The transfer must be a direct conversion from one institution to another.
11. The annual Roth IRA contribution limit and eligible earnings will apply, but there are no income limits.

1. A “poor man’s Dynasty Trust”:
2. For those with the means, opening a 529 account today with a $15,000 contribution can potentially grow to $35,000 in fifteen years, assuming a growth rate of 7%. This can be a smart strategy for wealthy families to fund Roth IRAs for their children or grandchildren. 
3.  Personal Roth IRA:
4. Consider opening a 529 account for yourself when you're younger and have fewer expenses. You can be both the owner and beneficiary.
5. In 15 years, when you might have more expenses and a higher income, you can use the funds in the 529 account to "contribute" to your Roth IRA.

If you find yourself with leftover funds in your 529 account, you have options. You can use the money for yourself, pass it on to another beneficiary, or withdraw the money. If you choose to withdraw funds, you'll typically pay taxes on the earnings, plus a 10% penalty on those earnings.

529 accounts have evolved into a versatile financial planning tool that goes beyond college savings. They now offer flexibility for covering various educational expenses, paying off student loan debt, and even funding Roth IRAs. Understanding these expanded uses can help you make the most of your 529 account and secure a brighter financial future for yourself and your loved ones.

In today's fast-paced world, many of us find ourselves living life on autopilot, following a checklist of societal expectations without truly examining what brings us fulfillment and joy. The recent trend of prioritizing external achievements over internal well-being is leaving many feeling drained and disconnected from their true desires. In this week’s episode, I chat with Registered Life Planner Andrea Miller to explore the importance of paying attention to what energizes you and how it can lead to a more fulfilling life.

Checking the Block

It's easy to fall into the trap of the "checklist mentality." We set goals for ourselves: get the job, earn the salary, buy the house, find the perfect partner, have kids, and acquire material possessions like cars, houses, vacations, etc. While these goals are not inherently wrong, they often prioritize external achievements over internal happiness and well-being.

This check-the-block approach can leave us feeling unfulfilled and disconnected from our true selves. It's essential to recognize that life is more than a series of boxes to tick off; it's about finding meaning, purpose, and joy in each moment.

Pay Attention - Don’t Be Asleep at the Wheel

In a world where we're bombarded with distractions and demands on our time, it's crucial to pay attention to where we're directing our energy and focus. Often, we give away our time and attention without realizing it, leaving us feeling like we're "asleep at the wheel."

Our brains are wired to protect us, and sometimes they create narratives and beliefs that push us to chase external accomplishments, thinking they will keep us safe. To break free from this pattern, we must become more aware of our thought patterns and redirect our attention to what truly matters.

Get into The Flow: Attention, Emotion, Behavior, Results

Understanding the flow of attention, emotion, behavior, and results can help us gain clarity and make positive changes in our lives. Work from the top, down:

1. Pay Attention: What we focus on at the top of the triangle determines our entire life experience. Pay attention to your thoughts, beliefs, and where you direct your energy.
2. Identify Emotion: Your attention influences your emotions. Are you feeling energized and joyful, or drained and frustrated? These emotions are often linked to where you're placing your focus.
3. Tune in to your behaviors: Are you asleep at the wheel? Emotions drive behavior. Are your actions aligned with your true desires and values, or are you simply reacting to external pressures and expectations?
4. Check your results: Your behavior leads to outcomes. Are you achieving the results you desire in life, or do you feel stuck and unfulfilled?

To begin your journey towards a more fulfilling life, start by paying attention to what energizes you and what depletes you. How? It’s as easy as 1, 2, 3:

1. Take out a sheet of paper and create two columns: "Energizes Me" and "Depletes Me." Throughout your day, note down activities, people, and experiences that either bring you energy or drain it.
2. Reflect on your list and see if any patterns emerge. What common themes or activities appear in the "Energizes Me" column?
3. Begin incorporating more of what energizes you into your daily life and gradually reduce activities that deplete you.

By following your energy and making intentional choices to focus on what truly matters to you, you can shift your life towards greater fulfillment and happiness. In the words of younger but wiser country/pop icon Miley Cyrus: “Ain’t about how fast I get there, ain’t about what’s waiting on the other side, it’s the climb.”

Life is too short to live on autopilot, following a checklist that doesn't align with your true desires. Embrace the power of attention and start prioritizing what energizes you today. Your path to a more fulfilling life begins with mindful awareness and intentional choices.

Have some extra cash? Wondering if you should put it toward your mortgage? Join Matt Robison and I this week as we delve into the answer to this FAQ. It’s not as simple as you might think. Why? Because why you shouldn’t is equally as compelling as why you should work to pay down that debt. 

Let’s start with the basics. From a strictly mathematical perspective, it usually doesn’t make sense to put extra cash into your mortgage. Why? Well, start by comparing your mortgage interest rate to the potential return on investments. If your mortgage rate is low (e.g., 3-4%) and you can potentially earn a higher return by investing your money elsewhere (e.g., 5-10% in a high yield savings account or the stock market depending on your timeline), it makes sense to keep your mortgage and invest your extra cash.

So we should just stop there, right? If we were robots, sure. But we are human, and humans have emotions which play a significant role in our decision making. If having a mortgage creates anxiety or discomfort for you, paying it off may provide a sense of freedom and autonomy. Some people prefer the peace of mind that comes with owning their home outright, even if the math suggests otherwise.

