HerMoney Podcast Bonus Mailbag #21: Planning Ahead: Family, Retirement And Real Estate

Kathryn Tuggle: (01:10)
Hey Jean.

Jean Chatzky: (01:11)
So you’re in New York today?

Kathryn Tuggle: (01:13)
I am here in New York city holding down the fort.

Jean Chatzky: (01:16)
And I’m in the burbs holding down the fort here.

Kathryn Tuggle: (01:18)
How’s it going with the sale of your home?

Jean Chatzky: (01:21)
Oh my God. Oh my God. That is a subject for another episode.

Kathryn Tuggle: (01:26)
All right.

Jean Chatzky: (01:27)
Suffice to say my renovation on the new place is stalled. Anybody who likes HGTV can look forward to my own renovation chronicles because I have plenty to share.

Kathryn Tuggle: (01:43)
Wow.

Jean Chatzky: (01:44)
But the renovation is stalled. So, although we got pictures of our house taken in preparation to list it, we have nowhere to go.

Kathryn Tuggle: (01:54)
Oh, my gosh. It’s just amazing all the people whose lives have been thrown into chaos over the last few months, like something so small as selling your home and renovations, which is ordinarily not the easiest process in the first place, but fairly straightforward, is now this whole other can of worms.

Jean Chatzky: (02:14)
Exactly. And I actually think now would be a great time to sell my house cause I hear that a lot of people are trying to escape the city for the suburbs, but again, nowhere to go. So we’re staying put for right now.

Kathryn Tuggle: (02:29)
All right.

Jean Chatzky: (02:30)
So what do we have first?

Kathryn Tuggle: (02:32)
Well, first we have some good news actually from one of our listeners, Rebecca, who wrote into us last September. Her original question aired in our episode with Megan Schleck, which was Episode 179. If anybody wants to go back and refresh their memory. But she writes, hi Jean. I wrote to you last fall asking whether I should sell my condo, which had lost much of its value back in 2008 or whether I should keep it and rent it. I had pretty made up my mind to sell but your advice to sell really validated my choice to do so. It took a long time to find a realtor who was willing to work with me. I contacted five people and four of them said it wouldn’t sell for more than $50,000 and it wasn’t worth their time. The fifth person I contacted, however, was young and eager and saw the potential in the condo and was willing to take it on. I moved out in November, spent December having the place spruced up and put it on the market in January. Within 48 hours after listing, I got a full price cash offer for 70,000 and we closed in February. Amazing.

Jean Chatzky: (03:33)
Amazing, right? This is what want. So you just send that good juju my way.

Kathryn Tuggle: (03:39)
Absolutely. I had paid $102,000 for the place in 2004. So, I lost $32,000 in this sale. But for the first time in my adult life, I’m debt free and I love it. I also love not having to deal with a condo board. Thanks again for your calm words of wisdom regarding a stressful and emotionally fraught situation. I felt so much better knowing that I was making a sound choice.

Jean Chatzky: (04:03)
Wow. Well thank you for writing with an update. I’m so, so happy to hear that. And I just want to say, Rebecca, it’s a clean slate. It’s a fresh start and I can hear the relief in the way that you write this. So, It makes me feel really, really good that you’re on the right track.

Kathryn Tuggle: (04:21)
Absolutely. And that persistence of calling multiple people always, always pays off.

Jean Chatzky: (04:27)
Absolutely. No question.

