The coronavirus pandemic has wreaked havoc on many aspects of people’s financial lives. Despite this, many people report that they have not stopped contributing to their children’s 529 college savings plans.
In early May, Savingforcollege.com released survey results showing the pandemic’s economic impact on families saving for college. About two-thirds of respondents reported seeing a decrease in their 529 plan’s value since January. Approximately one fourth said that someone in their household had lost a job or was making less money. However, most also said they hadn’t changed their strategy for saving for college.
As the situation developed, though, and economic hardship continued, more families (although not a majority) did report an impact on their college savings. A CollegeBacker survey in May reached out to 1,200 American adults. About 16 percent said they had paused their college savings contributions. Additionally, 17 percent planned to withdraw money from their college savings accounts, and 13 percent had decreased the amount they were contributing.
The June 2020 State of Savings report from Ascensus, which analyzed 529 plans with fewer than 500 participants between early 2019 and May 31, found about a 21 percent decrease in the amount of one-time contributions between the end of March and the end of May. However, Ascensus’ analysis showed hardly any change in automated contributions during that time period.
“There are many families facing a tougher situation so you do see some occasional monthly reductions in their contribution rates, but overall it hasn’t been as dire as you might expect,” Jordan Lee, founder and CEO of CollegeBacker, said in a press statement. Here’s what you need to know about 529 plans during the pandemic:
This Is How 529 Plans Work
The value of a 529 plan is that it allows adults, primarily parents or grandparents, to save money for a designated beneficiary. The account will grow tax-deferred, and money can be withdrawn tax-free for qualified expenses related to education.
The money can be withdrawn for other expenses (financial planners recommend this option only be used as a last resort) if times are hard. However, the plan’s earnings would then be subject to a 10 percent penalty, and the account holder would also be charged federal income tax on the withdrawal.
Extensions Were Granted to Return Money Refunded as a Result of the Pandemic
Federal regulators offered one break, however, for 529 plans during the pandemic. In some cases, families paid for college expenses for spring 2020 out of their 529 plans and may have received a refund for tuition or room and board due to schools closing their physical campuses and going online for much of the semester.
In a typical year, account holders would be required to reinvest the refund into their 529 plan quickly or be penalized. This year, the Internal Revenue Service allowed families 60 days (the deadline was July 15) to return the money without a penalty.
529 Plans Are Good Investments
The pandemic has forced many families into tough situations, as working members of families have faced layoffs, furloughs, and other economic hardships. However, 529 plans remain an excellent investment, as rules for how the money can be used have been relaxed over the years. Qualified expenses can include everything from tuition for vocational and trade schools to paying off student loans to some costs associated with K-12 education.
Federal laws restricting gifts to $15,000 each year are less stringent for 529 accounts. This means that grandparents or other adults who want to invest in a child’s education can give as much as $75,000 in a single contribution. In addition, if the account’s recipient decides not to go to college, another family member can use the money.
Your Budget May Be More Flexible Than You Think
Experts advise families to keep making contributions to their 529 plans—and even increase them if possible—during the pandemic. Some financial planners point out that typical budget items, such as eating out and vacations, may not be spent and the money could instead be allocated to college savings.
Families also should regularly review their budget and financial planning outlook. The current economic situation is changing rapidly due to ongoing questions about employment and the market. However, college will still be an expense in most cases, and a 529 college savings plan remains an excellent way to save for college even if you find yourself in financial hardship.
Plans May Be Uncertain, but 529s Are Flexible
The pandemic has forced many to change their plans, and your student may even be considering putting college off or choosing a different route all together. Restrictions on indoor gatherings have required many American colleges to remain online, an educational format that is less appealing to many students.
The good news is that 529 plans are designed for flexibility. This means you can continue saving while your student’s educational future unfolds, and the plan likely will cover other educational expenses if your student decides to pursue a nontraditional educational opportunity. And if your student foregoes education entirely to work or travel, the 529 plan can be transferred to a qualified relative whose education can benefit from the savings.
Retirement planning advice—which is not in short supply—can linger long past its time. Advice that may have worked 20 years ago, for example, may not be as applicable today, when the economy is different and people are making different choices about their retirement. It may be time to reconsider the following common retirement advice.
You Must Pay Off Your Debts, Including Your Mortgage
In reality, this advice is unachievable for many Americans. Becoming debt-free for many may be impossible or so difficult that it pushes retirement back many years. Following this guideline, then, would mean trading enjoyment in your senior years for more years of work.
