Latest news with #RobertBrokamp
Yahoo
18 hours ago
- Business
- Yahoo
Trump paves path for private equity and crypto in retirement accounts. Here's what it means for your 401(k).
Your 401(k) options could change soon. President Donald Trump signed an executive order Thursday to clear the way for Americans to invest their retirement savings in private equity, cryptocurrency, real estate and other alternative assets. It's a big win for the asset industry — giving financial managers access to some of the $12.2 trillion in Americans' 401(k) and related retirement plans. Private assets can also be more lucrative, and the Trump administration said they can give retirement savers more opportunities. 'The theoretical benefits are that everyday Americans can invest in a broader menu of companies,' said Robert Brokamp, a financial planning expert at stock market research company The Motley Fool. But there are higher risks — and not necessarily higher rewards. Critics say it could put people in danger of losing a huge chunk of their retirement savings. 'There is a lot less transparency and liquidity in private markets,' said Brokamp. 'There's not as much information about the companies, and it could be hard to sell your investments — especially during a panic and many, many investors are trying to sell at the same time.' Plus the fees are higher for private assets than for typical 401(k) investments like mutual funds and ETFs. Benjamin Schiffrin, director of securities policy at Better Markets, said target-date mutual funds holding stocks and bonds charge 0.3% — while private funds can charge 1% to 2% in management fees and up to 20% in performance fees, and interval funds charge 2% to 3%. Right now, private equity is technically allowed in retirement plans, but it's rare — though some companies like BlackRock are planning new offerings. There are ways people can invest in crypto through their 401(k)s, too, but it's also not common. And many 401(k) recordkeepers don't support private equity funds yet. The executive order could change that. It directs the Department of Labor to re-examine its guidance and clarify its position on alternative assets like private market investments, real estate interests and digital assets within 180 days. And it tells the Securities and Exchange Commission to consider ways to facilitate access to alternative assets for plans like 401(k)s. 'I think this is going to open the floodgates,' said Schiffrin. 'I think up until now, you've actually seen a lot of hesitancy on the part of 401(k) plan managers to go down the road of including private market assets like private equity and private credit, things like that in the 401(k) plans.' Employers would have to decide to offer the plans — and experts anticipate many might be reluctant, as they could be held liable for losses. However, with updated guidance from the government, employers may feel more comfortable adding these alternative assets into their 401(k)s. Many experts say that might not be a good thing. SageMint Wealth managing partner Anh Tran, a certified financial planner and attorney, believes there's a real risk that some investors will be drawn in by the allure of potentially higher returns from alternative investments without having the full picture. She said she would not advise anyone to make this kind of investment unless they fully understand the risk of losing that money entirely. 'It could be detrimental to less-informed investors whose only investment account is their 401(k),' said Tran. 'Without proper guardrails, such as limiting exposure to 5% to 10% of the portfolio, these investors could be exposed to unnecessary risk, misaligned expectations and potentially irreversible losses.' Knut Rostad, co-founder and president of the nonprofit Institute for the Fiduciary Standard, also fears private assets in 401(k)s could put retirement savers at risk of big losses. 'I think in practice, there'll be many fiduciaries who ignore this directive because they understand precisely what will result from it,' he said, referring to Trump's executive order. 'The result will be a massive train wreck where many people are seriously hurt. Their retirement accounts will be annihilated.' And cryptocurrencies come with their own dangers. 'It's not clear what, if any, protections investors are going to have when it comes to investing in crypto,' said Better Markets' Schiffrin. 'So that just is a whole separate category of risks that having crypto in 401(k)s opens up.' Meanwhile the Securities Industry and Financial Markets Association, a trade organization for broker-dealers, investment banks and asset managers, cheered the announcement as a win for retirement savers. 'As more U.S. companies choose to remain non-public, private markets have developed into a more robust asset class,' Kenneth E. Bentsen Jr., president and CEO of SIFMA, said in a statement. 'Access to such investments, however, has been limited primarily to institutional and high net worth investors.' He continued: 'Policy changes to expand access to private markets investments — appropriately tailored under ERISA and SEC rules — could serve to improve diversification, democratize access, and offer more investment choices to the benefit of everyday retirement savers.' Experts believe it could take months to see any changes. For now, they say education and safeguards are key — especially for younger investors and people without access to professional financial advice. 'There must be transparency, education and limits in place to prevent widespread harm,' said Tran. 'Otherwise, we could be setting the stage for not only financial loss, but broader economic and social consequences.' This article was originally published on Sign in to access your portfolio
USA Today
4 days ago
- Business
- USA Today
Trump opens 401(k)s to private equity. Here's how much to invest.
In the past, the private equity world has been largely populated by ultra-rich investors, endowments and pension funds. That is about to change. Retirement savers with 401(k) accounts are gaining access to the private investment market, which mostly pivots on privately held companies, rather than public ones. BlackRock, the world's largest asset manager, announced in June that it will offer a 401(k) target-date retirement fund that includes private investments, with a launch date in 2026. Another retirement giant, Empower, said in May that it will offer private investments in some workplace accounts later this year. Other retirement plan providers have made similar moves. And President Trump signed an executive order on Aug. 7 that calls for federal guidance on adding private investments and other "alternative assets" to 401(k) plans, effectively opening the door to those investments for retirement savers. "Alternative assets, such as private equity, real estate, and digital assets, offer competitive returns and diversification benefits," a new federal fact sheet states. "President Trump is expanding access to these assets to ensure a dignified and comfortable retirement for all Americans." Firms that invest in private assets are pushing to gain access to 401(k)s and other 'defined-contribution' workplace retirement plans, a $12 trillion market. Private equity firms raise money to buy, manage and sell companies for profit. Investors are typically very wealthy individuals or institutions. The private credit marketplace loans money to companies or individuals outside the banking and fixed-income industries. Regular retirement savers haven't had much access to private investments in the past. The minimum investment in a private equity fund might be in the millions, or at least the hundreds of thousands, according to Investopedia. Your money might be tied up for years. Here's why wealthy investors like private equity But there's a reason wealthy investors and endowment managers like private equity funds. In recent decades, 'They actually have done better than the stock market by 1 to 2 percentage points,' said Robert Brokamp, a senior adviser at The Motley Fool. Private equity yielded average annual returns of 10.5% from 2000 through 2020, Investopedia reports. Other estimates range higher. Private equity is considered a high-risk, high-return alternative to the stock market, which, of course, carries its own risks. 'Why do wealthy people like it? Because it has the highest upside,' said Keith Singer, a certified financial planner in Boca Raton, Florida. Along with the upside comes a steep downside. Private companies face fewer regulations and reporting requirements than public ones. It can be hard to divine how much money a private company earns. 'These are private companies, and with that comes less transparency,' Brokamp said. 'That's part of the reason people stay private: They don't want to do all the regulatory filings that come with going public.' The number of public companies has dropped 'by about half' since the mid-1990s, Brokamp said. Private companies tend to stay private longer and do public stock offerings later. Stocks are risky. Private equity can be riskier. Stocks carry risk, but a retirement saver who puts money in an S&P 500 index fund is 'investing in some pretty well-established companies,' Brokamp said. Private equity, by contrast, often involves companies in distress. Bankruptcies run higher. 'Private equity is riskier than public equity,' said Caleb Silver, editor in chief of Investopedia. 