Kathryn Tuggle: (04:29)
In terms of questions from our mailbag, our first note comes to us from Brandy, who is one of our heroes on the front lines. She writes, hi Jean and Kathryn. Thank you for the excellent content you put out. Listening to the podcast has been really helpful to me. My name is Brandy. I’m 32 years old, single no kids. I currently live in Oklahoma, but I’m a traveling RN and I’ve lived in several states over the last few years. I recently took a short-term job to help with the coronavirus pandemic and have earned a little more money than usual in the form of an increased hourly rate and a bonus. I’m wanting to invest in additional $2,000 so I put it in my Roth IRA, that now has a balance of $14,500. And once that hits my account, I’ll have around $2,500 in my Roth that still needs to be invested. An investing-savvy friend suggested I put that money in a money market fund right now due to market volatility that will likely occur. I’m currently invested in Fidelity’s 500 index fund, emerging market fund and stock selector small cap, as well as a few other stocks, like 3M company. In total, I have $21,000 in my Fidelity portfolio, $4,000 in a Sallie Mae money market account, $5,000 in an aggressive Acorns account and about $4,000 in savings and checking. I’m anticipating a few medical bills in the coming months that will not be covered by the insurance I currently have, which is why I’m keeping extra in my bank accounts. I paid off my student debt last year. I have no credit card debt. I don’t own a house or property, but I have a car that I pay $400 a month on with no interest. Overall, I feel like I’m in decent shape, but also behind on investing and saving for retirement. I do plan on going back to school to become an NP, but taking out student loans for a program is a deterrent despite how much I would make. I would be so grateful for any suggestions you have. I try to do a lot of this on my own, but as many have said it can be quite confusing and a little intimidating. Happy trails and stay well.

Jean Chatzky: (06:28)
Thank you so much, Brandy. And thank you for everything that you have been doing for everybody in America during this crisis. We owe you an incredible debt of gratitude. So, let’s see if we can help you. As I’m listening to your letter, I have a couple of questions. The first is, why is there so much money in investments outside of retirement accounts that have preferential tax treatment and less inside accounts that have preferential tax treatment. When we look at where we’re going to invest the next dollar, one of the things we look at is what accounts should we put it in? What basket do we put it in? And generally we try to put it in the place that is going to give us the greatest return on the money but also that gives us the most in terms of a tax benefit, a write-off on our taxes. You’ll often hear me talk about how I put 401ks at the top of the list because they have matching dollars from employers, in many cases, but also because you can contribute up to almost $20,000 a year into those accounts and get a significant deduction on your taxes. And that’s a big deal. Now, Roth IRAs are great. No doubt, Roth IRAs are great because if you’re able to pay the taxes now, particularly for somebody your age, that money can just grow tax free forever. But the money that you’ve got in that taxable Fidelity portfolio, as well as in the Acorns account, might be better if you put some of it into a retirement account. And you may be able to move some of that money into a retirement account, not all this year, not all next year, but over time, because it sounds like in your job as a nurse, you’re an independent contractor, which gives you the eligibility to open something called a SEP IRA. And you can contribute a whole lot of money, more than $50,000 every year if you wanted to into that account ,and take a tax deduction for doing so. And that has incredible value. As I look at the other things that you are saying here, I think you need basically an overall plan. And in order to figure out what that plan should be, you need some goals. I’ll be much better able to tell you where to put this money if you can tell me what this money is for. And even if you can’t tell me what it’s for specifically, if you can tell me when it’s for. So the money in your Roth IRA, for example, if this is really money for retirement, if you are not planning on using it for the next four decades or three plus decades, I wouldn’t put it in a money market. You are a young woman and you are at a time in your life where it’s okay to take risk with your money. It’s okay to ride the ups and downs of the market. And the same is true with your other investments. But if you were to tell me, actually, I really want to buy a home and I want to buy a home in the next few years. Then I would say, well, that’s not money we take a risk with because you don’t want to lose your down payment. So, Brandy, what I want you to do is follow up with us. I know you’ll listen to this because you listen to the show. I want you to write me again. Answer my questions. Why is the money in taxable brokerage accounts rather than in retirement accounts? And second, what are your goals for this money? And then we can get you on the right track.

Kathryn Tuggle: (10:35)
Those are great questions. And do you think it would benefit her to sit down with a financial planner too?

