Kid Cash acct. - put it to work?

[NJDoc]

Looking for some feedback from the group on putting some cash to work or not.

I tend to mentally organize my savings into separate little stacks...drives my wife crazy ..lol.

One stack is the grad school, wedding and house downpayment stack for my two daughters. There is $250K in that at present and my estimated need just changed as one daughter has announced she is dropping the premed track, which I had planned to fund the cost of med school. I have mixed feelings about that, but that is perhaps another post. I estimate total need at $450K, and the account funds through passive income at $60-70K per year. I also see this fund as my emergency kid cash, i.e.) car problems, moving costs ,apartment rent, etc.. The timeline on the marriage, house downpayment thing is a huge unknown of course, but grad school need starts in 3 years. There is 529 money that pays for the other daughters grad school and college, so the math is a little more than I have presented.

I'm down to $160K on the house mortgage, and we won't talk about the boat ... SO, the question is: Do I put some or a large chunk of that money to work and pay off the house mortgage now? I'm putting additional money toward principal now and the calculations show full payment in 3 years. Do I stick to my little organization stacks? There is a certain degree of comfort there as I like having the kids needs in front of me and knowing I have them covered and not counting on that passive income stream. The income will only continue as long as I am working, but I plan to work until age 59 1/2 , or I may stretch it out to 60 ( lol) , so another 6 1/2 to 7 years.

Thanks in advance for your input.

 

 

 

[Hatton]

A little confused.  The 250k is in addition to 529 money?  The 60-70k passive income is funding the 250k but will stop when you retire.  Are these correct?  Is the question whether to use the money on your mortgage or invest it?  If your daughter just made this decision I think I would give it some time before spending her med school money.  She might change back.  I do think paying off your mortgage prior to retirement is wise.

[jfoxcpacfp]

I'm confused, also, I think partially because your system is confusing. What is the rate on your mortgage? That basic piece of information would help in advising whether it makes more sense to put your money "to work" at, say, 3.1% or in a well-allocated equity fund portfolio for the long term.

In general, any money you might have to use from your nest egg in the next 5 years should not be tied up, i.e. put to work. For example, if your daughter changes her mind, would you be able to fund it via another resource if you have paid down the mortgage or invested the money? i.e., would you consider a home equity loan, if it came down to that?

Planning would benefit and give you clarity on your options, particularly this close to retirement.

[NJDoc]

My apologies, I realize I am not always clear in my descriptions.

Yes , the 250K , is in addition to the 529 funds, which I intend to drain completely. The $60-70K (after tax) money comes from a Surgery Ctr., which I must liquidate upon retirement. The question is whether to use the cash to pay off the mortgage now, presently at 4.25%, then pay myself back over time, or leave it alone and keep the cash account as is and let the mortgage liquidate over 3 yrs. I do not think it is wise to invest this money in equities as the need for a wedding , etc.. may be forthcoming in 2-3 yrs.

I do not consider these funds as "nest egg", or retirement funds, they are outside of the calculations for my own retirement, it is money for my children's education, wedding and helping them to buy a home. I do not count it when I count my net worth. And yes, I have done extensive planning and work closely with advisors and we are on track very nicely. The only reason I am sticking it out to age 60 is concern over mental boredom, and probably a bigger sailboat. 

 

 

[VagabondMD]

FWIW, I have a similar, but different, approach for similar goals as follows.

Completely outside of my own nest egg and the college 529s (which will also be drained), each child has an account with current balances of about $125k. The intent is to use the funds for grad school, house down payment, wedding and or other "starting in life" goals. The assets are invested aggressively (90:10 or so), as the time to draw on the the money is a minimum of 4 years (end date infinity), with my oldest child (son) just starting college and my daughter in 10th grade.

It sounds like your needs may be more concrete and more immediate for the money. One option would be to pay down the mortgage and then use your monthly draw that went toward the mortgage to replenish the fund. Or not.

In both of our cases, these extra funds are purely optional and a "bonus" for the children, and if need be, could probably used for other purposes.

We are similar in other ways, too, similar age, similar time horizon, and partial ownership of an income generating medical entity. I am part owner of an imaging center business, and will need to sell my share (worth about $55k), too, but as an original investor, I get a five year draw before selling, which will give me an income of $30-60k per year after retirement, not a fortune but not included in retirement planning projections and a lot better than a sharp stick in the eye!

[NJDoc]

Thanks Vagabond, nice to know others think along the same lines. I'm leaning toward not paying down the mortgage as my timelines for the kids could be shorter than I think. You never know when some boyfriend might propose to my oldest daughter....arrrgghhh.

I like the 5 year draw on sale of your ownership interest, it's something our entity may be forced to do as well. The founding members have a sweeter deal which may strain cash flow if the buy out were in a single lump sum. Nothing like several years of cash flow to start your retirement , eh?

 

[G]

Vagabond and NJDoc:  Do either of you want to adopt me?

[Donnie]

If you have a stable income and a debt to net worth ratio much less than 1.0x, I don't see any reason to pay down the debt.