'It's more speculative in nature because you are investing in companies that, in some cases, have no proven track record.' Given the risk, Silver suggests an everyday retirement saver should not invest 'more than 10% of your portfolio' in private investments: 'It's simply too risky.' Some of the emerging 401(k) offerings seem tailored to manage that risk. BlackRock, for example, plans to offer private investments within a broader target-date retirement fund. Target-date funds generally offer a mix of stocks, bonds and other investments, with the mix growing more conservative as you approach retirement. The new BlackRock fund would allocate only 5% to 20% of its holdings to private investments, with the quotient dropping as you age. Private equity tends to be illiquid: Investors generally see their money tied up for months or years. In a 401(k), by contrast, you can typically buy or sell investments daily. That should be less of a concern, though, when private equity sits in a target-date fund, which includes publicly traded investments that can be sold if an investor wants out. In 2020, the Trump Administration issued an 'Information Letter' instructing that 401(k)-type retirement plans could invest in private equity without violating federal regulations. The law requires 401(k) managers to act in the best interest of investors, protecting them from large losses and excessive fees. The new executive order instructs federal agencies to make any regulatory changes necessary to allow for private investments and other alternative investments, including cryptocurrency. Is private equity too risky for retirement savers? Some observers fear, however, that the risks of private investment may be too steep for everyday retirement savers. In June, Sen. Elizabeth Warren (D-Massachusetts) penned a letter to the CEO of Empower about its plan to offer private investments in 401(k) accounts. 'Given the sector's weak investor protections, its lack of transparency, expensive management fees, and unsubstantiated claims of high returns, we are seeking information on how your company will ensure the safety of the billions of dollars of retirement savings it safeguards as it implements this program,' Warren wrote. Empower responded, in essence, that retirement savers deserve a crack at the lucrative private investment market, after decades of exclusion. 'Empower believes in the democratization of private investing,' wrote Edmund F. Murphy III, the Empower CEO. Even so, leaders of the 401(k) industry will 'feel more comfortable' about private investments if Congress approves legislation that explicitly allows it, said Thomas Gahan, managing director of Procyon Partners, a financial advisory firm in Shelton, Connecticut. Gahan spoke to USA TODAY before Trump signed the executive order. Gahan predicts more 401(k) providers will offer private investments as an option in the target-date funds, as BlackRock plans to do. 'I think it's a stepping stone,' he said. The 401k industry may eventually allow any retirement saver to invest in funds made up entirely of private investments, Gahan predicted earlier this year, but probably not without legislation that explicitly permits the investments – or an executive order from Trump. That order has now arrived. 'This will happen over time,' he said, 'not overnight.'
Globe and Mail
5 days ago
- Business
- Globe and Mail
529 Plans, 401(k) Plans, and Using Any Extra Money From Washington
In this podcast, Motley Fool personal finance expert Robert Brokamp speaks with Martha Kortiak Mert of about the newly expanded uses of 529s and how to choose the right plan for you. Also in this episode: Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue » How does your 401(k) compare to the average worker's? Is it time to buy small-cap stocks? What you should do with any "raise" you'll receive from the "one big, beautiful bill." To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy. A full transcript is below. The $23,760 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these strategies. View the "Social Security secrets" » This podcast was recorded on July 25, 2025. Robert Brokamp: How should you choose 529 plan? How do you compare it to the average 401K participant? You're listening to the weekend Personal Finance edition of Motley Fool Money. I'm Robert Brokamp. We're doing a trial run of something a bit different for our Saturday episodes in which per usual, we feature a guest interview, and this week, I speak with Martha Kortiak Mert of about the newly expanded uses of 529's and how to choose the right plan for you. But then I'll also offer some other personal finance tidbits and tricks. Let's kick things off with three items from the news in a segment we're calling last week in Money. First up, they say that comparison is the thief of joy. But that doesn't stop us from doing it, especially when it comes to our bunny. If you're curious how your 401K behavior stacks up to the average workers, Vanguard has some answers, and it's recently released, How America Saves Report, based on analysis of all the retirement plans with the firm in 2024. Here are some highlights. The amount you have in your 401K is highly dependent on how long you've been contributing. Here are the median account balances based on job tenure. For people who have been on the job for 2-3 years, the median account balance is a bit more than $20,000, 4-6 years, a bit more than $44,000, 7-9, almost $73,000, and more than 10 years, almost $166,000. How much are workers contributing to their accounts? Well, the median savings rate is 6.8% just from the worker, and it's 11.5% when you include the employer match. Now, that's below the 15% savings rate that really most experts recommend nowadays, which means many folks might be behind in saving for retirement. Those workers might consider maxing out their accounts, and the limit this year is 23,500. Then when they turn 50, contributing even more with catchup contributions up to $7,500 or starting this year, 11,250 if you're 60-63 years old. What percentage of workers with Vanguard 401Ks took full advantage of their accounts last year? Well, 14% max out their accounts, and 16% of the 15 and older crowd made catch up contributions. Of course, it really doesn't matter how you compare to the average person. What really matters is whether you're on track to retire, when and how you want. To figure that out, you can start by using a good online calculator. One to consider is the CalcXML comprehensive retirement planning module. Just do an online search for it. You'll know you've found it if it has 606 as the last three numbers in its URL. Next item on our agenda, article from the Wall Street Journal, Jason Zweig, who highlighted the woes of small cap stocks. Over the past century, small caps have outperformed large caps by two percentage points annually on average, but not so much recently. In his article, Zweig cited the following staff from Steven DeSantis and Equity Strategist at Jeffrey's. Small caps have trailed large caps by more than seven percentage points over the last decade, which is the widest gap since 1935. Accordingly, money is just flowing out of ETFs that invested small US stocks while money is just pouring into the ETFs attract US large companies. This also means that small caps are a good bit cheaper. The Russell 2000 Index of small companies trades at a price to earnings multiple that is almost nine points lower than the S&P 500 PE. Iger argues, it might be time to go against the grade and grab some bargains by buying some small caps, which you can do pretty easily with a low cost ETF, such as the Vanguard Russell 2000 ETF, Ticker VTWO or the iShares CR S&P Small Cap ETF, Ticker IJR. Finally, we come to the number of the week, and that number is $435,300. That is the median price of an existing home that was sold in June an all time high, according to a report published last week by the International Association of Realtors, but while prices are up, sales volume is actually down 2.7%, and year over year inventory is up more than 15%. There's a bit of a slowdown in the real estate market. Growth of prices has boderated somewhat this year, and it took a bit of a dip in 2022. But anyone who owns a home that they bought more than a few years ago is likely sitting on some pretty nice gains. According to the Case Shiller National Home Price Index, home prices are up 49% over the past five years, 91% over the past decade, and 146% since the bottom of the housing crash in February of 2012. Putting a kid through college can easily cost well over $100,000. One way to prepare for that cost is by contributing to a 529 college savings plan. But how do you choose the right one? Here to provide some pointers is Martha Kortiak Mert, author and COO at Martha, welcome to Motley Fool Money. Martha Kortiak Mert: Hello. Thanks for having me. Robert Brokamp: The benefit of 529 savings plans is that the growth and withdrawals are tax free, as long as the money is used for qualified expenses, and that used to mean pretty much just college costs. But the list of qualified expenses just keeps growing, including this month, thanks to the big beautiful bill that was passed on July 4. Let's start by telling us a little bit about what a 529 can actually be used for. Martha Kortiak Mert: Sure thing, and you're right. That list is actually pretty long right now. Let's start with when your child is young. A few years ago, added to the list of qualified expenses was K-12 tuition. But with the passage of the one big beautiful bill, you now pay for a lot more than just tuition at the K-12 level. You can pay for curricular materials, online materials, private tutoring. You can also once your kid is in high school, you can pay for things like standardized tests, SAT exams, ACT. Those were things that people would often ask about, can I use my 529 plan to pay for this. Finally, the answer now is yes. At the K through 12 level, withdrawals have been limited to $10,000 per year per beneficiary. That is going up to $20,000 per year starting in January. That's just at the K-12 level. Then once you get post post secondary education, you can pay for college tuition, room and board, books, supplies, computers, software, things that you need for your course of study. But in addition, you