Jean Chatzky: (10:40)
She absolutely could. Yeah, she absolutely can. If that is something Brandy that is available to you or appealing to you, you work with a number of excellent financial services firms. You could get a financial planner through Fidelity. You could talk to somebody who is an independent, or you can certainly write us again and we can try to help.

Kathryn Tuggle: (11:02)
Great point. Thanks Jean.

Jean Chatzky: (11:04)
Sure.

Kathryn Tuggle: (11:05)
Our next note comes to us from Christine. She writes, hi Jean. To start, I wanted to say that I absolutely love how empowering this podcast is and to say that it has made significant impacts on my professional confidence and personal finances. I’m writing today because my husband and I are trying to plan for retirement. We’re typical DINKs, 24 years old and earning a joint annual income of $165,000. We’re currently tackling $190,000 of student debt, but we should be able to pay it all off before the end of 2021. Amazing.

Jean Chatzky: (11:38)
That’s amazing.

Kathryn Tuggle: (11:39)
Alongside our aggressive student loan repayment plan, we’re putting about 6% of our income into our traditional 401k to max out our employers match and applying 60% of our take home pay to loans. Once the loans are paid off, we to fully max out our 401k contributions up to the IRS limit and put away additional savings in an IRA so that our total annual retirement savings is at least 15% of our gross income. With these savings, our portfolio is projected growth rate and a plan to get into real estate investment via rental properties, we feel that we’ll be able to save enough for the two of us to retire comfortably at 65. However, we know that we’ll need to serve as legal guardians for my autistic older brother when my parents pass, meaning we’ll need access to enough finances to support the three of us in retirement. My parents don’t currently have any savings set aside for my brother and don’t think there’ll be able to save anything for him in the future. They started their own retirement savings late, only contributing enough to get the employer match and already anticipate my father having to work at least part time until he passes, because they’re still trying to pay off their own student debt. With them focusing solely on their debt and retirement, my husband and I know we’ll have to provide all of the long-term financial support from my brother. Right now, my brother works six hours a week for minimum wage, and doesn’t put any money away in savings. We want to support his continuous development as an adult and help him learn an employable skill so that he can save some of his own money in either an able account or a Roth IRA to help offset future retirement costs. We both feel that my brother has untapped potential and is high functioning enough to be taught a skill to earn real money for savings. So, it seems irresponsible to wait until he’s in our care to start that growth. However, we worry it will seem selfish to tell my parents that we’re concerned with managing financial security for the three of us in retirement. And we’re not sure how to approach them about taking that next step for my brother now, instead of waiting until he’s with us. I would really appreciate any advice you can give.

Jean Chatzky: (13:41)
So Christine, I have to say, this is the least selfish question I think we’ve ever been asked. There’s absolutely nothing at all selfish about understanding that you will be taking responsibility for your brother and telling your parents that you’re willing to do that. That you’re expecting to do that. I mean, that is an incredible gift. That should take a huge weight off their minds and their shoulders. And so I don’t think you have to worry about that at all. I think if you’re worried about making them feel badly that they haven’t saved, that doesn’t necessarily need to be where you begin this conversation. I’d suggest that you and your parents all sit down with an estate planning attorney who specializes in helping families with special needs children. There are a lot of them, and they’ll be able to tell you about how you set up a system for your brother, so that not only can he put money into an able account, which for people who haven’t heard of it is kind of like a 529 account, but for adults with disabilities. Or whether he needs a special needs trust. There are a lot of rules about what individuals with disability are allowed to have as far as money in their own names, in order to make them eligible for benefits that they may get through social security, like SSI or other benefits like Medicaid. You want to make sure, based on the fact that your brother’s working such a limited amount of time right now, that you preserve his eligibility for those benefits later. And that takes a professional who knows how to do that planning. I think that you are amazing. I think that the debt pay down rate that you guys are on for your student loans is unbelievable. And the fact that you’re thinking about your brother’s development in this kind of way at 24 years old, it just blows me away. So, I would not think that this is selfish at all. This is an act of love and devotion and your brother and your parents are really, really lucky to have you.

