How do we supplement college savings?
Q: I am 47, married and have an 11-year-old. My spouse has a 401(k) and I have a 403(b) with accumulation of about $200,000. Our income is in the $140,000 range. We have approximately $40,000 savings in a mix of investments: CD, diversified mutual funds. We have approximately $20,000 in UGMA, savings bonds and mutual funds slated for our child's college education. We own a home with a 5.25 fixed mortgage and have about 40 percent equity. I have a generous college tuition plan for my child through my employer, but would like to have at least $50,000 in college savings to supplement.
We recently received about $210,000 distribution from our interest in the sale of property in a LLC we inherited. We will have about $30,000 in 2008 tax liability in capital gains between our basis at inheritance and disbursement. We want to be conservative in regards to maintaining capital while realizing some income and growth. We want to supplement college savings with conservative, tax beneficial investment. What are your suggestions on this?
My thoughts: $25,000 to vanguard 529 with 50 percent in total bond and 50 percent in inflation protected securities. Remainder to fidelity with 50 percent in a core account in tax free muni fund and 50 percent in cash reserve funds.
A: Well, you're in a good position. Be sure to keep the money for taxes just in the bank in a mm fund.
Now here's why I DONT like bonds here: The Fed just created a huge liquidity pool -- and it will ultimately result in inflation. IT wouldn't be so tough, but we need to borrow $9T to float our debt. Do you think central banks around the world will keep reinvesting those dollars at 3.5 percent now that they know the Fed will inflate, create money, just to save our system?
No. They'll demand higher rates to compensate. And we'll be required to pay, because we need to refi our debt.
My thoughts: Don't buy anything longer than 3-4 years in bonds.
Don't buy muni bonds! Cities are going to be hard-pressed for cash with all these foreclosures!
Chicken money mantra: I'm not so concerned about the return ON my money, as I am about the return OF my money!
Now it's up to you!
Terry Savage is a registered investment advisor and the author of the newly published The Savage Number: How Much Money Do You Need To Retire? (256 pages, Wiley, $24.95).