In some cases, it’s OK to carry debt into your retirement; the key is determining which debt is manageable. Paying off high-interest debt, such as credit card balances, is important—interest rates on credit card debt can be 15% or higher, which means your debt can quickly build. Growing debt and a fixed retirement income aren’t compatible, and in this case, it’s a good idea to pay off all high-interest debt before retirement.
Other debt, however, may be tolerable—and even beneficial—during retirement. If you can comfortably make the payments on low-interest debt with your retirement income, there’s no reason to postpone retirement. In other situations, your money may be better spent on investments rather than paying off low-interest debt. For example, if your mortgage interest rate is 4% and your investments are generating a 6.5% rate of return, it makes more sense to invest your money rather than use it to make additional mortgage payments.
The 4% Retirement Withdrawal Rule
This rule was developed in the 1990s. It essentially says that you’re ready to retire when your savings will last for 30 years if you plan to withdraw 4% of your retirement savings the first year and a similar amount, adjusted to inflation, over the remaining 29 years.
However, many financial planners say this formula doesn’t fit all retirement situations and doesn’t take into account a fluctuating market. Retirees also don’t spend consistently over the course of their retirement—they tend to spend more in the early years when they are traveling and marking off experiences on their “bucket list.” Spending may drop as retirees settle down or increase if health issues arise.
A better strategy is to consult with a financial planner about a safe withdrawal strategy based on your circumstances and plans for your senior years. For example, a plan could be built around your required minimum distributions, or you could calculate what you need to cover basic living expenses and then factor additional money into your budget for travel and other expenses.
You Need $1 Million in Savings
Saving $1 million has been the longtime gold standard for retirement, but more recent estimates from the Bureau of Labor Statistics have increased that estimate to $1.5 million per family. Reasons for the increase include a drop in pensions, which previously could be relied upon to supplement retirement savings; inflation; and longer lifespans. Many people are in retirement for three decades or more.
Retirees Spend Less
Retirement doesn’t necessarily cause your spending to decrease. Traditional guidelines state that retirees should plan to spend between 75% and 85% of their current budget, but that estimate doesn’t always hold true.
The best way to map out retirement spending is to make a retirement budget, estimating what you’ll spend each month when you stop working. You may delete some budget items, like commuting costs, but you may take on new expenses with more travel or new hobbies. Creating a retirement budget will help you avoid an unexpected surprise if your spending in retirement doesn’t drop.
Social Security Withdrawals Should Begin at a Certain Age
Conventional wisdom has advised everything from withdrawing benefits immediately when you become eligible at 62 to delaying until you reach 70. In reality, the ideal age to begin claiming Social Security benefits depends on your individual situation.
The best time for you to claim benefits will depend on your retirement budget. For example, if you begin withdrawing at age 62, your monthly benefits will be reduced because you haven’t reached your full retirement age, which will range between 66 and 67, depending on your birth year. If you wait until your full retirement age, your monthly check will include a bonus.
Retirees with comfortable savings may choose to withdraw early for extra spending cash, while people who know they will need help with income later in retirement may want to hold off so their monthly check is larger. Your health may also be an issue—people in good health who think they will live a long time may want to delay claiming benefits, while those who are in declining health may benefit more from larger checks now.
Regardless of your situation, it’s wise to consult with a financial planner about your retirement plan to make the most of the options available.
During economic crises, it can be instinctive to change course with your finances as uncertainty and perhaps even panic set in. However, it will benefit you financially to avoid making quick decisions about your money, particularly during a recession. Financial stability, especially during the COVID-19 pandemic, will reduce stress on your family and keep you moving toward your financial goals.
Here are some sound options for managing your finances during the pandemic.
Pad your emergency savings
While the pandemic has hurt many aspects of the American economy, personal savings rates have soared. CNBC recently reported that the US Bureau of Economic Analysis showed a personal savings rate (the percentage of disposable income that people save) of 33 percent in April, the highest it’s been since the 1960s, when the agency began keeping track. Nationwide stay-at-home orders have encouraged savings, as people have drastically reduced their spending on travel, shopping, and entertainment and eating out.
If you continue to have a steady income, this is an excellent time to build an emergency fund for situations ranging from job loss to an unexpected medical bill. Financial experts recommend saving between three and six months of living expenses to make sure that you can weather unforeseen hardships, including the pandemic if it stretches out.
A good place to start would be saving any lump sum of money you receive, such as a tax refund, work bonus, or a commission. You could also decrease the amount you contribute to your 401(k) temporarily and move the difference into your emergency fund.