can also pay for trade schools. You can pay for vocational education. Now you can pay for a range of credentialing and accreditations and continuing education as well. This can include things like welding certification programs, HVAC. There are a number of different programs that are now going to be considered eligible expenses for 529 plans, as well as, again, if you're in law school, if you study to become an accountant, any studies that you're doing for your certification or your accreditation, like a CPA exam or bar exam, you can also now use a 529 plan to pay for those exam fees as well as educational courses that you're doing for those exams. Robert Brokamp: A much broader range of uses. That might appealing to anyone who's listening to this, so they think, OK, I maybe should open a 529. The interesting thing is, though, they're unique. If you want to open an IRA, you'd have to decide, well, yeah, I can go to Schwab or Vanguard or Fidelity or whatever. But with 529, they're operated by states. You're like, well, do I go with Virginia or Utah or Alaska? How should someone go about choosing the right 529 for their student? Because you don't have to stick with your own states plan. Martha Kortiak Mert: No, absolutely. This creates a lot of confusion for people and it gives them a lot of choices, which can be a good thing, but sometimes too many choices makes things hard. For one thing, we suggest look at your states plan. Now almost 40 states offer some type of state tax benefit. Most of the time, you have to use your state's 529 plan to get the tax benefit, but not in all cases. Check if you are in a state where you have state income tax, check to see if your state offers a deduction or a credit for contributions that you make to a 529 plan and whether or not you have to use your own states plan to get that. If you are not in a state that offers a tax benefit, and even if you are in one that offers, check out and see, we actually have an article one our site that breaks us down how much is available and you can say, what's the actual benefit? You can see how much is that worth to you and look around and look at how different plans are rated. If you're in a state that maybe doesn't have the highest performing 529 plan. If your 529 plan doesn't offer some of the options that you'd be looking for to invest in, shop around, see what else is out there. There are close to 100, 529 plans of different kinds out there. About half of them or maybe a little over half are direct sold, meaning you can just go to the website and open those yourself. The remaining ones have to be opened for you by a financial advisor or broker. Robert Brokamp: You can transfer money from one 529 to another. Can you try to game the system? Can you like, I'm going to contribute to my state's mediocre plan to get that tax break, but then I'm going to transfer it to another 529, or is there a catch there somewhere? Martha Kortiak Mert: No catch. You can totally do that. The other thing that happens is people move states sometimes, so maybe you open your states plan for that tax benefit, then you move to another state. Depending where you're moving, you could transfer that money, or you can just keep it where it is and open a new 529 plan in that new state if that offers a tax benefit, as well. They're actually really flexible in that way. There's no reason that you only have to open one 529 plan if you have more than one child. It's probably a good idea to open a different one for each child. But for sure, you can max out your tax savings in your state tax benefit, and then open an additional one. Robert Brokamp: You mentioned ratings of 529 plans. A few people do it Morningstar does it, but you all do it at saving for as well. What are some of the criteria you use when it comes to how you've ranked and rated 529 plans? Martha Kortiak Mert: Yeah, let's start with the rankings, because that sort of feeds into our overall ratings, as well. Our rankings are an analysis we do of how all the 529 plans perform, so what their investment returns have been. Now, of course, within a 529 plan, you have multiple choices of how to invest your money. You can choose from portfolio options that are, give you age based or target year options. You choose the one that corresponds to your child's age or the expected age of enrollment in college, and those funds will shift over time from more aggressive type of investments to more conservative investments as your child nears college age. But they also offer different single fund and static blends and things like that. You do have quite a range of investment options. How do we compare the performance of one 529 plan to another 529 plan? We have to find a way to normalize those things. What we do is, in this case, we look just at the age based and year of enrollment portfolios, and we basically calculate an average across the age range. What would your average return be at any given point in time from 0-18 plus years of age? Then we compare that average performance for all the different plants. That's how we rank which are the best performing 529 plans. That performance component is definitely a big component for people. When we think about the rating and how we rate 529 plans, we want to be able to rate them based on which are the plans that are going to most help you as a parent, as a grandparent, ensure that you're reaching your goals for your child or your grandchild. Their performance is a big element of that, but we also think about things like saving success. That means, does the plan offer different types of features that will enable you to save more? This can include things like, does it have a gifting feature? How easy is it for you to if your parent have grandparents, family and friends on birthdays and holidays, make gift contributions into the 529 plan in lieu of a toy, for example. Ease of use. How easy is it to enroll in the plan? This is a place a lot of people drop off during the enrollment process because they really just get stuck. It's hard for them to figure out what these different options are that are being offered, and ultimately program delivery. How likely do we think it is that a 529 program manager is going to continue to deliver excellence to their investors? Those are some of the things we look at. We use both publicly available information, and we also survey all the 529 plan program administrators with a series of questions that they provide answers to us. Robert Brokamp: You mentioned various relatives there. Some people may wonder, well, how does a 529 affect my financial aid eligibility? It comes down really to ownership. Tell us a little bit about the different financial aid treatment when the parent owns it versus the kid or maybe another relative like the grandparent. Martha Kortiak Mert: A 529 plan is considered on the financial aid form, the FAFSA form that you fill out for federal financial aid. Whether it's owned by the parent or the student, it is considered a parent asset. A maximum of 5.64% of that asset value is included in the FAFSA form, ultimately. You put the full amount, but what's actually considered in the calculation is just up to 5.64%. Basically, if you're saving in any way, whether that money is in mutual funds or in a bank account, that's going to be considered at the same rate. If you can save, that's not a reason to not open a 529 plan. If a grandparent is considering whether to contribute to the parents 529 plan or to open their own, the good news for grandparents now is that a grandparent 529 is not considered for financial aid purposes. Now, in the past, it used to be withdrawals that you made from a grandparent 529 plan and then used to help the student were considered as untaxed student income. That was considered at a much higher rate, I think that was 20%. That has gone away. That untaxed income is no longer considered. Any cash support that's provided to the student from a grandparent or a family friend or other family member, that is not considered on the FAFSA. It does give an additional bump for grandparents that are trying to decide whether or not to open a 529 plan. The other thing to consider, too, or just to be aware of, really, if the parents are divorced, only one parent is filing the FAFSA form. That is the parent who provides most of the financial support to the student. If both parents have a 529 plan, the other parent, the 529 plan that they have for that same student would also not be reported on the FAFSA. Robert Brokamp: The whole grandparent thing, to me, feels like a huge loophole. It's basically completely ignored for financial aid purposes. Do you know why they made that change? Martha Kortiak Mert: I know that over time. I don't know exactly why that change was made. I know it was something, though, that had caused a lot of confusion over time. There was a whole strategy and loophole around how to use grandparent funds to pay for college without affecting financial aid, and so it used to be you would wait until the sophomore year to start withdrawing from a grandparent 529. There was a loophole there already, and a lot of people were aware of it, and that's gone away now, essentially, so I think made it a lot easier overall. Robert Brokamp: I say grandparent, but it's really anyone other than the parent doesn't have to be a grandparent. Let's move on to the final question. Are there any underappreciated or lesser known aspects of 529 accounts or just saving for college in general that you think more people should know about? Martha Kortiak Mert: Yeah. People are so concerned about what happens if I don't use it. I think especially in this day and age, where there is so much focus and emphasis on the value of a college degree, is it still worthwhile, especially given the student debt picture? A lot of people, they have a lot of uncertainty and trepidation