How to Run a Balanced Offense- For Your Savings
November 29, 2022
We hope this finds you and your teams doing well as the postseasons for most high schools are about to wrap up while college and professional teams are entering crunch time for their conference rankings, bowl game assignments, and playoff seedings.
When designing a game plan for a successful, well-balanced offense, coaches on the offensive side have a challenge not only to keep the opposing defense on its toes but also, in some cases, managing which of your best players will get the ball, how often, and in what type of position to be successful. In other words, figuring out the best play to call against a defense while also optimizing your playmakers can be difficult at times.
Similarly, we all want things from our money. For some, that includes a bright future for their kids, a comfortable retirement, and the enjoyment of life here and now. Balancing all of those factors can be equally as difficult when it comes to financial planning and your savings plan.
So how do you set priorities when looking at multiple financial goals? Here are the questions to ask yourself (and the answers):
Can you afford to fall behind?
If you run behind schedule, what’s the backup plan?
The ramifications of falling short on retirement savings are pretty extreme: not being able to support yourself in your old age. But if you reserved the same margin for error for every financial goal, you might end up sacrificing your quality of life here and now. Not every goal is equal.
Think about goal-setting in the context of your likelihood of success. You can estimate on the high side for priority goals when the most important thing is reducing your chances of coming up short. However, being over-prepared comes with a cost of its own.
An analogy: Maybe you have an appointment. There’s potential for an unexpected delay, like heavy traffic. If it takes you 45 minutes to get there under normal circumstances, you might give yourself an hour, just in case. Now, if a certain meeting is super important, you could leave much earlier, say two hours beforehand. In the vast majority of cases, you’ll get there far earlier than you needed to, but you’ll almost never be late. The cost of this approach? The hour you could have spent doing something else. If it’s an especially high-priority meeting, leaving very early may be the right move, especially if the commute is unpredictable. But if it’s something routine, the time sitting around might not be worth the other things you could be doing (like an extra hour of sleep).
Pay yourself first
You may currently be on track for our retirement goals, but you may have less margin for error when it comes to your kids’ education savings goal, especially to the extent they elect to pursue expensive graduate degrees. That’s a conscious choice, for two reasons. First, if push came to shove, you could look at other areas of your financial lives to compensate. Second, student loans are an option if necessary. And there are other ways to manage costs, such as your kids getting part-time jobs or asking them to factor expense into their choice of university or graduate program.
For retirement, the fallback options tend to be less robust. You could travel less and generally live a leaner lifestyle, but it’s difficult to predict exactly how decades of retirement will go. For example, there may be unavoidable expenses like health care or long-term care. Even simply living a long time can escalate our retirement costs. There’s no ideal way to borrow your way out of a retirement problem.
Because of this, it may be best to prioritize saving for retirement ahead of your kids’ education. Not because you aren’t deeply committed to their education and career choices, but because you have more options if you fall short.
Be as flexible as possible
Some goals have more flexible timelines. For example, you may have some discretion on when you need to buy a car or a second home, so you could conceivably take a little longer to save or let your money grow, if necessary.
By contrast, there isn’t much wiggle room on when your kids go to college—that’s a function of their age. Theoretically speaking they have more discretion about the timing of a graduate education, but realistically those decisions should depend more on career advancement than financing.
Similarly, retirement isn’t all that flexible. If you are running behind on retirement savings, you might have a little wiggle room on when you retire, but there’s a limit. At a certain point, you may no longer be able to work anymore, or your retirement may not be entirely optional.
When you’re flexible about when you need to meet a goal, you inherently have a higher margin for error. When it comes to more flexible goals, it’s better to save in a way that gets you there most often, without worrying about every conceivable what-if.
Consider timeline when saving for multiple education funds
If you have multiple children, think of each child’s education goal as its own distinct financial goal with the same priority but different time horizons. The nearest-term goal (meaning the oldest child’s fund) is slightly less forgiving because the time horizons are shorter.
In the end, regardless of which account the money sits in, it can be used to cover any child’s expenses. So, if you’re underfunded when your first kid heads off to school, you can probably chip in from your other kids’ accounts, assuming you can increase your savings to plug the gap or reallocate from elsewhere. If you’re running behind because market performance has been weak, that may even out over time. Bringing the balances for the younger children back up would become a higher priority in that scenario, however, given that it’s generally wise to prioritize each child’s education equally.
