I recently wrote about investment alternatives for retirees who are seeking higher income in today’s challenging investment environment. A younger reader wrote me with a question from his age group’s particular perspective:
“My question is what do you recommend for someone that still has around 25 years left in the workforce. I’m maxing out my 401(k) at work. However, I’ve just had my third child and have not yet started a 529 college fund for any of my children (ages 8, 5, and 6 weeks).
Basically, I’d like to know your recommendation on maximizing my funds’ growth over my remaining working life for retirement (I am weighted heavily in equity stocks in my 401(k) currently with some balance of bond funds) and what 529 plan / funds do you recommend? There was a time over 5 years ago that Utah’s 529 fund was all the rage, but I’m now seeing some recommendations for Alabama’s 529 plans.”
Signed: Saving for Retirement and Kids’ Education
First, I want to applaud ‘Saving for Retirement’ for thinking well ahead about the important issues of retirement and college funding. Most families don’t do this and the results, particularly related to retirement, are devastating with less than 5% of all retirees being financially prepared. On the education front, many parents realize too late the mammoth costs of putting a child through college. Four years of in-state college can easily cost $80,000 in today’s terms and you can expect at least $160,000 for a four-year private college. While this reader did not provide his retirement income goals, if he wanted to maintain an inflation adjusted retirement income based on $75,000 in today’s dollars, he’d need approximately $3,000,000 of investment capital at retirement. Most people are very surprised by the size of these numbers and one of the keys to success is developing a success strategy as early as possible so that you have time working on your side.
To answer this reader’s questions, I’ll start with the college funding. Yes, we used to recommend the Utah 529 Plan to our clients but last summer Alabama adopted a new plan run by Vanguard which is as competitive as any in the nation and you’ll receive a state income tax deduction of up to $10,000 per year for new deposits, including transfers from other plans. Currently, for Alabama residents, we recommend all new deposits go to the Alabama 529 Plan and we are systematically transferring in money from out-of-state plans to capture the $10,000 state income tax deduction. In particular, we often recommend one of Vanguard’s Age-Based investment options. These plans automatically become more conservative by shifting money out of stocks into bonds as your child approaches college age. Visit the Resource Center at www.WelchGroup.com; click on ‘Links’; the ‘College Costs Calculator’ and run projections on how much you’ll need to invest to fund your child’s college education. For more information on the Alabama 529 Plan, visit www.CollegeCounts529.com.
As to the question about retirement, I would start with a retirement analysis in order to get some idea of how much you’ll need to be investing in order to reach your retirement goal. Visit the Resource Center at www.WelchGroup.com; click on ‘Links’; then ‘Retirement Planning Calculator’ for a quick estimate. If you are investing primarily through your company’s 401k plan, I think you’re on the right track having your investments weighted heavily towards stocks. If your goal is large and you have 25 years, we might typically recommend 80% to stock mutual funds with the balance in bond funds. The last decade in stocks has been quite challenging but I expect stocks to outperform bonds over the next five years or more. If you are investing additional money outside your 401k, you could consider a similar no-load mutual fund strategy. If you’re inclined towards individual stocks versus mutual funds, I still like blue chip dividend-paying stocks. As the 80 million Baby Boomers retire over the next dozen or more years they’ll seek income investments with an opportunity for conservative growth….and these stocks are a near perfect fit.