Help me to understand this...

[hopefulfirefly]

Suze always says not to keep $$$ that you need in the short term, in the stock market.

In last week's show someone called in because she didn't know what to do. Her son's college savings (in stock market) lost a lot of value and he's going to college in the next year or so. Suze repeated her position that you should never keep $$ that you need in the short term in the stock market. She told the woman that she should have taken that money out.

My question relates to this & retirement. If you need to take that money out 5-7 years before you need it....how do you do that without paying the fees, penalties associated with taking it out too soon? For example, how would that woman have taken $$ out for college expenses 5-7 years before she would spend it on college without paying fees or penalties?

Thanks for helping me to understand!

[JanH]

Maybe she meant that you need to put things like college funds into an investment that is not in the stock market. I think she thinks that money in the stock market is in for the long haul. That way, it takes the ups and downs and still makes money. Short term stuff is probably saving for college and house buying and other things where the money wouldn't be in long enough to ride the ups and downs of the markets. When she told that lady she should have taken it out, she probably meant that she should have taken it and put it in a different kind of investment until he needed it. I am not sure she meant taking money out early for retirement. I think you leave that in for the long period until you reach the age where you are eligible for taking some out.

[Like2Plan]

Suze always says not to keep $$$ that you need in the short term, in the stock market.

In last week's show someone called in because she didn't know what to do. Her son's college savings (in stock market) lost a lot of value and he's going to college in the next year or so. Suze repeated her position that you should never keep $$ that you need in the short term in the stock market. She told the woman that she should have taken that money out.

My question relates to this & retirement. If you need to take that money out 5-7 years before you need it....how do you do that without paying the fees, penalties associated with taking it out too soon? For example, how would that woman have taken $$ out for college expenses 5-7 years before she would spend it on college without paying fees or penalties?

Thanks for helping me to understand!

hopefulfirefly,
You can invest in an evolving age based 529 plan for the child. Such a fund has a mixture of stocks and bonds, et'c. As the child ages, the portfolio automatically becomes more conservative.

Here is a link to such a plan and the details and mechanics of how it works: Virginia 529 investment choices

There are also target retirement funds which work in a similar fashion..

[jIM_Ohio]

When you have the money you need in 3 years, make sure it is cash based.
When you have the money you need in 7 years, make sure it is cash or bond based.

For most saving of mid/long term goals (which require lots of money) there are 5 phases:

1) starting out- you do things to make sure you can create accounts-deposits are worth as much or more than the account balances.
2) accumulation- The deposits are worth more than the gains in the account.
3) growth- the gains in the account are substantially more than the deposits to the account
4) stability- the account has reached the needed value and can fund the goal needed
5) draw down- you need to sell shares to reach goal needed.

Each phases has a given risk level. The risks you take accumulating and the risks you take when stability is the goal are two very different things.

Accumulation will involve a reasonably high stock allocation (greater than 50%). Stability might cut that allocaton and add cash, bonds or other investments.

For college, I would advice using a stable strategy for 3-5 years before money is needed.

For retirement, the goal is that the gains in stability are enough to live from and never have to draw down. Of course this varies with the investor too (some investors are OK spending down retirement savings).

[LivingAlmostLarge]

Personally I'd make the kid take out loans, let the money ride and pray it works out by the time he graduates. Besides the point I'm making my kids take out loans so if they party and fail out they pay for it. BUT for As, B, and maybe C+ I'll pay, or pay 50% for C.

That way it can be 100% a free ride if you study hard. But there are strings like grades.

[hopefulfirefly]

When she told that lady she should have taken it out, she probably meant that she should have taken it and put it in a different kind of investment until he needed it.

I agree-that is what she meant. However, aren't their penalties/fees when you take $$ out (lets use retirement for example) before you need it? If I want to retire at 50, I can't take all my money out of the stock market at 45 without some kind of penalty, right?

You can invest in an evolving age based 529 plan for the child. Such a fund has a mixture of stocks and bonds, et'c. As the child ages, the portfolio automatically becomes more conservative.

Here is a link to such a plan and the details and mechanics of how it works: Virginia 529 investment choices

There are also target retirement funds which work in a similar fashion..

So, do I have to be sure my retirement funds are structured this way now? I'm 25-so retirement is a long way away.