Kathryn Tuggle: (16:25)
I couldn’t agree more, Jean. Just what she wrote, we are your typical DINKs at 24 years old, I just want to say nothing about this is typical. This is amazing. The amazing debt repayment plan, the amazing foresight to be thinking and planning and loving your brother in such a way. It’s just amazing.

Jean Chatzky: (16:45)
Yeah. And if you have trouble finding resources, shoot us a note. My nephew has autism. I’m familiar with this system and if I can help you in any way, please let me know.

Kathryn Tuggle: (16:59)
Amazing.

Jean Chatzky: (16:59)
And Kathryn, I want to take one or two more letters, but before we do that, let’s just remind everybody that HerMoney is supported by Fidelity Investments. For more than 70 years, investors have relied on Fidelity to help plan for their financial futures. As always, when the unexpected happens, Fidelity is there to help you work through it with financial planning and advice for what you need today and tomorrow, helping to make it all clear. To see how Fidelity can help you and your family on the path forward. Visit Fidelity.com. We are back with our mailbag special. We’re taking all of your questions around planning ahead for retirement, family and more. Kathryn what’s next.

Kathryn Tuggle: (17:41)
Our next note is from Day Spring. She writes, hi HerMoney team. I so love the podcast and try to be an active contributor to the private, HerMoney Facebook group. Over the last year, I’ve really gotten into personal finance and it’s definitely my passion. My husband might say obsession of mine now. Thank you for all you do. And for making learning about personal finance, a fun and approachable endeavor. So here’s my question. I’ve looked online and couldn’t seem to find anything. So, apologies if this is a dumb question. I recently got married in the midst of the pandemic and though we had to cancel our big day, we are still quite happy to be wed. My inlaws are equally as happy and already excited for future grandchildren. My father-in-law was interested in starting a 529 for our future kids, but his finance guy said you can’t do that until they’re born. But I had the idea, since you can move money between 529 accounts, what if he was to set up an account in my name or my husband’s name, just to start saving now. And then when kids are born, create accounts for them and then transfer the money in. Of course there’s concern if we don’t have kids, but I do have student loan debt. So, perhaps it could be used for that if we were to not have kids. Or be transferred to one of the other grandchildren. Or even take the risk and be okay with the non-education penalty. I haven’t heard anyone suggest this solution before. So, perhaps it’s against 529 rules, but I figured I’d ask the expert. Can you start a 529 in someone else’s name before a child is born and plan to transfer the money later? Thank you so much.

Jean Chatzky: (19:12)
So you are a smart cookie. This is exactly the way that you should be thinking. Congratulations on your marriage. Congratulations on planning for this wonderful future family. I hope that your father-in-law is not rushing you more than you want to be rushed. But I do love that he wants to save for his future grandchildren. Yeah, he can open this account in your name, but he can also open it in his own name, and transfer ownership of the account to you once the child is born. For financial aid reasons, it’s better that a parent be the owner of the account than a grandparent be the owner of the account. That’s just how the formulas work. But you got plenty of time here. So, I would say give him the choice. He may feel better being in control of this money and moving it to you, to the grandchild, when he feels like it. And in answer to your other question, if it is in your name, you absolutely can use that money to pay off student loan debt. In case there are no kids down the pike.

Kathryn Tuggle: (20:20)
I did not know that about 529s until this very moment about student loan debt. That’s amazing.

Jean Chatzky: (20:26)
Because it’s new. It’s part of the secure act, which was just passed last year. So yeah, it’s a new benefit and it’s absolutely a possible thing to do.

Kathryn Tuggle: (20:34)
Amazing.

Jean Chatzky: (20:36)
Yeah.