around opening a 529 plan. For one thing, I do think that this expansion of benefits does help a lot because now you can say, look, your child is probably going to need something post high school, right, to make it in today's world. If that's not college, it's going to be something else. Really, there's not a great reason to not open a 529 plan. The other thing, we didn't really talk about, which I think people are aware of, but if you think about that tax benefit that you get of a 529 plan, we just focused on the state tax benefits. But of course, the really big benefit of a 529 plan is that those withdrawals that you're making come out federal tax free and state tax free. As long as it's being spent on qualified education expenses, we went through that list earlier. It's a pretty expansive list. That can add up to thousands of dollars. You could put the money in a mutual fund. You're going to be taxed along the way. In the case of a 529 plan, all that tax is deferred, and you are going to have to pay thousands of dollars every time you're taking withdrawals are. You're going to pay the capital gains tax rate, I should say. Depending on how much you have in there and how much you've earned over time, you're basically, you can't count on every dollar that you see in your account going to pay for college. With 529 plans, I think that's really the beauty of it that every dollar, when you go and look at your account statement online, every dollar that you see there can go toward education, and that's pretty huge. I think there are other flexibilities, you can transfer to another beneficiary if you end up. If you're in the enviable position of having more in your 529 plan than you need. The other actually pretty recent development that we didn't talk about that is huge is if you do end up with leftover money in your 529 plan. You can now transfer up to $35,000 to a Roth IRA for your beneficiary. You have to do it within the Roth IRA rules. You can only transfer so much up to the transfer limit each year. But that's a great way to jump start your kids retirement savings, as well. If you end up not spending or not spending all the money. I really encourage people to not delay, start early, put money away regularly. It's just I've heard from so many parents, friends of mine that say, I didn't get it. I didn't start saving until middle school, and I didn't understand the value of the compounding I would get if I'd started 10 years earlier, eight years earlier or something. You start early, you're going to use those funds one way or another. Robert Brokamp: Martha, this has been great. Thank you for joining us. Martha Kortiak Mert: Thank you so much. Robert Brokamp: It's time for our final segment. Get it done. In which we provide an actionable tip to make the boast of your bunny. A few weeks ago President Trump signed into law the one big beautiful bill, and there's a lot in that bill's 870 pages, including a higher standard deduction, a higher state and local taxes deduction, a bonus deduction for seniors, a higher child tax credit, and a deduction for tips received by some workers. But it's not all about the breaks. The bill also eventually eliminates energy efficiency tax credits, limits student loan repayment options, and make some cuts to social welfare programs. But hey, whalers get a higher deduction for whaling related expenses, so that's nice. In the end, how much the new tax law will reduce your tax bill will depend on all factors, including your income, job, your age, your address, things like that. But most middle to upper income households could see their after tax incomes rise 2-4% annually over the next few years. Think of it like a raise. With any raise, it's a good idea to be proactive about what you do with that extra money. My recommendation is to use most or even all of it to boost your savings rate, especially if you're behind in saving for retirement or any other goals. Right after you're done, listening to this podcast, log into your 401K, IRA, brokerage account, or your high yield savings account, and boost the amount that you have automatically contributed by a few percentage points. Because down the road, you may need that money. Estimates vary, but the big beautiful bill could increase the federal budget deficit by three trillion to $6 trillion over the next decade. Meanwhile, it could move up the depletion of the Social Security Trust Fund a year earlier to 2032, and around that same time, one of the trust funds that supports Medicare will run dry. In other words, over the next several years, the federal government will be borrowing even more money while two of its biggest and most important programs will become increasingly underfunded. Make the most of your tax cuts. Use that extra money to plump up your portfolio, because at some point, Uncle Sam is going to have to shore up Social Security, Medicare, and the rest of his finances, possibly resulting in higher future taxes and/or reduced retirement benefits. That's a show. What do you think of this new format for Saturday? Email your feedback to podcasts at That's a podcast with an s at As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. You see, our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Fool on, everybody.
Yahoo
5 days ago
- Business
- Yahoo
529 Plans, 401(k) Plans, and Using Any Extra Money From Washington
In this podcast, Motley Fool personal finance expert Robert Brokamp speaks with Martha Kortiak Mert of about the newly expanded uses of 529s and how to choose the right plan for you. Also in this episode: How does your 401(k) compare to the average worker's? Is it time to buy small-cap stocks? What you should do with any "raise" you'll receive from the "one big, beautiful bill." To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy. A full transcript is below. The $23,760 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known could help ensure a boost in your retirement income. One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these podcast was recorded on July 25, 2025. Robert Brokamp: How should you choose 529 plan? How do you compare it to the average 401K participant? You're listening to the weekend Personal Finance edition of Motley Fool Money. I'm Robert Brokamp. We're doing a trial run of something a bit different for our Saturday episodes in which per usual, we feature a guest interview, and this week, I speak with Martha Kortiak Mert of about the newly expanded uses of 529's and how to choose the right plan for you. But then I'll also offer some other personal finance tidbits and tricks. Let's kick things off with three items from the news in a segment we're calling last week in Money. First up, they say that comparison is the thief of joy. But that doesn't stop us from doing it, especially when it comes to our bunny. If you're curious how your 401K behavior stacks up to the average workers, Vanguard has some answers, and it's recently released, How America Saves Report, based on analysis of all the retirement plans with the firm in 2024. Here are some highlights. The amount you have in your 401K is highly dependent on how long you've been contributing. Here are the median account balances based on job tenure. For people who have been on the job for 2-3 years, the median account balance is a bit more than $20,000, 4-6 years, a bit more than $44,000, 7-9, almost $73,000, and more than 10 years, almost $166,000. How much are workers contributing to their accounts? Well, the median savings rate is 6.8% just from the worker, and it's 11.5% when you include the employer match. Now, that's below the 15% savings rate that really most experts recommend nowadays, which means many folks might be behind in saving for retirement. Those workers might consider maxing out their accounts, and the limit this year is 23,500. Then when they turn 50, contributing even more with catchup contributions up to $7,500 or starting this year, 11,250 if you're 60-63 years old. What percentage of workers with Vanguard 401Ks took full advantage of their accounts last year? Well, 14% max out their accounts, and 16% of the 15 and older crowd made catch up contributions. Of course, it really doesn't matter how you compare to the average person. What really matters is whether you're on track to retire, when and how you want. To figure that out, you can start by using a good online calculator. One to consider is the CalcXML comprehensive retirement planning module. Just do an online search for it. You'll know you've found it if it has 606 as the last three numbers in its URL. Next item on our agenda, article from the Wall Street Journal, Jason Zweig, who highlighted the woes of small cap stocks. Over the past century, small caps have outperformed large caps by two percentage points annually on average, but not so much recently. In his article, Zweig cited the following staff from Steven DeSantis and Equity Strategist at Jeffrey's. Small caps have trailed large caps by more than seven percentage points over the last decade, which is the widest gap since 1935. Accordingly, money is just flowing out of ETFs that invested small US stocks while money is just pouring into the ETFs attract US large companies. This also means that small caps are a good bit cheaper. The Russell 2000 Index of small companies trades at a price to earnings multiple that is almost nine points lower than the S&P 500 PE. Iger argues, it might be time to go against the grade and grab some bargains by buying some small caps, which you can do pretty easily with a low cost ETF, such as the Vanguard Russell 2000 ETF, Ticker VTWO or the iShares CR S&P Small Cap ETF, Ticker IJR. Finally, we come to the number of the week, and that number is $435,300. That is the median price of an existing home that was sold in June an all time high, according to a report published last week by the