[DebbieL]

My plan for my own daughter (currently 15 and very bright, but also EXTREMELY lazy) is to reimburse for good grades only. She will have to pay her own tuition (which is relatively affordable here - say $1,400 per semester for a full course load). If I see ANY effort and decent grades then we'll talk reimbursement. Laziness such as she currently displays with her schooling. Zip! Why should I burn my money. I think for most kids at that age they need to learn responsibility. It is just to easy to burn through the parent's money and not really value what you're getting. JMO.

[noppenbd]

I agree-that is what she meant. However, aren't their penalties/fees when you take $$ out (lets use retirement for example) before you need it? If I want to retire at 50, I can't take all my money out of the stock market at 45 without some kind of penalty, right?

The distinction you are not making is "taking money out of the stock market" is not the same as "taking money out of your retirement account". You can sell investments (stocks, mutual funds, bonds, etc) within your retirement account without incurring any penalties or taxes. The taxes and penalties come when you actually make a nonqualified withdrawal (like at age 45). There are even ways to get around that if necessary (72t exception).

[Snave]

Personally I'd make the kid take out loans, let the money ride and pray it works out by the time he graduates. Besides the point I'm making my kids take out loans so if they party and fail out they pay for it. BUT for As, B, and maybe C+ I'll pay, or pay 50% for C.

That way it can be 100% a free ride if you study hard. But there are strings like grades.

Can you do this? I was wondering about that. Are you able to pay off student loans using money from a 529?

[hopefulfirefly]

The distinction you are not making is "taking money out of the stock market" is not the same as "taking money out of your retirement account". You can sell investments (stocks, mutual funds, bonds, etc) within your retirement account without incurring any penalties or taxes. The taxes and penalties come when you actually make a nonqualified withdrawal (like at age 45). There are even ways to get around that if necessary (72t exception).

Thank you! You're absolutely right, I was not connecting those dots. Thank you, I understand now.

[LivingAlmostLarge]

Snave, if they graduate with only A and B I'll take the penalty hit and give them the money. Or better yet if they go to grad school I'll give them the cash for medical, law, business, etc school and they can defer their loans while they are in and have paid for graduate school.

If they are determined enough like my DH and graduates with a 3.9, it doesn't matter I will take over paying the loans. Hard work will be rewarded. Crap work much like debbie says is not going to be rewarded.

I am very, very ambivalent about using the 529 money to pay for college and having my kid flunk out. And how else will they go if I don't pay for it if not for loans?

I will make too much for any other option.

But no 529 can't pay for student loans.

[jIM_Ohio]

I am using taxable accounts for all education expenses for my kids. I would prefer to choose what educational endeavors I fund... maybe one kid is a nature freak and a trip to south american rain forests is more educational than a degree, maybe the other twin is a superstar athlete and needs some living expenses while they make a go of it in the minors (dad can dream, can't he?). Flexibility outweighs tax free for me.

If you use a 529, but only choose to pay for good grades, what will happen if your child is a C student or drop out?

[maat55]

I am using taxable accounts for all education expenses for my kids. I would prefer to choose what educational endeavors I fund... maybe one kid is a nature freak and a trip to south american rain forests is more educational than a degree, maybe the other twin is a superstar athlete and needs some living expenses while they make a go of it in the minors (dad can dream, can't he?). Flexibility outweighs tax free for me.

If you use a 529, but only choose to pay for good grades, what will happen if your child is a C student or drop out?

I'm under the impression that a 529 not used for education, becomes an Traditional IRA. I'm not sure of this.

[LivingAlmostLarge]

Pass it on to the next kid? You can just take it out and pay a penalty. I probably won't save much in a 529 for college either. I want to control most of it and defintiely put strings attached like I've said.

[disneysteve]

My question relates to this & retirement. If you need to take that money out 5-7 years before you need it....how do you do that without paying the fees, penalties associated with taking it out too soon?

Retirement and college are two entirely different things. College is a finite event that, hopefully, is done and over with in 4 years. Retirement is a stage of life that hopefully will last 20-30 years or more. You don't cash out your entire retirement savings on the day after you retire. You draw from it gradually over many years. So you may sell some stocks, pay taxes (if applicable) and move on, but the rest of the money remains invested.

For college, we've got a 529 plan with an age-adjusted portfolio that gradually shifts money out of stocks as DD nears age 18. It adjusted when she was 11 and adjusts again in another year or two.