Kathryn Tuggle: (20:36)
Our last question comes to us from Courtney in Denville, New Jersey. She writes, hi Jean and Kathryn, thanks for always having such interesting guests with great perspectives and all the information you ladies provide to help everyone make better money moves. My husband and I are 38 and have really taken control of our finances since becoming parents seven years ago. We’re contributing monthly to a 529 for our daughter, and we’ve been maxing out our 401ks for the past two years. We both put a portion in our regular 401k account and a portion in our Roth 401k account. We both have good income and my husband also does some 1099 consulting work on the side. We set aside money each month with the intention of also maxing out our Roth IRA contributions but the last two years we’ve made too much to qualify, to contribute by a few thousand dollars. We know how lucky we are to be in this position. We’ve used this bonus money to pay down our mortgage and for home renovations. Now that our renovations are complete, we’re waiting to see what will happen over the next few months, with everything going on, to sort out if we will refinance our mortgage and combine it with our HELOC. On the mortgage, we owed 91,000 at 3% and are on track to have it paid off in 2025. With our HELOC, we currently owe $160,000 paying interest at 3.5% at this time, but that will adjust in March of 2021 to prime minus a quarter. Since both of these loans have great interest rates, we’re trying to figure out if we should increase what we contribute to our regular 401k’s and decrease the portion, going into our Roth 401k to lower our taxable income, to be able to contribute to our Roth IRAs again. Or is that not allowed? Or we could continue to use the money we set aside for our Roth IRAs to pay down debt if our income is too high to contribute. Our financial planner suggested that we use the money to start a taxable investment account through his company, but said we’d need $25,000 to start it and the fees seem a little high. What should we do? Thank you so much for all of your advice.

Jean Chatzky: (22:33)
Wow. There’s a lot going on in this question. So, here’s what I wouldn’t do. I wouldn’t take the money and use it to start the taxable account at his company because I think you have other options here. You can increase what you’re putting into your regular 401ks and that should free you up to contribute into your Roth IRAs. You may also want to make a contribution into a traditional IRA, if you’re not eligible for the Roth, with the idea of converting those assets to Roth assets at an opportune time. There are a lot of people looking at doing that this year because investments in their IRAs are down to the point where taxes, that will have to be paid on the gains in those portfolios, have been minimized which just hasn’t been true for the last couple of years. But the other thing that occurs to me that you don’t mention is the possibility of 529 college savings accounts for your child or now children. You say you became parents seven years ago. You may want to embark on putting some money away for college. I had a very interesting conversation, Kathryn, with our friend and college expert, Mark Kantrowitz earlier today. And he gave me some new parameters around how much parents should be trying to save for college for their kids that I’ve never heard before. And basically it goes like this. I found them really helpful. That if you think your children will be going to an instate public school, you want to put away $3,000 for every year of age. If you think there’ll be going to an out of state public school, $5,000 for every year of age. And if you think there’ll be going to a private college, $7,000 for every year of age. And that’s not going to pay the full boat ride of college, it’ll get you to the point where you’re paying a significant chunk of it though. And that will minimize the borrowing that you have to do on the other end.

Kathryn Tuggle: (24:53)
That’s such great advice. I would not have thought of that.

Jean Chatzky: (24:56)
Well, she mentioned being a parent. So, we’re always looking for something that we can do that comes with some tax benefits. I don’t know where they live, but there may be a tax deduction on the table for the state tax return, which can be substantial. It certainly was in New York. And then you get the satisfaction of knowing that you’re saving for college as well.

Kathryn Tuggle: (25:20)
Absolutely great point.

Jean Chatzky: (25:22)
Thanks. Thank you so much to everybody who wrote in with your great questions today. We love helping you out with the answers that you need. So please keep them coming at mailbag@hermoney.com. If you like what you hear, I hope you’ll subscribe to our show at Apple Podcasts. Leave us a review because we love hearing what you think. We want to thank our sponsor Fidelity. Ordinarily, we record our podcast out of CDM Sound Studios. Today, Kathryn and I are recording remotely, socially distanced, from the comfort of our homes. Our music is provided by Video Helper and our show comes to you through Megaphone. Thank you so much for joining us.