Every family experiences thorny life challenges that raise financial questions: When is it time for a young couple to quit paying rent and buy a first home? Should trust funds be set up for children? Or how can a retired couple’s estate planning work to help the future of their children and grandchildren?
Often, the answer might seem simple—except that there is often more than one question, and the right answer to one question may cause problems in seeking resolution to another. To further complicate matters, each family’s situation is different, so there is no one-size-fits-all approach.
We sought advice from five Delaware experts who deal every day with families facing financial issues. Here, they offer some helpful guidelines.
Joan Sharp, founder of River Family Advisors: Once you have decided that you want to support your children in college, start saving when they are born. Currently, the best type of account for saving is a 529—this grows tax-deferred, then if the money is used to pay educational costs, in most cases the funds are not taxed when used. They also allow you to give five years of annual gifting in one year so you can frontload contributions.
Bill Starnes, founder, Mallard Advisors: Since there are no in-state tax benefits to using the Delaware College Investment Plan, look at low-cost 529 plans outside of Delaware. Low cost is paramount because most 529 plans are commodities.
Rick Miller, partner, Van Buren Financial Group: Technically, you can open a 529 even before a child is born by listing yourself as beneficiary and then transferring the account after the child is born. Other options include taxable investment accounts, Roth IRAs, Coverdell Education Savings Accounts and UGMA/UTMA accounts.
Miller: Establishing a trust is a way to place constraints on the timing and spending of money that your child receives. For example, if the trust you establish for your child is $100,000, you could stipulate that they receive four payments of $25,000 at the ages of 20, 30, 40 and 50.
Sharp: It’s important for parents to first ask themselves why. Do you want your kids to have a cushion to support any type of career they want, including starting a business? Next, are you someone who wants to control the distributions? When money goes into a custodian account, the child has access to the funds at the age of 18 to 21, depending on the state, with no restrictions. If you want to control when and how your children receive the funds, a trust is a good tool.
Starnes: Continue to live like you are a college student—do not go buy a new car. Continue to eat your ramen noodles and pizza, funneling all of your available cash flow toward the loans. One caveat is to consider waiting to pay them off to see if the current federal administration comes up with legislation to help pay off/down student loans.
Miller: Federal loans tend to charge a lower percentage relative to private education loans, and, right now, undergraduate borrowers are paying approximately 2.75 percent. If you have multiple loans, focus on paying off the highest-interest loan first by making additional principal payments if you have available cash flow. If you have one loan, you can focus on making extra payments when suitable. If your student debt interest rate is high and you have established credit, you may want to investigate other loan options. Keep in mind that there is a student loan interest deduction that allows you to subtract up to $2,500 from your taxable income. If your student loan interest rate is low and you have a long-term investment horizon, it might make sense just to make regular payments while you contribute any excess cash to your investments.
Mia Burch, president, Delaware Association of Realtors: Currently, rent price is higher by at least 10 to 15 percent than a mortgage. But first, every buyer needs to qualify themselves before they can even venture out into the market: Do you have a reserve for at least three to six months? A credit minimum of 640? Do you have money for a down payment of at least 3.5 percent (FHA minimal DP requirement) and closing costs (approximately 3.5 to 4.5 percent)? Have you been working full time for a minimum of two years? Are you going to stay in the property for at least five years? If the answer is “no” to any item above, you may not be financially ready to buy in this market.
Miller: On one hand, mortgage rates are low and could signal a great time to buy. On the other hand, there are currently more real estate agents than there are homes for sale, so supply is low, demand is high and prices are on the rise. If you have the means to pay the down payment and avoid the dreaded private mortgage insurance, we are proponents of building equity versus paying rent to a landlord.
Starnes: First, a mortgage provides positive financial leverage. This is the ability to borrow at one rate—the mortgage rate—and invest at another by using your money for investment rather than mortgage prepayment. In other words, if you were not making mortgage prepayments and you were to instead keep the money invested at a rate higher than the mortgage interest rate over the life of the mortgage, then you come out ahead in the long run. If you can invest money over the long run at a rate that is higher than the mortgage rate, you win! Of course, this comes with some additional risk. Second, a fixed mortgage allows you to maintain a low rate as mortgage rates rise but also allows you to refinance at an even lower rate if mortgage rates drop. Third, investing the excess funds provides some flexibility in the event of job loss/disability due to the funds remaining liquid and not locked up in home equity. The bottom line: Invest your excess cash flow rather than paying down the mortgage unless you are the type to spend the invested dollars.
Charles Durante, attorney-partner, Connolly Gallagher: Everyone with an income should consider setting aside as much as permitted. This can mean participation in the 401(k) plan at work, but for those who don’t have such an opportunity, this could mean an individual retirement account for those with full-time jobs who are not yet vested in a company retirement account, or a Keogh account, which is suitable for freelancers.
Starnes: See a fee-only financial planner who acts exclusively in the capacity of a fiduciary to their clients. They can help you explore all of the variables and assumptions that must be considered when doing retirement projections and planning. If you are just getting started, create some momentum and begin the lifelong habit of saving at least 15 percent of your income when you are young—more if starting later.
Miller: But first, start with a plan. After you have visualized how you want your retirement to look and have written down your goals, take account of how much you are spending and making today. Think about how that might change in retirement. From there, you can consult with an investment professional to design a plan that can meet your goals while fitting within your risk tolerance.
Durante: It’s not always an obvious choice. Since an executor would be on the job for 12 to 24 months, he or she should be someone of any age who can manage responsibility and deadlines. If funds will be left in trust, though, the choice of a trustee should look farther. It can be a family member, friend or trusted business associate, but it could also be a financial institution that is selected by, and can be removed by, that family member, friend or business associate.
Starnes: The executor should be person they can talk with about their wishes, affairs and give updated lists of where accounts and assets are held along with passwords. Basic documents are durable financial power of attorney, healthcare power of attorney and a will. These documents should be reviewed every three to five years and updated when there are any life transitions.
Miller: Tragedy can strike at any time—so it’s best to appoint an executor as early as possible.