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Ask the Expert: Financial Planner Q&A

Published on 5/8/2019
This month, Chris Hutchins from Grove is answering members’ questions about financial planning.

Q 1. In this housing market, is it more prudent to invest in real estate, real estate REITS or stocks in general?
A–Due to its great appreciation over the years, the San Francisco housing market presents a unique challenge when answering this question. It may seem like a good place to invest, however, that largely depends on your long-term goals. A home purchase is only an investment tool if you plan to (and are able to) rent the home out for a profit, or if you plan to sell the home at some point and move into a home that costs less (pocketing any net proceeds). If you don’t see yourself becoming a landlord or relocating to a city with a more affordable cost-of-living, then purchasing a home doesn’t make sense as an investment since you won’t be able to realize any cash from it.
In our opinion, REITs (Real Estate Investment Trust) are a great way to get the benefits of investing in real estate without the hassle of living in, or managing property. However, to help mitigate major loss should the real estate market see a sudden downturn, REIT investments should only be one part of a properly diversified investment portfolio that includes stocks and bonds.

Q 2. Can 529 college savings plans be used to pay tuition at private universities?
A–Yes, 529 plans can be used to pay for private universities as well as private k-12 schooling. When it comes to determining whether a 529 plan makes sense for your financial situation, here are some additional things to consider:

Make sure you take care of your finances first When thinking about saving for your child’s educational expenses, make sure you are on track towards your own retirement savings first. A financial planner can help you make sure you are saving at a rate that supports your future goals. In some cases, even maxing out your 401(k) might not provide you with enough savings for the type of retirement you have in mind. Remember that your child can always utilize student loans if needed, but you can’t take out a loan to fund your retirement. The best gift you can give your child is an elderly parent who is financially independent.

Consider the needs of your child and your thoughts on education Not every child goes to college. If you opt for a 529, those funds must be used to pay for qualified education expenses. For example, if your child decides not to go to college and would rather use those savings to help with a home purchase instead, you will not only pay income tax on the account’s growth, but will also be hit with a 10% penalty. If you don’t like the idea of those future funds being tied to qualified education expenses, then a 529 plan may not be the best fit for you.
You can however, easily transfer 529 accounts between family members. So, if your first child decides not to go to college, you can update the 529 beneficiary to be your second child — or even yourself if you choose to go back to school!

Time horizon Generally speaking, 529s are best for younger children. A child who is already in high school doesn’t have a substantial time horizon for 529 funds to grow.Tax benefitsFor college specific savings, 529s are hard to beat. Your after tax money grows tax free and you will not pay taxes on the distributions as long as they are used for qualified education expenses ( with most investments, there is no guarantee of a specific return. Generally, a diversified portfolio will yield positive returns in the long-term.

State specific plans California does not offer state tax incentives, so there is no reason to stick to the California-sponsored plan. Your child will be able to use 529 funding from any state’s plan for any qualified institution, regardless of what state the savings are held in. Although, be aware that not all international schools accept 529 funding.
Without state tax incentives, the best option is a low cost plan that is in line with your investment philosophy. We recommend Utah’s 529 plan as an excellent investment option with low fees.

What investments to choose In most 529 plans, you can select a fund based on your child’s age that will automatically rebalance appropriately as your child gets closer to starting college (the portfolio becomes less aggressive as the timeline shrinks so there is less risk of loss on your investment). This is a great benefit for anyone who doesn’t want to think about it too much, and prefers a low-maintenance savings approach. If you are a more hands-on, experienced investor, you can also build a portfolio of your choosing based on investment options available within the 529 plan (similar to the way a 401(k) works).

529s might reduce financial aid eligibility 529 accounts owned by the student or their parents will count as assets and can reduce need-based aid. If the 529 is owned by someone other than the student or their parents (such as a grandparent) the withdrawals made each year will count as income for the child and can also affect financial aid.

Q 3. How do you figure out how much you need to have saved to retire comfortably – taking inflation and cost of living in the Bay area into account?
The best way to determine your retirement scenario is to run a Monte Carlo analysis showing your probability of success in retirement (i.e. not running out of money before your projected date). There are many companies, like Vanguard, with retirement simulators that allow you to run this type of analysis:
Alternatively, a more “back-of-the-napkin” calculation can be done utilizing “The 4% Rule.” This rule roughly surmises that the amount you need to save for retirement can be estimated by multiplying the sum of your annual spending by 25. For example, according to the rule, you would need around $1,000,000 in savings to maintain a $40,000/yr budget in retirement. However, it’s best to consider the rule as just a guide, given that it first came into popularity during the 1990’s, and may not accurately represent the investment returns of today’s market environment, or the inflation of living expenses.