International Association of Realtors, but while prices are up, sales volume is actually down 2.7%, and year over year inventory is up more than 15%. There's a bit of a slowdown in the real estate market. Growth of prices has boderated somewhat this year, and it took a bit of a dip in 2022. But anyone who owns a home that they bought more than a few years ago is likely sitting on some pretty nice gains. According to the Case Shiller National Home Price Index, home prices are up 49% over the past five years, 91% over the past decade, and 146% since the bottom of the housing crash in February of 2012. Putting a kid through college can easily cost well over $100,000. One way to prepare for that cost is by contributing to a 529 college savings plan. But how do you choose the right one? Here to provide some pointers is Martha Kortiak Mert, author and COO at Martha, welcome to Motley Fool Money. Martha Kortiak Mert: Hello. Thanks for having me. Robert Brokamp: The benefit of 529 savings plans is that the growth and withdrawals are tax free, as long as the money is used for qualified expenses, and that used to mean pretty much just college costs. But the list of qualified expenses just keeps growing, including this month, thanks to the big beautiful bill that was passed on July 4. Let's start by telling us a little bit about what a 529 can actually be used for. Martha Kortiak Mert: Sure thing, and you're right. That list is actually pretty long right now. Let's start with when your child is young. A few years ago, added to the list of qualified expenses was K-12 tuition. But with the passage of the one big beautiful bill, you now pay for a lot more than just tuition at the K-12 level. You can pay for curricular materials, online materials, private tutoring. You can also once your kid is in high school, you can pay for things like standardized tests, SAT exams, ACT. Those were things that people would often ask about, can I use my 529 plan to pay for this. Finally, the answer now is yes. At the K through 12 level, withdrawals have been limited to $10,000 per year per beneficiary. That is going up to $20,000 per year starting in January. That's just at the K-12 level. Then once you get post post secondary education, you can pay for college tuition, room and board, books, supplies, computers, software, things that you need for your course of study. But in addition, you can also pay for trade schools. You can pay for vocational education. Now you can pay for a range of credentialing and accreditations and continuing education as well. This can include things like welding certification programs, HVAC. There are a number of different programs that are now going to be considered eligible expenses for 529 plans, as well as, again, if you're in law school, if you study to become an accountant, any studies that you're doing for your certification or your accreditation, like a CPA exam or bar exam, you can also now use a 529 plan to pay for those exam fees as well as educational courses that you're doing for those exams. Robert Brokamp: A much broader range of uses. That might appealing to anyone who's listening to this, so they think, OK, I maybe should open a 529. The interesting thing is, though, they're unique. If you want to open an IRA, you'd have to decide, well, yeah, I can go to Schwab or Vanguard or Fidelity or whatever. But with 529, they're operated by states. You're like, well, do I go with Virginia or Utah or Alaska? How should someone go about choosing the right 529 for their student? Because you don't have to stick with your own states plan. Martha Kortiak Mert: No, absolutely. This creates a lot of confusion for people and it gives them a lot of choices, which can be a good thing, but sometimes too many choices makes things hard. For one thing, we suggest look at your states plan. Now almost 40 states offer some type of state tax benefit. Most of the time, you have to use your state's 529 plan to get the tax benefit, but not in all cases. Check if you are in a state where you have state income tax, check to see if your state offers a deduction or a credit for contributions that you make to a 529 plan and whether or not you have to use your own states plan to get that. If you are not in a state that offers a tax benefit, and even if you are in one that offers, check out and see, we actually have an article one our site that breaks us down how much is available and you can say, what's the actual benefit? You can see how much is that worth to you and look around and look at how different plans are rated. If you're in a state that maybe doesn't have the highest performing 529 plan. If your 529 plan doesn't offer some of the options that you'd be looking for to invest in, shop around, see what else is out there. There are close to 100, 529 plans of different kinds out there. About half of them or maybe a little over half are direct sold, meaning you can just go to the website and open those yourself. The remaining ones have to be opened for you by a financial advisor or broker. Robert Brokamp: You can transfer money from one 529 to another. Can you try to game the system? Can you like, I'm going to contribute to my state's mediocre plan to get that tax break, but then I'm going to transfer it to another 529, or is there a catch there somewhere? Martha Kortiak Mert: No catch. You can totally do that. The other thing that happens is people move states sometimes, so maybe you open your states plan for that tax benefit, then you move to another state. Depending where you're moving, you could transfer that money, or you can just keep it where it is and open a new 529 plan in that new state if that offers a tax benefit, as well. They're actually really flexible in that way. There's no reason that you only have to open one 529 plan if you have more than one child. It's probably a good idea to open a different one for each child. But for sure, you can max out your tax savings in your state tax benefit, and then open an additional one. Robert Brokamp: You mentioned ratings of 529 plans. A few people do it Morningstar does it, but you all do it at saving for as well. What are some of the criteria you use when it comes to how you've ranked and rated 529 plans? Martha Kortiak Mert: Yeah, let's start with the rankings, because that sort of feeds into our overall ratings, as well. Our rankings are an analysis we do of how all the 529 plans perform, so what their investment returns have been. Now, of course, within a 529 plan, you have multiple choices of how to invest your money. You can choose from portfolio options that are, give you age based or target year options. You choose the one that corresponds to your child's age or the expected age of enrollment in college, and those funds will shift over time from more aggressive type of investments to more conservative investments as your child nears college age. But they also offer different single fund and static blends and things like that. You do have quite a range of investment options. How do we compare the performance of one 529 plan to another 529 plan? We have to find a way to normalize those things. What we do is, in this case, we look just at the age based and year of enrollment portfolios, and we basically calculate an average across the age range. What would your average return be at any given point in time from 0-18 plus years of age? Then we compare that average performance for all the different plants. That's how we rank which are the best performing 529 plans. That performance component is definitely a big component for people. When we think about the rating and how we rate 529 plans, we want to be able to rate them based on which are the plans that are going to most help you as a parent, as a grandparent, ensure that you're reaching your goals for your child or your grandchild. Their performance is a big element of that, but we also think about things like saving success. That means, does the plan offer different types of features that will enable you to save more? This can include things like, does it have a gifting feature? How easy is it for you to if your parent have grandparents, family and friends on birthdays and holidays, make gift contributions into the 529 plan in lieu of a toy, for example. Ease of use. How easy is it to enroll in the plan? This is a place a lot of people drop off during the enrollment process because they really just get stuck. It's hard for them to figure out what these different options are that are being offered, and ultimately program delivery. How likely do we think it is that a 529 program manager is going to continue to deliver excellence to their investors? Those are some of the things we look at. We use both publicly available information, and we also survey all the 529 plan program administrators with a series of questions that they provide answers to us. Robert Brokamp: You mentioned various relatives there. Some people may wonder, well, how does a 529 affect my financial aid eligibility? It comes down really to ownership. Tell us a little bit about the different financial aid treatment when the parent owns it versus the kid or maybe another relative like the grandparent. Martha Kortiak Mert: A 529 plan is considered on the financial aid form, the FAFSA form that you fill out for federal financial aid. Whether it's owned by the parent or the student, it is considered a parent asset. A maximum of 5.64% of that asset value is included in the FAFSA form, ultimately. You put the full amount, but what's actually considered in the calculation is just up to 5.64%. Basically, if you're saving in any way, whether that money is in mutual funds or in a bank account, that's going to be considered at the same rate. If you can save, that's not a reason to not open a 529 plan. If a grandparent is considering whether to contribute to the parents 529 plan or to open