Segregating accounts by purpose is a good idea in my view.  Co-mingled accounts can lead to tracking issues (how much money is allocated to which purpose) and behavioral issues (dipping into an account to fund something in excess of what you had originally earmarked for that purpose).  I think leaving it in cash may not be a great idea.  You could consider and intermediate bond fund so you can get a bit more return on your investment while it is sitting around for the next few years without taking much principal risk.

[StarTrekDoc]

+1 with G -  Adopt me -- better yet, adopt my kids

We have separate accounts in Fidelity for these things since I like to visualize the buckets easily at a glance and able to adjust the risk in each account easily -- use 'like' funds to avoid wash sales during adjustments/rebalancing.

You never know the timing of the 'draw' with the kids and market, but unless it's <1 year, I'd be heavier on the bonds/stocks over pure cash account.

As for the mortgage -- the WCI eternal question - what is a paid off home worth to you?  I you sleep better and feel better, then do it.  The savings are guaranteed and you'll be happy and the fund will replenish quickly in 2 years with the passive income (if you retire out early, you'll get the buyout bolus too, so that's there too).

The 'financial' answer is to maintain status quo and shift your cash into more productive instruments since the large post grad med school drain isn't on the immediate horizon (vs the Central Park wedding, right?)

[The White Coat Investor]

NJDoc wrote:

Looking for some feedback from the group on putting some cash to work or not.

I tend to mentally organize my savings into separate little stacks…drives my wife crazy ..lol.

One stack is the grad school, wedding and house downpayment stack for my two daughters. There is $250K in that at present and my estimated need just changed as one daughter has announced she is dropping the premed track, which I had planned to fund the cost of med school. I have mixed feelings about that, but that is perhaps another post. I estimate total need at $450K, and the account funds through passive income at $60-70K per year. I also see this fund as my emergency kid cash, i.e.) car problems, moving costs ,apartment rent, etc.. The timeline on the marriage, house downpayment thing is a huge unknown of course, but grad school need starts in 3 years. There is 529 money that pays for the other daughters grad school and college, so the math is a little more than I have presented.

I’m down to $160K on the house mortgage, and we won’t talk about the boat … SO, the question is: Do I put some or a large chunk of that money to work and pay off the house mortgage now? I’m putting additional money toward principal now and the calculations show full payment in 3 years. Do I stick to my little organization stacks? There is a certain degree of comfort there as I like having the kids needs in front of me and knowing I have them covered and not counting on that passive income stream. The income will only continue as long as I am working, but I plan to work until age 59 1/2 , or I may stretch it out to 60 ( lol) , so another 6 1/2 to 7 years.

Thanks in advance for your input.

 

 

 

Click to expand...

If you're planning on giving your kids $450K in their 20s, I think you should get a boat and not feel badly about it. Think about it this way. Let's say you don't buy squat for your kid- no wedding, no schooling, no car nothing. You just put $450K to work for them at age 20. It earns 5% real a year from then until they retire at 70. They retire on $5.1 Million without ever having to save for retirement. It's an immense sum to be given at that age. Probably more valuable even than the additional earnings ability of a college education.

I guess my point is that if you want to spend some of your money or be debt free or whatever, go ahead and do so. This isn't an "emergency fund in case the car breaks down" it's enough money that your kid will never have to save any money for retirement and if they can live in any sort of frugal manner, won't even have to work the last 30-50 years of their life.

Is that really your goal? That all of your kids' needs will be taken care of? Would you (and they) be better off letting them fend partially for themselves and directing some of that wealth into a trust for the third generation?

[NJDoc]

WCI,

I get your point, I actually wouldn't do that as I think it removes the impetus to make money on their own and will likely rob them of the feeling of accomplishment.

We actually are still debating giving them the house downpayment money, but I am definitely paying for their education and of course the weddings.

BTW: got a boat , thinking bigger...have to stop looking at yachtworld.com.

 

 

[q-school]

what's the deal with weddings these days?  bride family pays all?  fifty/fifty?  one third each parent/one third kids?

what about second weddings if that unfortunate scenario should arise?  what's the etiquette?

what about all these fancy trusts you guys have to make sure that if divorce occurs, the other spouse gets nothing?

[StarTrekDoc]

That's the beauty of trust funds and delineation for the 3rd generation to protect from in-law and step-spouse/children interloping.  Sad, but true needs in today's society.

For wedding, the total costs were split nearly 33/33/33 since we had two locations and my parents (husband side) threw a large Chinese banquet at home too since we kept the wedding itself limited in size due to the location.

@WCI - good point on the long term savings on that money posed toward retirement--power of compounding investments!; but the starter seed money is so much nicer and allows them to make it their own way as NJDoc said.

@NJDoc - get that yacht and start deducting it too as your second home.  We're free to visit in October to go up to Maine with you

 

[beagler]

I'm planning on a good amount left in the 529 that can be used for grandchildren. Tax free compounding and with 45 year horizon and tax free withdrawal. Maybe enough for great grandchildren... I have no qualms setting up multi-generational education slush fund.

UGMA for kids -- I like WCI plan: $30-50k in the twenties. Enough for a down payment, travel, or to start a business. Not enough to get into big trouble or to get too lazy. Hopefully a tool to teach them about investment.

[q-school]

I thought there were taxes applied to 529 when it dropped to the next generation?