Postgame talk
At the end of the day, it helps to be nimble when it comes to managing your finances. Planning is about preparation, but it is also about managing tradeoffs based on your own values and aspirations and the income and savings you have at your disposal to make them a reality. The good news is that there are a lot of different ways to solve for goals, including options we covered like maintaining a prudent amount of risk in the portfolio, delaying spending, increasing savings or supplementing with things like student loans. The most important thing is to work out what matters most to you and to get on the path toward making it a reality.
How much am I allowed to save?
The IRS recently announced contribution limits for 2023 for the following savings accounts commonly used for retirement and education expenses (3)(4)(5):
- 401(k), 403(b), 457 and other employer-sponsored plans = $22,500 with an additional $7,500 allowed for savers older than 50 years of age
- $330,000 is the maximum amount of compensation considered when determining an employer’s match or contribution
- Traditional and Roth IRAs = $6,500 depending on eligibility after consulting with a tax advisor
- Coverdell Education Savings Accounts (ESA) = $2,000 depending on eligibility after consulting with a tax advisor
- Most 529 plans allow for lifetime contributions to exceed $235,000 or higher depending on guidelines specific to each state-sponsored plan
Keith Norris
Matt Kuerzi
About the Authors
Keith Norris, First Vice President and Financial Advisor, and Matt Kuerzi, Vice President and Financial Advisor, are co-founders of The Derby City Group at Morgan Stanley in Louisville, Kentucky. They have combined over 40 years of experience helping families with their financial planning (1). In 2019, Matt was recognized by Forbes in their first ever list of “Best-In-State Next-Gen Advisors”. He can be reached directly at (502) 394-4094 or [email protected].
Branch address: 4969 U.S. Highway 42, Suite 1200, Louisville, KY 40222
(1) Keith Norris, First Vice President, Financial Advisor, experienced in the financial services industry since 1997. Matt Kuerzi, Vice President, Financial Advisor, experienced in the financial services industry since 2002.
(2) Source: http://www.morganstanley.com/ideas/retierment-savings-vs-education-savings
(3) Source: http://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
(4) Source: http://www.irs.gov/newsroom/tax-benefits-for-education-information-center
(5) Source: https://www.savingforcollege.com/compare-529-plans
The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be appropriate for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Investment Advisers Act of 1940, ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.
Source: Forbes.com (July, 2021). Top Next-Gen Wealth Advisors. SHOOK considered advisors born in 1981 or later with a minimum 4 years as an advisor. Advisors have: built their own practices and lead their teams; joined teams and are viewed as future leadership; or a combination of both. Ranking algorithm is based on qualitative measures: telephone and in-person interviews, client retention, industry experience, credentials, review of compliance records, firm nominations; and quantitative criteria, such as: assets under management and revenue generated for their firms. Investment performance is not a criterion because client objectives and risk tolerances vary, and advisors rarely have audited performance reports. Rankings are based on the opinions of SHOOK Research, LLC, and are not indicative of future performance or representative of any one client’s experience. Neither Morgan Stanley Smith Barney LLC nor its Financial Advisors or Private Wealth Advisors pay a fee to Forbes or SHOOK Research in exchange for the ranking. For more information, see www.SHOOKresearch.com.
Asset Allocation does not assure a profit or protect against loss in declining financial markets.
The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
Morgan Stanley Smith Barney LLC offers a wide array of brokerage and advisory services to its clients, each of which may create a different type of relationship with different obligations to you. Please visit us at http://www.morganstanleyindividual.com or consult with your Financial Advisor to understand these differences.
Morgan Stanley Smith Barney LLC. Member SIPC.
CRC 4841404 7/2022
For more information about the AFCA, visit www.AFCA.com. For more interesting articles, check out The Insider and subscribe to our weekly email.
If you are interested in more in-depth articles and videos, please become an AFCA member. You can find out more information about membership and specific member benefits on the AFCA Membership Overview page. If you are ready to join, please fill out the AFCA Membership Application.