Adjust your budget
Millions of Americans have been affected by COVID-19 shutdowns, whether they have been furloughed, laid off, or experiencing a reduction in wages. The economic fallout is far from over, so even those who have yet to be impacted by COVID-19 could as companies examine their long-term revenue and adjust their plans in the coming months.
Regardless of your job situation, this is a good time to make adjustments to protect yourself against job loss or wage reduction. You can think through your long-term income potential and job security and consider ways to insulate your family from income loss as the impact of COVID-19 unfolds over the coming months and years. You may also want to make your budget more conservative, increase your savings, and reduce non-essential spending.
Look at payment reduction options
While your income may seem stable now, that may not be true a few months down the road as the economic crisis stretches out. To be prepared for financial difficulties, familiarize yourself now with programs that allow for payment deferment or reduction on key debts.
Mortgage payments: If a time comes when you can’t make your mortgage payment, call your bank. Many states will allow property owners to take a “holiday” from mortgage payments if their cash flow has been impacted by COVID-19. Lending institutions may allow you to postpone payments without incurring late fees, extra interest, or a negative impact on your credit score.
Credit card payments: In the wake of COVID-19 financial hardship, many credit card companies are offering relief to their clients in the form of lower interest rates, reduced fees, and delayed monthly payments. Contact your credit card company for details about their COVID-19 relief plan.
Federal student loan payments: The US Department of Education currently has reduced the interest rates on federally-backed student loans to 0 percent for a minimum of 60 days, and graduates can also take a break from payments for at least two months if they call 1-800-4FED-AID and request it.
Reconsider your real estate
Your biggest monthly budget item is likely your rent or mortgage. Financial setbacks, such as a job loss, can become severe if you can’t pay it. If you’re a renter and you’re anticipating or experiencing a financial hardship, ask your landlord for a temporary reduction in your monthly payment or if you can apply your security deposit toward rent. In a more extreme scenario, you may need to get out of your lease early and move to a more affordable rental.
If you’re a homeowner, call your bank and ask for mortgage relief, such as deferred payments or temporarily paying interest only on your mortgage. With interest rates extremely low, this may be an ideal time to refinance your mortgage to decrease your payments or shorten your loan terms so that you can pay it off more quickly.
Is it time for more investments?
While your inclination may be to save right now, you may be missing out on excellent investment opportunities. Many stock prices are low, making it a good time to enter the long-term investment market or temporarily increase contributions to your 401(k). Bear markets have rebounded above average for several years, a historic trend that could play out again when the COVID-19 recovery begins.
As with any risk, however, caution is always advised. Before you step further into the market, make sure you have a generous emergency savings fund, stable expenses, and job security.
Retirement, unfortunately, does not always coincide with the time we’re tired of our jobs, ready to start sleeping in, and looking forward to more time for hobbies. Choosing the right time to retire is largely dependent on our financial situation, and that doesn’t always match up with our mental readiness.
Retiring too early or without a sound financial plan could tarnish your golden years. Here are four factors to consider as you plan your retirement date.
Your debt level
Managing a lot of debt payments on a fixed retirement income can be difficult, especially if your budget is tight. Unexpected expenses will leave you with little wiggle room and could lead to difficult circumstances such as losing your house.
If you are in this situation, a better choice is to work for a few more years and focus your income on paying down debt, especially high-interest loans or credit. This may mean cutting back on extra expenses to pay more toward high-interest debt such as credit card balances. You may also want to downsize or pay off your mortgage altogether, reducing the monthly payments you’ll have to make in retirement.
If you’re not sure whether to dedicate income to your retirement account or debt payments, look at what your retirement portfolio is earning compared to the interest rate you’re paying on your debt. If you’re earning 7 percent in the market and paying a 3.5 percent interest rate on your mortgage, a better choice is to invest your money. If the situation is flipped, paying down your debt would be the wiser choice.
Whether you can pay your monthly bills
It’s generally accepted that you’ll need about 80 percent of your pre-retirement annual income for a financially stable retirement. If you’re already struggling to pay bills while you’re working, retiring with a lower monthly income will only make your situation worse.
Your monthly budget will change in retirement. You’ll receive income from your retirement savings, pensions, and Social Security, and your budget lines for work-related expenses such as community and lunches out will likely drop. However, these changes may not be enough to cover your budget comfortably if you were already living month-to-month. Before you stop working, think through your retirement budget and whether a few more years on the job and decreasing your expenses would put you in a better position to retire.