Maybe you aren’t anxious about your mortgage, which is great, but there is another factor to consider from the human side of decision making. Your financial decisions might be influenced by your upbringing, cultural norms, or peer groups. Sometimes people follow a particular financial path simply because "that's what you're supposed to do" or because they've seen others do it. If you have a strong belief system with regard to debt, it is a consideration worth noting.

Finally, the decision to pay down your mortgage early could also be motivated by significant life events, like retirement or sending kids to college, which can blend rational and emotional considerations. If you only have 15 years until retirement but refinanced to take advantage of the super low interest rates of 2020/2021 with a 30 year mortgage, you may want to pay that off by the time you retire from the workforce. 

Ultimately, you need to consider both the mathematical and emotional aspects of paying down your mortgage and make a decision that aligns with your unique circumstances and goals.

Ah, estate planning. Such a fun exercise. No one wants to think about the end, but we will all smile, so we might as well plan for it. In this week's podcast, join Matt Robison and I as we explore the importance of planning for your golden years, the ones filled with activity, those that slow down, and even the ones where you may need extra care.

Some of the ideas discussed in this podcast come from the fantastic article by Karen Kreider Yoder and Stephen Kreider Yoder at the Wall Street Journal. Their article entitled "We're Retired and Healthy. But How Do We Plan for Our Decline?" has a lot of great information and quotes. I'm always trying to learn from those slightly ahead of me (in life), and I highly recommend the retirement series that they are writing.

In this episode, Matt and I discuss:

• The spending smile 
• Realistic goal planning
• Reframing your perspective from what you have to do to what you get to do

Don't let the icy grips of death scare you. Instead, view retirement planning as an opportunity, not an obligation. By thinking ahead and preparing now, you empower yourself to make the most of your time. Embrace change, seize the present, and shape a future that's not just secure but also filled with the adventures and experiences you've always dreamed of.

Are you ready to create your ideal lifestyle? Let’s Connect.

Learn more about Mike and my services at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

This week, Matt Robison and I discuss the concept of being aggressive in your investment strategy, especially when you have time on your side. 

Over a 40-year period, historical data shows that investing $10,000 in the U.S. stock market could grow to an impressive $650,000, assuming an average annual return of 11%. Even in the worst-case scenario over the past century, where returns were just under 9%, that $10,000 investment would still grow to a substantial $300,000. 

In contrast, conservative investments like bonds would only see your initial $10k grow to around $50k over the same time frame. This stark contrast illustrates the potential rewards of being more aggressive with your investments.

But, what about Target Date Funds?

Many people rely on target date funds to simplify their investment decisions. These funds automatically adjust your asset allocation based on your expected retirement date. While target date funds are a solid starting point, they tend to include up to 10% bond allocations even when you have decades until retirement.

But, what if the stock market tanks?

One of the main reasons people shy away from aggressive investing is loss aversion, a psychological bias that makes us fear losses more than we desire gains. It's a natural instinct, but it can hinder your financial progress if you're overly cautious.

To overcome this bias, it's essential to evaluate your investments rationally. Consider the worst-case scenario when it came to that $10k investment discussed earlier. Even at the lowest returns, it is still almost 83% more than the return on bonds.

In summary, being aggressive with your long-term investments can significantly enhance your financial success. While caution has its place, don't let fear hold you back from embracing an aggressive investment strategy. Consider your long-term goals, evaluate your risk tolerance, and explore opportunities for higher returns. With the right approach, you can harness the power of aggressive investing to secure a brighter financial future.

Are you ready to create your ideal lifestyle? Let’s Connect.

Learn more about Mike and my services at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Inflation has a way of eroding the purchasing power of our money over time, making it essential to plan smartly to ensure financial security. In this episode, Matt Robison and I delve into the intricacies of managing finances in the face of rising inflation. Most notably, we talk about the importance of aligning investment strategies with specific timeframes to make the most of your assets.

What does time have to do with investments? Quite a bit, actually. We are currently in a period in which our savings are generating some income. We are seeing a return on CDs, bonds, and even checking and savings accounts. You might find yourself in a situation where you have some extra cash (yay!) but don’t know what to do with it. The most effective financial planning requires aligning your investment choices with your anticipated expenses. 

Consider the following:

1. Short-Term Needs: Emergency Savings and Upcoming Expenses
2. Maintain an accessible emergency fund (Cash, CDs or Money Market Funds) for unforeseen financial setbacks.
3. Allocate cash for immediate needs or short-term expenses like a down payment on a house or a new car and keep those funds in appropriate safe options like cash, CDs, individual bonds or Money Market Funds.
4.  Medium-Term Goals: Two to Five Years
5. Consider bonds and bond funds as a way to preserve capital and earn moderate returns.
6. Evaluate investment options to counteract the effects of inflation on your money by getting some interest payments plus potential upside returns.
7.  Long-Term Investment: Over a Decade or More
8. Stocks are the wisest choice for long-term growth.
9. Companies adjust prices to account for inflation, offering an effective hedge against its impact.
10. Real estate investments also present opportunities for long-term financial growth.

Inflation can indeed be a drag on financial stability, but with careful planning, it can also serve as a catalyst for creating a resilient investment strategy. By understanding the relationship between timeframes and investment options, you can take steps to navigate inflation's impact on your finances.