Dear Quentin,
I’m 36 years old. I have about $53,000 in a money-market savings account. I keep anywhere from $1,000 to $2,500 in a checking account. I have about $290,000 in my retirement. I have a wife who has had no job for four-plus years. We both agreed that she would raise our 4-year-old as a stay-at-home mom. I’m not complaining.
I only make about $62,000 a year, and took a pay cut for a better career. I used to make $79,000. I will eventually make more once raises come in. I own everything except our house, on which I still owe about $54,000. I have no debt, and I only purchase what we can afford with my paychecks. I use credit cards for everything, get 1.5x cash back, then pay it off in total every month.
“‘Should I put her money in a 529 college plan or keep it rolling over in a CD?’”
I put $100 from every paycheck into my daughter’s savings account, a CD with a decent interest rate. She has about $12,000 saved up already. My wife has a retirement account with about $45,000 to $50,000. I haven’t checked it lately. My credit score is 847; my wife’s is 799. I feel like I’m behind in the savings and retirement game.
I was putting the maximum IRS deferral limit into my 401(k) until we decided that my wife should quit, then I dropped it to 5%. I’m not saying I feel behind because my wife has no income. If we need money, I can work overtime or she can get a job. She will get a job once our daughter starts school. I plan on working until 67.
Am I doing it all right? Where can I improve? I want to live comfortably when we retire, but I also want my daughter to have the life I never had as a child. Should I put her money in a 529 college plan or keep it rolling over in a CD?
Father, Husband & Saver
Dear Saver,
You’re doing more than OK. You’re ahead of the game. You have already saved more than four times your annual salary, and you haven’t even hit 40 yet. Most people your age are playing catch-up, trying to make sure they can pay rent and make it to the end of the month without going into the red.
The average balance for a 401(k) in the U.S. is approximately $129,300, according to Fidelity Investments; for an IRA, it’s $134,900. And get this: Roughly one-quarter of Americans have NO retirement account, according to the Federal Reserve, so you are among the most fortunate.
Your wife is working full-time as a stay-at-home mom, and will return to the workplace. You have $54,000 left on your mortgage. With the median house in the U.S. costing around $382,000, you’re in a position that is enviable to millions of Americans.
As for what’s missing in your finances? Financial advisers do recommend having an emergency fund with three to six months of savings in case you lose your job, or have some other medical emergency or unforeseen event. Switching jobs is the best way to increase your salary.
You may also wish to consider a Roth IRA account. They’re often a good option for people who are in a low tax bracket like yourself but expect to be in a higher tax bracket as they get older. Provided certain conditions are met, they’re not taxed upon distribution.
In your 30s, the general rule of thumb is to keep 30% of your allocation in bonds and 70% in stocks. In your 70s, reverse that equation. The logic being that you have three decades to ride the ups and downs of the market, but once again, this all depends on your risk tolerance.
The CD vs. 529 plan question depends on your goals and risk tolerance. Certificates of Deposits are flexible; they have a guaranteed return and fewer fees than 529 plans, and you can time the deposit agreement to coincide with your child’s educational needs.
However, unlike CDs, 529 plans have tax-deferred contributions and withdrawals are excluded from federal income tax as long as they are used for qualified college expenses. They come with fees, which can vary, and they must be used for one beneficiary.
MarketWatch columnist Howard Gold has advice for people like yourself who are considering setting up a 529 plan. Among his tips: “Don’t be blinded by the tax break; select a plan based on performance, low costs and fund choice, not state tax breaks,” he writes.
“Don’t try to be clever by putting the plan in the name of another adult,” he adds. “Don’t hoard the money in the plan. Some parents who have larger plan balances might be tempted to hold some of it back to pay for their child’s future graduate or professional school.”
Members of the Moneyist Facebook group weighed in on your letter, with one person stating, “You’re a lot better off than most of us. There’s a ton of boomers with more housing debt and less saved up,” and another describing your predicament as a “humble brag.” Take that as a compliment.
You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
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The Moneyist regrets he cannot reply to questions individually.
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