Your retirement plan
Estimating your financial needs in retirement can be a moving target, as you don’t know how long you will live and what your expenses will be as the years go on. Today, Americans are living longer—if you are nearing retirement age and are in good health, it’s likely you could live to 90. In that case, you’d need to plan for savings that would last as long as 25 years.
If you’ve thought about what retirement will be like but now how exactly you’ll fund it, you’re probably not ready to retire yet. After defining your retirement goals and lifestyle, you’ll need to estimate your retirement living expenses, plus annual inflation. Retirement budgeting can get complicated, as you’ll need to figure out how much Social Security you’ll receive depending on what age you’ll retire and factor in new expenses such as healthcare costs and travel plans.
Retirement also can bring large, unexpected expenses, such as pricey home repairs and vehicle replacements. If you’re not sure whether your retirement income would cover these costs, it may be best to take care of them now instead of factoring them into your retirement budget.
When you have a plan in place, whether you draw it up yourself or work with a financial adviser, you’ll have a better idea of how many years you’ll need to work to have the retirement you want.
Your anxiety level about quitting your job
It can be hard to stop working, even if you’re financially prepared. Plus, you may love your job and not really want to leave it. Work gives our days structure and purpose, and the thought of days on end with no concrete plans may be stressful. This can lead to spending over your retirement budget as you try to fill the time.
If you’re in this situation, you have several options for managing retirement. You can keep working and saving, which will be financially beneficial when you retire. You also can take a part-time job or a regular volunteer shift with a local organization as you ease into retirement. If you’re worried about your retirement budget, you can try living on your retirement income and see if it’s enough for you to manage comfortably.
If you find that you’re not ready to retire, you’ll reap the many benefits of extra years of work. Along with increased savings and more time to pay off debts, you can stay on your work’s healthcare plan and spend a few years preparing for living on a retirement budget.
As more Americans are facing a retirement with inadequate savings or pensions, some are choosing to delay retirement past age 65—and some research has shown working longer could pay off financially. However, critics aren’t sure this is the best route to extending or building your retirement savings.
A study conducted by researchers from the Stanford Center on Longevity and the Society of Actuaries, which was released in 2019, found that retiring later is beneficial. The report states that “delaying retirement, even for a few years, can significantly increase the eventual retirement income.”
Researchers looked at 292 strategies for building retirement income and found the most effective to be delaying Social Security payments until age 70. The longer someone can wait to draw down their retirement and postpone Social Security payments, the more retirement income they’ll have, according to the report.
Here’s what proponents of a later retirement—and their detractors—say about putting off retirement and working longer.
More savings: While logic says that the more years you work, the more time you’ll have to save, there may be additional benefits to putting off retirement until age 70. Working in the second half of your 60s could be a time of higher earnings than in the past, and you may be able to save more if you’re old enough to have paid off your children’s college tuition, your mortgage, or your car loan. This could leave you with more money to put away for your impending retirement.
The rules for IRAs also benefit older workers. People who are working and age 50 and older can make catch-up contributions to their retirement accounts, allowing them to save more in their IRA or 401(k) at a time when their earnings are high: up to $26,000 annually in a 401(k) and $7,000 annually in an IRA. If you work for a company that matches IRA savings, you’ll add some free savings to your growing retirement contributions.
Some research backs this strategy. According to the Center for Retirement Research at Boston College, 86 percent of people who work until age 70 will be financially comfortable in their retirement.
Expanded Social Security benefits: Current rules allow workers to retire at age 66 or 67 and receive their full Social Security benefits. While claiming Social Security is allowed as young as 62, some experts say that working a few years past official retirement age can reap substantial benefits.
For example, your payments will increase by 8 percent for every year you are eligible for Social Security benefits but don’t take them. This incentive ends when you are 72, the required minimum distribution age, but let’s say you wait until age 70 to retire. Here’s how it would work: If your monthly benefit is $1,500 and your full retirement age is 66, waiting until age 72 to claim Social Security would increase your monthly Social Security payment to $1,980—a lifetime benefit.
Fewer retirement years to fund: According to the Social Security Administration, people are living longer, which means they will face a longer period of retirement. The agency estimates that men who are 65 will live, on average, to about 84 years, while 65-year-old women will live on average to almost 87 years. About one-fourth of all people who are 65 years old will live past 90.
As life expectancy lengthens, so does the expected period of retirement. That means that working a few years gives you more time to increase your savings without spending it and decreases the number of years your retirement savings will need to provide an income. Here’s an example: At age 65, say you have saved $500,0000. If your savings earn a 4 percent annual return (a conservative amount), when you are 70, your savings will have grown by about $62,000.