their own, the good news for grandparents now is that a grandparent 529 is not considered for financial aid purposes. Now, in the past, it used to be withdrawals that you made from a grandparent 529 plan and then used to help the student were considered as untaxed student income. That was considered at a much higher rate, I think that was 20%. That has gone away. That untaxed income is no longer considered. Any cash support that's provided to the student from a grandparent or a family friend or other family member, that is not considered on the FAFSA. It does give an additional bump for grandparents that are trying to decide whether or not to open a 529 plan. The other thing to consider, too, or just to be aware of, really, if the parents are divorced, only one parent is filing the FAFSA form. That is the parent who provides most of the financial support to the student. If both parents have a 529 plan, the other parent, the 529 plan that they have for that same student would also not be reported on the FAFSA. Robert Brokamp: The whole grandparent thing, to me, feels like a huge loophole. It's basically completely ignored for financial aid purposes. Do you know why they made that change? Martha Kortiak Mert: I know that over time. I don't know exactly why that change was made. I know it was something, though, that had caused a lot of confusion over time. There was a whole strategy and loophole around how to use grandparent funds to pay for college without affecting financial aid, and so it used to be you would wait until the sophomore year to start withdrawing from a grandparent 529. There was a loophole there already, and a lot of people were aware of it, and that's gone away now, essentially, so I think made it a lot easier overall. Robert Brokamp: I say grandparent, but it's really anyone other than the parent doesn't have to be a grandparent. Let's move on to the final question. Are there any underappreciated or lesser known aspects of 529 accounts or just saving for college in general that you think more people should know about? Martha Kortiak Mert: Yeah. People are so concerned about what happens if I don't use it. I think especially in this day and age, where there is so much focus and emphasis on the value of a college degree, is it still worthwhile, especially given the student debt picture? A lot of people, they have a lot of uncertainty and trepidation around opening a 529 plan. For one thing, I do think that this expansion of benefits does help a lot because now you can say, look, your child is probably going to need something post high school, right, to make it in today's world. If that's not college, it's going to be something else. Really, there's not a great reason to not open a 529 plan. The other thing, we didn't really talk about, which I think people are aware of, but if you think about that tax benefit that you get of a 529 plan, we just focused on the state tax benefits. But of course, the really big benefit of a 529 plan is that those withdrawals that you're making come out federal tax free and state tax free. As long as it's being spent on qualified education expenses, we went through that list earlier. It's a pretty expansive list. That can add up to thousands of dollars. You could put the money in a mutual fund. You're going to be taxed along the way. In the case of a 529 plan, all that tax is deferred, and you are going to have to pay thousands of dollars every time you're taking withdrawals are. You're going to pay the capital gains tax rate, I should say. Depending on how much you have in there and how much you've earned over time, you're basically, you can't count on every dollar that you see in your account going to pay for college. With 529 plans, I think that's really the beauty of it that every dollar, when you go and look at your account statement online, every dollar that you see there can go toward education, and that's pretty huge. I think there are other flexibilities, you can transfer to another beneficiary if you end up. If you're in the enviable position of having more in your 529 plan than you need. The other actually pretty recent development that we didn't talk about that is huge is if you do end up with leftover money in your 529 plan. You can now transfer up to $35,000 to a Roth IRA for your beneficiary. You have to do it within the Roth IRA rules. You can only transfer so much up to the transfer limit each year. But that's a great way to jump start your kids retirement savings, as well. If you end up not spending or not spending all the money. I really encourage people to not delay, start early, put money away regularly. It's just I've heard from so many parents, friends of mine that say, I didn't get it. I didn't start saving until middle school, and I didn't understand the value of the compounding I would get if I'd started 10 years earlier, eight years earlier or something. You start early, you're going to use those funds one way or another. Robert Brokamp: Martha, this has been great. Thank you for joining us. Martha Kortiak Mert: Thank you so much. Robert Brokamp: It's time for our final segment. Get it done. In which we provide an actionable tip to make the boast of your bunny. A few weeks ago President Trump signed into law the one big beautiful bill, and there's a lot in that bill's 870 pages, including a higher standard deduction, a higher state and local taxes deduction, a bonus deduction for seniors, a higher child tax credit, and a deduction for tips received by some workers. But it's not all about the breaks. The bill also eventually eliminates energy efficiency tax credits, limits student loan repayment options, and make some cuts to social welfare programs. But hey, whalers get a higher deduction for whaling related expenses, so that's nice. In the end, how much the new tax law will reduce your tax bill will depend on all factors, including your income, job, your age, your address, things like that. But most middle to upper income households could see their after tax incomes rise 2-4% annually over the next few years. Think of it like a raise. With any raise, it's a good idea to be proactive about what you do with that extra money. My recommendation is to use most or even all of it to boost your savings rate, especially if you're behind in saving for retirement or any other goals. Right after you're done, listening to this podcast, log into your 401K, IRA, brokerage account, or your high yield savings account, and boost the amount that you have automatically contributed by a few percentage points. Because down the road, you may need that money. Estimates vary, but the big beautiful bill could increase the federal budget deficit by three trillion to $6 trillion over the next decade. Meanwhile, it could move up the depletion of the Social Security Trust Fund a year earlier to 2032, and around that same time, one of the trust funds that supports Medicare will run dry. In other words, over the next several years, the federal government will be borrowing even more money while two of its biggest and most important programs will become increasingly underfunded. Make the most of your tax cuts. Use that extra money to plump up your portfolio, because at some point, Uncle Sam is going to have to shore up Social Security, Medicare, and the rest of his finances, possibly resulting in higher future taxes and/or reduced retirement benefits. That's a show. What do you think of this new format for Saturday? Email your feedback to podcasts at That's a podcast with an s at As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. You see, our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Fool on, everybody. Robert Brokamp has positions in iShares Trust-iShares Core S&P Small-Cap ETF. The Motley Fool has positions in and recommends iShares Trust-iShares Core S&P Small-Cap ETF. The Motley Fool has a disclosure policy. 529 Plans, 401(k) Plans, and Using Any Extra Money From Washington was originally published by The Motley Fool Sign in to access your portfolio
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How Much Makes Someone Wealthy, and Why It Can Pay to Delay Social Security
In this podcast, Motley Fool retirement expert Robert Brokamp speaks with Michael Finke, a professor of wealth management at the American College of Financial Services, about claiming Social Security early. Also in this episode: How much money do you need to be financially comfortable, and how much makes you wealthy? Which countries' stock markets are performing the best in 2025. A unique way to measure the stock market's valuation. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy. A full transcript is below. Don't miss this second chance at a potentially lucrative opportunity Ever feel like you missed the boat in buying the most successful stocks? Then you'll want to hear this. On rare occasions, our expert team of analysts issues a 'Double Down' stock recommendation for companies that they think are about to pop. If you're worried you've already missed your chance to invest, now is the best time to buy before it's too late. And the numbers speak for themselves: Nvidia: if you invested $1,000 when we doubled down in 2009, you'd have $462,306!* Apple: if you invested $1,000 when we doubled down in 2008, you'd have $38,522!* Netflix: if you invested $1,000 when we doubled down in 2004, you'd have $619,036!* Right now, we're issuing 'Double Down' alerts for three incredible companies, available when you join , and there may not be another chance like this anytime soon.