« « Previous PostNext Post » »
We hope this finds you and your teams doing well as the postseasons for most high schools are about to wrap up while college and professional teams are entering crunch time for their conference rankings, bowl game assignments, and playoff seedings.
When designing a game plan for a successful, well-balanced offense, coaches on the offensive side have a challenge not only to keep the opposing defense on its toes but also, in some cases, managing which of your best players will get the ball, how often, and in what type of position to be successful. In other words, figuring out the best play to call against a defense while also optimizing your playmakers can be difficult at times.
Similarly, we all want things from our money. For some, that includes a bright future for their kids, a comfortable retirement, and the enjoyment of life here and now. Balancing all of those factors can be equally as difficult when it comes to financial planning and your savings plan.
So how do you set priorities when looking at multiple financial goals? Here are the questions to ask yourself (and the answers):
Can you afford to fall behind?
If you run behind schedule, what’s the backup plan?
The ramifications of falling short on retirement savings are pretty extreme: not being able to support yourself in your old age. But if you reserved the same margin for error for every financial goal, you might end up sacrificing your quality of life here and now. Not every goal is equal.
Think about goal-setting in the context of your likelihood of success. You can estimate on the high side for priority goals when the most important thing is reducing your chances of coming up short. However, being over-prepared comes with a cost of its own.
An analogy: Maybe you have an appointment. There’s potential for an unexpected delay, like heavy traffic. If it takes you 45 minutes to get there under normal circumstances, you might give yourself an hour, just in case. Now, if a certain meeting is super important, you could leave much earlier, say two hours beforehand. In the vast majority of cases, you’ll get there far earlier than you needed to, but you’ll almost never be late. The cost of this approach? The hour you could have spent doing something else. If it’s an especially high-priority meeting, leaving very early may be the right move, especially if the commute is unpredictable. But if it’s something routine, the time sitting around might not be worth the other things you could be doing (like an extra hour of sleep).
Pay yourself first
You may currently be on track for our retirement goals, but you may have less margin for error when it comes to your kids’ education savings goal, especially to the extent they elect to pursue expensive graduate degrees. That’s a conscious choice, for two reasons. First, if push came to shove, you could look at other areas of your financial lives to compensate. Second, student loans are an option if necessary. And there are other ways to manage costs, such as your kids getting part-time jobs or asking them to factor expense into their choice of university or graduate program.
For retirement, the fallback options tend to be less robust. You could travel less and generally live a leaner lifestyle, but it’s difficult to predict exactly how decades of retirement will go. For example, there may be unavoidable expenses like health care or long-term care. Even simply living a long time can escalate our retirement costs. There’s no ideal way to borrow your way out of a retirement problem.
Because of this, it may be best to prioritize saving for retirement ahead of your kids’ education. Not because you aren’t deeply committed to their education and career choices, but because you have more options if you fall short.
Be as flexible as possible
Some goals have more flexible timelines. For example, you may have some discretion on when you need to buy a car or a second home, so you could conceivably take a little longer to save or let your money grow, if necessary.
By contrast, there isn’t much wiggle room on when your kids go to college—that’s a function of their age. Theoretically speaking they have more discretion about the timing of a graduate education, but realistically those decisions should depend more on career advancement than financing.
Similarly, retirement isn’t all that flexible. If you are running behind on retirement savings, you might have a little wiggle room on when you retire, but there’s a limit. At a certain point, you may no longer be able to work anymore, or your retirement may not be entirely optional.
When you’re flexible about when you need to meet a goal, you inherently have a higher margin for error. When it comes to more flexible goals, it’s better to save in a way that gets you there most often, without worrying about every conceivable what-if.
Consider timeline when saving for multiple education funds
If you have multiple children, think of each child’s education goal as its own distinct financial goal with the same priority but different time horizons. The nearest-term goal (meaning the oldest child’s fund) is slightly less forgiving because the time horizons are shorter.
In the end, regardless of which account the money sits in, it can be used to cover any child’s expenses. So, if you’re underfunded when your first kid heads off to school, you can probably chip in from your other kids’ accounts, assuming you can increase your savings to plug the gap or reallocate from elsewhere. If you’re running behind because market performance has been weak, that may even out over time. Bringing the balances for the younger children back up would become a higher priority in that scenario, however, given that it’s generally wise to prioritize each child’s education equally.