70 is the new 60? If you are generally in good health, putting off retirement until you are 70 shouldn’t be cutting into your remaining years of health. Modern medicine and life expectancy rates mean you that you likely will have many years after age 70 to enjoy your retirement.
In addition, working a few more years might actually be good for your health. Researchers have found that working keeps you physically and mentally sharp, and one study even concluded that people who work longer might live longer, too.
Some financial experts, however, disagree that 70 is a better age to retire. Many people retire in their early to mid-60s because of health reasons, or they are pushed out of their job and don’t have the option to work longer. Some simply don’t enjoy their job and don’t want to spend their sixties unhappy in their employment.
Considering a later retirement is fine, but don’t bank your savings plan on it by waiting until you’re 60 to start seriously saving. The earlier you can put away money, the better. This will help you build a retirement savings that will allow you to retire when you want—regardless of your age.
With 2019 over, there’s no better time to build up your retirement savings than now. The arrival of a new year is an excellent opportunity to review your savings plan, especially if you are nearing retirement age.
While it’s always wise to start saving as early as possible, putting away money for retirement is a good move no matter when you start. You can start taking advantage of compounding interest, building your retirement nest egg as much as you can. Many financial advisors stress the importance of these savings, as Social Security will not likely provide a viable retirement income by itself. A retirement savings plan will provide the needed income to cover monthly expenses in retirement.
Here are five smart moves you can make with your retirement savings in 2020.
Save early and often
While Vanguard reports that more millennials are joining 401(k) plans (some thanks to employers’ automatic enrollment programs), many aren’t checking in on their plan’s growth after they enroll. That means they also aren’t increasing their contributions, staying educated about what they’re investing in, or making sure that they aren’t paying high management fees that are taking away from their returns.
It’s smart to open a 401(k) plan when you’re young, but it’s equally important to keep tabs on your account and commit to regular contributions and, if possible, increase your contributions. Ideally, you will save between 10 percent and 15 percent of your income and maximize your employer’s 401(k) match. However, if that’s not possible right now, try a small increase in your contribution this year and increase it by 1 percent every time you receive a raise.
Make saving a habit
Prioritizing retirement savings can be difficult, especially when you’re faced with monthly bills and a budget devoted to paying down expenses. However, to build a strong retirement fund, it’s imperative to save now so you won’t have to play catch-up later. One way to ensure that you’re putting money away each month is to treat your savings contribution as a monthly bill.
If you create a monthly budget, add a line for savings alongside your allocation for electricity, the mortgage payment, and the water bill. Your savings are equally as important, and adding this budget line will prompt you to allocate money each month toward your retirement before spending money on “extras” such as entertainment and vacations.
One way to ensure you’re saving is to set up automatic contributions to your retirement account. That way you’ll consistently contribute every month, and when you get a raise or a bonus, you can make extra or increased contributions.
Begin envisioning your retirement
While the prospect of sleeping in, not working, and having endless days off may seem blissful right now, in reality, many retirees quickly find retirement boring—and their retirement savings may not fund a revised plan that includes travel, shopping, or other expenses.
To make sure that your retirement savings match your retirement plans, think through now how you might spend your time in retirement. Do you want to travel the world? Spend part of the year visiting family and friends? Buy a cabin in the mountains? Take classes at your local community college?
Once you get an idea of what you’d like to do in retirement, you can put together a budget reflecting how much it might cost and check whether your savings are on track to match it. If not, you may want to increase your monthly allocation. Or, you can think of a more affordable way to spend retirement that still will make you happy. Either way, planning your retirement now will guarantee a more fulfilling retirement.
Invest your retirement savings well
Your investment strategies for your retirement fund should change as you age. You might consider investing less aggressively as the years go on, as there won’t be time to recover any losses if the market sinks close to the time you plan to begin withdrawals.
For example, if a lot of your money is tied up in stocks, you may want to move a larger portion of it to bonds. As a general rule to follow, about half of your stock portfolio should be invested in stocks at age 60.
Increase your accounts
While one retirement savings plan is good, more can be even better. If you plan to max out your contribution to your 401(k) plan in 2020, consider opening a Roth IRA account with your tax refund or 2019 bonus. Roth IRA contributions are made post-tax.
However, if you are in a higher tax bracket, a traditional IRA may be a better choice. This option allows you to fund the account before your income is taxed; instead, you’ll pay taxes on withdrawals, when you’ll likely be in a lower tax bracket. This option allows you to postpone—and potentially pay less—in taxes.