*Stock Advisor returns as of August 4, 2025 This podcast was recorded on August 02, 2025. Robert Brokamp: How much does it take to be considered wealthy in America, and why most people should delay claiming Social Security? You're listening to the Saturday Personal Finance edition of Motley Fool Money. I'm Robert Brokamp, but this week, we speak with Dr. Michael Finke about the recent trend of Americans claiming Social Security earlier, and why most economists think that's probably not a good idea. But first, let's start with our last week in money segment. I have a question for you. What net worth does someone need to be considered financially comfortable, and what net worth makes someone wealthy? Schwab asked those questions, and its recently published Modern Wealth Survey. The average responses to those questions were that, to be considered comfortable, it takes a net worth of $839,000, and to be wealthy, you need $2.3 million. I first heard about this survey from USA Today journalist Daniel Davis, who asked for my take for an article that he wrote on the survey, and here's what I said. "There's no right number for every single person, of course. What really matters is that, if you can meet the four criteria for financial well being as laid out by the Consumer Financial Protection Bureau, and they are, Number 1, having control over day-to-day and month-to-month finances. Number 2, having the capacity to absorb a financial shock. Number 3, being on track to meet your financial goals, and Number 4, having the financial freedom to make the choices that allow you to enjoy life. If you meet all those criteria, I'd say, you're comfortable. If you're significantly exceeding them, perhaps by being well ahead in terms of meeting your financial goals, then I think you could consider yourself wealthy. For our next item, I have another question for you. Which country's stock market is performing the best so far in 2025? Did you say Poland or Greece? Well, you're right. I'll accept either answer, because they both have returned almost 60% this year. Then you have the stock markets in Spain, South Korea, and Austria, which have returned more than 40%, and the markets in Vietnam, Germany, and Italy, which have returned more than 30%. Overall, the entire international stock market has returned 18% this year, while the US stock market has returned 8%. There are a lot of reasons for this year's outperformance of international stocks, but the biggest probably are that many countries are choosing to invest more in their own economies, and perhaps, even more important, the decline of the US dollar, which had its worst first half of the year since 1973, and a falling dollar is like a tailwind to international stocks. It is nothing new for international stocks to take the lead. According to a report from Morgan Stanley, "International stocks have outperformed US stocks in four of the eight decades since World War II." We're talking in the 50s, 70s, 80s, and the first decade of the 2000s. During these cycles, international equities beat the US by a median of 4.9% per year. All that said, last week saw a bit of a reversal of this trend. Trade deals were announced with Japan, South Korea, and the EU that are generally considered favorable to America, and the US stock market responded by having a better week than international stocks, and closing near all time highs. At least, as of this taping after the markets closed on Thursday, July 31st. As the stock market goes up, so does its valuation, which brings us to the number of the week, and it is 218. That is the number of work hours at the current average wage required to have enough money to purchase one unit of the S&P 500 according to the Leuthold Group. They calculated this number all the way back to 1947, and the current figure is the highest over that almost eight decade period. In other words, it takes more labor these days for the working woman or the working man to earn enough to invest in a single share of an S&P 500 index fund. Now, this may say as much about whether work or income has kept pace over the decades as it does about stock valuations, and for their calculation, Leuthold used the average hourly wage of the manufacturing sector, which has grown from $1.04 in 1947 to $28.87 today. But more traditional stock market valuation measures are also at high levels. Both the trailing and forward price to earnings multiples for the S&P 500 are significantly above average, and the cyclically adjusted P/E, also known as the Shiller P/E, after Economist Robert Shiller is now just about at his second highest level ever, with the highest being the peak of the .com boom. You can claim Social Security at age 62, but for every month you delay up to age 70, you'll get a bigger benefit. While most beneficiaries still claim in their early to mid 60s or so, more had been delaying, but there's evidence that trend is reversing. Here to talk about why delaying still makes sense is Dr. Michael Finke, Professor at the American College of Financial Services. Michael, welcome back to Motley Fool Money. Michael Finke: Great to be here. Robert Brokamp: You recently wrote an article for, I think, about the concerns that higher income folks are claiming earlier, which you believe is a mistake. Let's start with why you think some people might be more reluctant to delay nowadays. Michael Finke: Well, obviously, some of the messaging about Social Security is scaring people. It's apparently a ponzi scheme, and it's not surprising that there is this general temptation to just want to take it early. Now a lot of this negative messaging about Social Security is making people feel like they're justified. They just want to get the money now. But to those of us who study retirement income planning, there's no better retirement income source than Social Security, because it is what we consider to be the holy grail. It's annuitization, which is generally, well, not generally, it's acknowledged by economists that is the most efficient way to generate lifetime income. It's getting rid of the risk of not knowing how long you're going to live. Annuities are all else equal, the most efficient way to generate retirement income. Social Security is really the holy grail of annuities, because it is not just a stream of income that lasts for a lifetime. It gets rid of that risk of not knowing how long you're going to live, but it's also inflation protected, and that doesn't exist in the private sector. It seems like a strange way to think about it, but the best way to think about delayed claiming is that, you're buying more of an inflation protected annuity. It costs money to buy it, and the money that it costs is the bridge of spending that you need to withdraw probably most efficiently from your traditional qualified assets, like a traditional IRA, pull the money out, fill up those tax buckets before the age of 70 in order to provide that income, and then delay claiming is a way of getting a higher inflation protected base of income to cover your expenses. I feel like it's very often not characterized that way. To an economist, it makes perfect sense that delay claiming is buying Social Security. But what I hear when I look at conversations about delayed claiming of Social Security are things that are irrelevant. One of the things that's relevant is, well, I really want to live it up in my mid 60s. After I retire, I want to spend more money, so I'm going to claim Social Security now. This is what blows people's minds, you can spend more money early in retirement if you know that you're going to get a higher inflation protected income later. It just means that you have to psychologically get over this hurdle of spending more out of your IRA or whatever you're going to be spending the money from, you can spend more money in your mid 60s to late 60s if you get that higher Social Security payment for the rest of your life. You can live better at every period of retirement if you're disciplined enough to delay claiming Social Security. Robert Brokamp: In your article, you make the point that it's even more compelling argument for people who have higher incomes. I don't know exactly what you mean by higher income, but basically anyone who's listening to a financial podcast has above average income and wealth. What is it about income level that makes delaying even more compelling? Michael Finke: We did this study a few years ago, David Blanchett and I, where we actually dug into the data on anybody that contributes to a 401(k) plan versus those who don't have a qualified retirement plan. That's about half of Americans who don't have a qualified retirement savings plan and the ones who have a 401(k). In other words, if you've contributed to a 401(k) in your working life, you're on this longer live side. They'll live maybe 4-5 years longer than the other half of Americans. In other words, when Social Security estimates how long people are going to live, they use the entire population of Americans, including all the people who keep the fast food joints in business. If that's not you, if you exercise, if you eat a little bit more healthily, as a lot of higher income earners do, you're going to live longer. What that means is that by delaying Social Security, you're going to get an actuarily unfair benefit from delaying claiming, which means you're going to live longer. You're going to cash more Social Security paychecks than the average American, which is why you should do it. Now, I've actually had an interesting policy conversation with people about this, and they say, well, delay claiming is actually going to put Social Security on a more precarious footing because it's going to cost the US government more. I say, well, that's true, but I feel like a lot of people who delay claiming are going to continue working, and they'll continue contributing to payroll taxes. It's probably going to be a wash anyway, but if you really want to stick it to the government, the best way to stick it to the government is to delay claiming, not to claim at 62. The government wants you to claim it 62, especially if you're healthy, because then they're going to pay you in present value terms a lot less. Robert