Postgame talk
At the end of the day, it helps to be nimble when it comes to managing your finances. Planning is about preparation, but it is also about managing tradeoffs based on your own values and aspirations and the income and savings you have at your disposal to make them a reality. The good news is that there are a lot of different ways to solve for goals, including options we covered like maintaining a prudent amount of risk in the portfolio, delaying spending, increasing savings or supplementing with things like student loans. The most important thing is to work out what matters most to you and to get on the path toward making it a reality.
How much am I allowed to save?
The IRS recently announced contribution limits for 2023 for the following savings accounts commonly used for retirement and education expenses (3)(4)(5):
- 401(k), 403(b), 457 and other employer-sponsored plans = $22,500 with an additional $7,500 allowed for savers older than 50 years of age
- $330,000 is the maximum amount of compensation considered when determining an employer’s match or contribution
- Traditional and Roth IRAs = $6,500 depending on eligibility after consulting with a tax advisor
- Coverdell Education Savings Accounts (ESA) = $2,000 depending on eligibility after consulting with a tax advisor
- Most 529 plans allow for lifetime contributions to exceed $235,000 or higher depending on guidelines specific to each state-sponsored plan
|
Keith Norris |
Matt Kuerzi |
About the Authors
Keith Norris, First Vice President and Financial Advisor, and Matt Kuerzi, Vice President and Financial Advisor, are co-founders of The Derby City Group at Morgan Stanley in Louisville, Kentucky. They have combined over 40 years of experience helping families with their financial planning (1). In 2019, Matt was recognized by Forbes in their first ever list of “Best-In-State Next-Gen Advisors”. He can be reached directly at (502) 394-4094 or [email protected].
Branch address: 4969 U.S. Highway 42, Suite 1200, Louisville, KY 40222
(1) Keith Norris, First Vice President, Financial Advisor, experienced in the financial services industry since 1997. Matt Kuerzi, Vice President, Financial Advisor, experienced in the financial services industry since 2002.
(2) Source: http://www.morganstanley.com/ideas/retierment-savings-vs-education-savings
(3) Source: http://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
(4) Source: http://www.irs.gov/newsroom/tax-benefits-for-education-information-center
(5) Source: https://www.savingforcollege.com/compare-529-plans
The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be appropriate for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Investment Advisers Act of 1940, ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.
Source: Forbes.com (July, 2021). Top Next-Gen Wealth Advisors. SHOOK considered advisors born in 1981 or later with a minimum 4 years as an advisor. Advisors have: built their own practices and lead their teams; joined teams and are viewed as future leadership; or a combination of both. Ranking algorithm is based on qualitative measures: telephone and in-person interviews, client retention, industry experience, credentials, review of compliance records, firm nominations; and quantitative criteria, such as: assets under management and revenue generated for their firms. Investment performance is not a criterion because client objectives and risk tolerances vary, and advisors rarely have audited performance reports. Rankings are based on the opinions of SHOOK Research, LLC, and are not indicative of future performance or representative of any one client’s experience. Neither Morgan Stanley Smith Barney LLC nor its Financial Advisors or Private Wealth Advisors pay a fee to Forbes or SHOOK Research in exchange for the ranking. For more information, see www.SHOOKresearch.com.
Asset Allocation does not assure a profit or protect against loss in declining financial markets.
The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
Morgan Stanley Smith Barney LLC offers a wide array of brokerage and advisory services to its clients, each of which may create a different type of relationship with different obligations to you. Please visit us at http://www.morganstanleyindividual.com or consult with your Financial Advisor to understand these differences.
Morgan Stanley Smith Barney LLC. Member SIPC.
CRC 4841404 7/2022
For more information about the AFCA, visit www.AFCA.com. For more interesting articles, check out The Insider and subscribe to our weekly email.
If you are interested in more in-depth articles and videos, please become an AFCA member. You can find out more information about membership and specific member benefits on the AFCA Membership Overview page. If you are ready to join, please fill out the AFCA Membership Application.