Brokamp: You point out in your article that the boost you get from delaying isn't equal from ages 62-70. At some ages, you actually get a slightly bigger bump than others. Generally, what are those ages? Michael Finke: Whenever that benefit goes up by a higher percentage. In other words, if you're thinking actuarily, so you've got a table and you're estimating if you wait to claim an annuity, how much more money can you get? Now, this is already built into annuity pricing. If you claim at age 66, you're going to get more income than if you claim at age 65, because you're not going to live as long. You're not going to get as many checks. Whoever it is, the insurance company, Social Security Administration, they know that. They know that they're going to pay you a little bit less if you claim at a later age. That's totally fair. However, Social Security built in the formula using a shortcut. The shortcut is, it's the same percentage up to the age of 64 or 65, then it starts out at 5% is the increase. Then it goes up to six and two-thirds percent. Then if you're born after 1960, it goes up to 8% per year after full retirement age at the age of 67. You get an additional 8% bump from 67-68, another 8% from 68-69 and another 8% from 69-70. But that's not actuarily the way it should be. It should be maybe 7.5% between 67 and 68. It should be maybe 8% between 68 and 69, maybe 8.5% between 69 and 70. But the government created a shortcut, and that shortcut means that the year after that bump in income is the most valuable year. When it goes from 5%-6 and two-thirds percent, that is either the most valuable or the second most valuable year. Between full retirement age of 67 and 68, if you can just delay that one year, that is the most valuable in present value terms, and it's even more valuable for women. Now, the other big caveat here is that, if you're a higher earning spouse and you have a lower earning spouse that is younger than you. Let's just give as an example because in older generations, it was more common that the male was the higher earning spouse. Not necessarily so much in younger generations, but older generations. The male was the higher earning spouse, oftentimes married a woman that was younger than him. In which case, that guy can be in rough shape. He can be overweight. He can be diagnosed with heart disease, just gone through a triple bypass, and we'll ask you, why should I wait to claim till 67? Because your longevity doesn't matter. What matters is the surviving spouse who gets your benefit after your death. You should base your claiming decision on the lower earning spouse, and especially if the lower earning spouse is expected to live longer than you, if they're younger, if they're in better health, then you definitely want to delay claiming, because that spousal benefit is hugely valuable. Robert Brokamp: That's because it's not just your benefit you're thinking about. When you pass away, your spouse will get your benefit, and so if you claimed earlier, you've reduced the benefit your spouse is going to get. Michael Finke: That's right, forever. If your spouse is younger, then when you die, they're stuck with that lower benefit forever. Now, the other big question I get is, well, Social Security is going bankrupt, and in 2033, it's going to go away. A lot of people just don't understand the way the Social Security system works, which is that it is a pay-go system, which means that anybody who's working contributes through payroll taxes to Social Security, that money goes to beneficiaries. The problem is that the benefit is scheduled to be reduced by a little over 20% in 2033 or so if the government doesn't do anything. Now, I don't know about you, but I can't even imagine what would happen to the political landscape if all baby boomers saw their Social Security check decline by 23%,. Nobody would ever get reelected again, who is currently in Congress. That's never going to happen. What's going to happen is some combination of borrowing more money, I think probably taxes are going to have to go up a little bit. Maybe we change the inflation adjustment so that it's a little bit less generous because many have argued that it's actually too generous, especially after people who are Social Security age, if the price of gasoline goes up, then they can just travel a little bit less. Workers don't have the same amount of budget flexibility, therefore, it's probably the most politically palatable way to help at least reduce some of the problems that Social Security has by adjusting that inflation or changing the inflation adjustment to more closely represent the way people actually spend money. But it's not going to go away. But even if, in the worst case scenario, everybody's benefit gets cut, even those who claimed at the age of 62 and have this lower benefit, they're going to get cut by the exact same percentage as someone who waited to claim, which is one of the reasons why everybody who's modeled this out has found that, in the worst case scenario, it still makes sense to delay claiming. Robert Brokamp: Let's say someone agrees that delaying is the right move. Let's say, they retire at 65. They have a diversified portfolio. Should they be spending down their stocks or their bonds or both while they wait to delay to age 70? Michael Finke: That is such a great question. This is one of those points that I have to continue to make to even financial advisors. When you delay claiming, you're buying an inflation protected annuity, which a good way to think about this is, it's an annuity that's constructed with treasury inflation protected securities. You are buying more bonds, which means that you should take the bonds from your portfolio to fund your spending during that bridge period until those higher Social Security benefits start. Then once they start, if you think about a balance sheet that includes the value of Social Security, you're increasing the value of that asset on the balance sheet, which means you can actually reduce your allocation to bonds that are held directly in investments as opposed to a bond which is held in a somewhat theoretical sense in the value of your Social Security, but it's still there. In fact, it's even more valuable than bonds, because it also provides inflation and longevity protection. The allocation to stocks then should be higher once you've delayed claiming so there is not this trade. A lot of people say things like, well, if I just would have invested the money, I could have been better off. Well, most people probably have a balance of bonds and stocks in their portfolio. Take the money from your bonds to delay claiming Social Security. Don't touch the allocation to equities. Don't sell your equities in order to make that bridge. There's no downside. Even if equities go up, you have just as many equities as you did before. The other thing is that once the Social Security payment starts, the higher Social Security payment, you're now withdrawing less from your investment portfolio, which takes the pressure off the portfolio to fund your lifestyle. If you have a down year in the equity market, then you're going to have to pull a lot of money out of stocks to fund your lifestyle if you've claimed it 62, because you're going to have to rely on that portfolio more to fund your spending. But if you delay claiming Social Security, you're going to have this long period where you're going to get substantially more, the difference between 62 and 70 is like 72% higher income. That's substantial. For a lot of retirees, especially as they get older, that's going to cover a big chunk of their expenses. Robert Brokamp: It's time for our get it done segment. Earlier in the show, I said that a sign that you're at least financially comfortable is that you are on track to beat your financial goals, so are you? Well, one way to find out is to use an online tool. Last Saturday's episode, I highlighted the CalcXML retirement planning module that's Calc, C-A-L-C, XML, retirement planning module, which you can find just by doing an online search, but also check out any retirement calculators offered by your brokers, your IRA provider, your 401(k) account provider. In fact, you really should do a few analyses with a few different tools because you want to get different opinions, and no single free online tool is perfect. For more general goals like saving for a new car or a home, just a regular online savings calculator would do, and you'll find plenty of those scattered about the Internet. If you're saving for college, check out any calculators found on the website of your state's 529 plan, and also do an online search for the Invite Education College Savings Estimator, which is very customizable and can pull in the cost of a college your kid may be considering. Finally, if you work with any financial advisor, she or he should be able to use their professional grade tools to see if you're on track to make all your financial dreams come true. That's a show. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or it gets. Don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content, and are provided for informational purposes only. You see our Fool advertising disclosure, please check out our show notes. I'm Robert Brokamp. Fool on, everybody. As always, The Motley Fool cannot and does not provide personalized investing or financial advice. This information is for informational and educational purposes only and is not a substitute for professional financial advice. Always seek the guidance of a qualified financial advisor for any questions regarding your personal financial situation. Robert Brokamp has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. How Much Makes Someone Wealthy, and Why It Can Pay to Delay Social Security was originally published by The Motley Fool Sign in to access your portfolio
